Central Bank seeks to end loyalty penalty for car and home insurance customers
July 22, 2021
The Central Bank has recommended a ban on home and motor insurance customers being charged a loyalty penalty the longer they remain with an insurance provider, a practice known as “price walking”.
However, the regulator has stopped short of recommending the outlawing of dual pricing, where new and renewing customers with a similar risk profile and cost of service are charged different premiums for reasons other than risk or cost of service.
This is because the Central Bank’s study of the issue found it can bring benefits for consumers by encouraging competition, discounting and innovation.
The Central Bank launched a review into the area of so-called “differential pricing” practices following claims that customers were being penalised with higher premiums for showing loyalty to their insurers.
This particularly affects vulnerable groups or those with differing abilities, time or willingness to search for better offers, the bank says.
The review examined the extent to which use of these pricing practices leads to outcomes that are consistent with the Consumer Protection Code 2012.
It also sought to identify the drivers of consumer behaviours, including how consumers engage with the insurance industry, and assessed the adequacy of the governance and oversight of differential pricing by insurance providers.
The report was based on a market analysis of 11 insurance providers, including 44 inspections, quantitative analysis of almost 11 million individual policy records and a survey of 5,500 consumers.
“Our analysis shows that some of the practices identified could result in unfair outcomes for some consumers in the private car and home insurance markets,” the report states.
“As a consequence of these practices, the premiums paid by certain policyholders deviate significantly from the expected costs of the policy to the insurer,” it says.
“The price relative to the expected costs also increases the longer a customer remains with their insurer,” it adds.
The study also found that oversight of pricing practices is lacking and that the automatic renewal processes, which is a common feature of the insurance market, lacks transparency.
The recommendations include a ban on price walking in the personal consumer motor and home insurance market, because it “is unfair and could result in unfair outcomes for some groups of consumers”.
The analysis found those who stayed with the same insurer for nine years or more pay, on average, 14% more on private car insurance and 32% more on home insurance than the equivalent customer renewing for the first time.
The Central Bank is also recommending that providers of motor and home insurance to personal consumers review their pricing policies and processes annually to ensure focus on pricing practices is maintained.
The report also calls for the introduction of new consumer consent and disclosure requirements to ensure the automatic renewal process is more transparent for all personal non-life insurance products.
The Central Bank is also considering a number of additional measures in relation to complaints resolution, vulnerable consumers and customer engagement and transparency as part of an ongoing review of the consumer code.
A public consultation will now take place until October 22 on the proposals, with measure set to be finalised by July 1. The Central Bank has powers to enact legislation itself in certain circumstances.
The Central Bank’s Director General Financial Conduct, Derville Rowland, said a financial services system that sustainably serves the needs of the economy and consumers needs functioning and trustworthy insurance markets and insurance providers.
“Insurance providers are responsible for selling their customers products that meet their needs both now and into the future, and to do so fairly. While innovation in insurance provision offers the potential for improved products and services, it can also pose risks to consumers,” Ms Rowland said.
“Differential pricing is one such example, and in line with our mandate, the Central Bank will intervene to guard against firms using practices that are unfair to consumers,” she cautioned.
Derville Rowland said that on foot of the Central Bank’s “comprehensive” review, it is proposing a number of policy measures to strengthen the consumer protection framework and protect consumers from the stealth practice of price walking, which its considers unfair.
“However, we are conscious of the benefits that pricing practices can also provide so our proposals are balanced to allow consumers retain the opportunity to avail of new business discounts to allow them to shop around for the best prices, while ensuring that those who remain with the same insurer are not unfairly hit by loyalty penalties,” she said.
The report’s findings have been welcomed by Minister for Finance Paschal Donohoe, and Minister of State with responsibility for Insurance, Sean Fleming, who said their officials are ready to assist the Central Bank in any way with the implementation of these proposals.
“We have consistently stated our belief that the industry should treat customers honestly, fairly and professionally,” said Mr Fleming.
“While the consultation process is important, given the technical nature of this matter, we also expect that all insurers will now review and end these practices. In this regard, renewed Ministerial engagement with the main insurance companies is envisaged for the autumn,” he added.
Sinn Féin spokesperson on Finance, Pearse Doherty, described the report as a damning indictment of the insurance industry and said it represents a “victory for consumers.”
Mr Doherty, who had led a campaign for an investigation into differential pricing, said the practice now has to stop.
“We now need to move to implement the proposals as soon as possible,” he said.
“I will now engage with the Central Bank and the Department of Finance to ensure that the changes necessary are robust and fair for consumers; following on from the proposals I put forward in legislation in January.”
Insurance Ireland welcomes ‘balanced and proportionate’ report
Insurance Ireland said today’s Central Bank report is “balanced and proportionate”.
Insurance Ireland said the findings highlight the importance of active consumer engagement and competition in the market which benefits consumers.
“The report acknowledges good practice which already exist in the market and outlines proposals to address the aspects which the CBI identified as a source for potential challenge for some consumers,” it added.
Moyagh Murdock, CEO of Insurance Ireland, said the report finds that differential pricing benefits some consumers who are engaged and shop around for their insurance to obtain the best price for their needs. However, for other consumers, who do not actively engage in shopping around, the practice can bring costs.
“Our members remain fully committed to working with the Central Bank of Ireland, and Insurance Ireland will engage constructively in the public consultation process to ensure measures being put in place will work to the benefit of all consumers,” Ms Murdock said.
“Our members recognise the importance of providing documentation and information that is meaningful and transparent for consumers engaging with their insurance providers, and this report underlines the importance of consumers shopping around regularly to ensure they get the best value, as consumers would with utilities such as telecoms/broadband or gas and electricity services,” she said.
“Insurance Ireland believes that it has an important role to play in this regard and we have recently launched a public awareness campaign designed to encourage consumers to shop around to get the best deal,” she added.
But Brokers Ireland said it was disappointed that the Central Bank had stopped short of recommending a ban on differential or dual pricing.
Brokers Ireland represents 1,225 broker firms.
Cathie Shannon, Director of General Insurance at Brokers Ireland, said the Central Bank’s interim report published last December found renewing customers were paying significantly more than the expected cost of the policy, while new business customers were paying marginally less.
“We expect the CBI to take robust action in this area, due to its consumer protection mandate,” Ms Shannon said.
“The Financial Conduct Authority in the UK was unequivocal in its recent finding that the practice of dual pricing in home and motor insurance markets harms more consumers than it benefits,” she added.