Ministers Donohoe & Fleming welcome publication of Central Bank’s Differential Pricing Review Final Report

Ministers Donohoe and Fleming welcome the Central Bank of Ireland’s Final Report and Public Consultation on Differential Pricing in the Motor and Home Insurance Markets and seek swift action by Insurers

The Minister for Finance, Paschal Donohoe TD, and the Minister of State with responsibility for Financial Services, Credit Unions and Insurance, Seán Fleming TD, today (Wednesday) welcomed the publication by the Central Bank of Ireland of its Final Report and Public Consultation on its Review of Differential Pricing in the Private Motor and Home Insurance Markets. In particular, the Ministers support the pro-consumer proposals to:

Ban price walking in the motor and home insurance markets for personal consumers;
Require providers of motor and home insurance to personal consumers to review their pricing policies and processes annually;
Introduce new consumer consent and disclosure requirements to ensure the automatic renewal process is more transparent for all personal non-life insurance products.

Commenting on the report, Minister Donohoe said:

“We would like to thank the Central Bank of Ireland for its detailed work and careful consideration in bringing this evidence-based report to fruition. The Government welcomes that the Central Bank has proposed to end the practice of ‘price walking’; a form of dual pricing, and that it will now commence a consultation on its detailed legislative proposals. As noted earlier this year, it was important to allow the detailed technical work be completed and, as this is a complex issue, it is essential that any regulatory changes are tailored to the specific circumstances in the Irish market, which is different to other larger markets”.

Minister of State Fleming said:

“The Government is committed to tackling the issue of dual pricing under its Action Plan for Insurance Reform and as such we welcome the publication of this Report ahead of the September target. Our officials will examine the Report’s findings, as a matter of priority and are ready to assist the Central Bank in any way with the implementation of these proposals. We would strongly encourage all stakeholders with an interest in this matter to respond to the public consultation being held by the Central Bank on changes to its Consumer Protection Code, to ensure that their views can be considered. The report also raises a number of issues that the insurance industry needs to reflect on right now. We have consistently stated our belief that the industry should treat customers honestly, fairly and professionally. 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.”

ENDS

Note to Editors:

Government Action Plan for Insurance Reform

The publication of today’s Report by the Central Bank completes action 55 of the Action Plan for Insurance Reform, two months ahead of schedule.
The Department of Finance will now work to implement action 56 of the Action Plan, which is a principal action, as soon as possible:

o “Examine the Central Bank’s Review of Differential Pricing in the Motor and Home Insurance Markets and take any appropriate actions as deemed necessary in light of the findings of the Central Bank of Ireland in their final report.”

Differential Pricing Explained

Differential Pricing – The Central Bank defines differential pricing in insurance services as a circumstance or practice whereby customers with a similar risk and cost of service are charged different premiums for reasons other than risk and cost of service. This includes the use of any modelling technique or the application of a non-risk adjustment during the pricing process, which leads to customers with a similar risk and cost of service being charged differing premiums. It includes a range of techniques that combine information about expected claims experience and customer behaviour - for example, the tendency to renew or shop around.

Dual Pricing – This is a form of differential pricing. This is where new and renewing customers with a similar risk and cost of service are charged different premiums for reasons other than risk and cost of service.

Price Walking – This is where customers are charged higher premiums relative to the expected costs the longer they remain with an insurance provider.

The practice of differential pricing is widely used across a range of markets, and can bring benefits for consumers. For example, it can encourage competition and innovation and facilitate market access for consumers who might be unable or unwilling to pay a uniform price. However, differential pricing can also cause harm to consumers, particularly if it is used to increase the prices of policyholders by stealth, or if it affects vulnerable groups or those with differing abilities, time or willingness to search for better offers.

Central Bank Review – further background

The Central Bank undertook the Review to assess how differential pricing is used in the private car and home insurance markets in Ireland and its impact on consumers.
The Review focused on the most significant forms of stealth pricing practices applied by insurance providers in the market. These include price walking, where customers are charged higher premiums relative to the expected costs the longer they remain with an insurance provider and, the closely related practice of treating the pricing of new business and renewal customers differently for reasons other than risk and cost of service which is known as dual pricing.
The Review incorporated a market analysis of the 11 insurance providers in scope, including 44 inspections, quantitative analysis of almost 11 million individual policy records and the gathering of consumer insights based on a survey of circa 5,500 consumers.
Following the Central Bank’s market analysis work, it issued a Dear CEO letter to the insurance sector in September 2020 setting out its initial observations and requirements. This was followed by an Interim Report in December 2020 which concluded that the majority of firms apply some form of differential pricing.
The Review is now complete. The Central Bank’s analysis shows that some of the practices identified could result in unfair outcomes for some consumers in the private car and home insurance markets. As a consequence of these practices, the premiums paid by certain policyholders deviate significantly from the expected costs of the policy to the insurer. The price relative to the expected costs, also increases the longer a customer remains with their insurer. The Central Bank 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 Review also considered the likely costs and benefits of potential solutions to the risks identified, conducting analysis of potential market and consumer price effect. The Central Bank’s recommendations and proposals for change are focussed on the issues that have the potential to cause the greatest harm for consumers and are based on the evidence gathered as part of the Review.

The Report concludes that:

The majority of motor and home insurance firms apply some form of differential pricing.
Some of the pricing practices identified could result in unfair outcomes for some consumers.
As a consequence of these practices, the premiums paid by certain policyholders deviate significantly from the expected costs of the policy to the insurer.
The price relative to the expected costs also increases the longer a customer remains with their insurer.
The Central Bank also found that oversight of pricing practices is lacking and that the automatic renewal process lacks transparency.

Accordingly, the Central Bank is proposing to:

Ban price walking in the motor and home insurance markets for personal consumers.
Require providers of motor and home insurance to personal consumers to review their pricing policies and processes annually.
Introduce new consumer consent and disclosure requirements to ensure the automatic renewal process is more transparent for all personal non-life insurance products.

A public consultation process on these proposals will run until 22 October 2021, and the Central Bank intends that the finalised measures will apply from 1 July 2022.

Central Bank Proposals

The series of proposed policy measures would, in the Central Bank’s view, strengthen consumer protections and ban practices that directly lead to some consumers paying more for private car and home insurance policies based on how long they are with their current insurance provider.
The Central Bank is proposing the following:

o Ban price walking in the motor and home insurance markets for personal consumers.

o Require providers of motor and home insurance to personal consumers to review their pricing policies and processes annually.

o Introduce new consumer consent and disclosure requirements to ensure the automatic renewal process is more transparent for all personal non-life insurance products.

Along with these specific policy measures, the Central Bank is also considering a number of additional measures in relation to complaints resolution, vulnerable consumers and customer engagement and transparency. These will inform the separate review of the Consumer Protection Code that is currently under way and will be published in the coming months.

Next Steps

The report incorporates a public consultation on the Central Bank’s proposals to address risks to consumers arising from price walking, oversight of pricing practices, and automatic renewals. The consultation seeks views from all relevant stakeholders on the proposed policy measures. The consultation sets out the proposed provisions and a series of questions, seeking views on the specific issues identified. We welcome evidence to support views provided in response to this consultation.
The public consultation process will run until 22 October 2021 . Any submissions received after this date may not be considered. Submissions should be made by e-mail to consumerprotectionpolicy@centralbank.ie .
Taking into account the views of stakeholders in response to this consultation, the Central Bank intends to finalise these measures early next year.