Differential Pricing

Differential pricing is the practice of charging customers different premiums for reasons other than risk and cost of service. It includes a range of tools, which combine information about expected claims experience and customer behaviour, for example, the likelihood of the consumer shopping around.

The Central Bank has noted that the practice is widely used across a range of markets and, can bring benefits for consumers. For example, it can encourage competition and open up access to the market for consumers who may be unwilling to accept a single price point. However, according to the Central Bank it can also harm consumers if it is used to increase prices by stealth or if it affects vulnerable groups or those who are less likely to shop around for their insurance.

Two main types of differential pricing are specifically identified by the Central Bank:

• Price Walking: This is the practice of customers being charged higher premiums as time goes on and the costs to the insurer of the policy reduce; and
• Dual Pricing: This is the practice of treating new customers and customers renewing their policies differently, for reasons other than risk and cost of service.

The Review

In January 2020, the Central Bank commenced a review on differential pricing the private car and home insurance markets. The review involved a market analysis of the 11 relevant insurance providers together, including 44 inspections, an analysis of almost 11 million policy records, and information gathering from consumers themselves in the form of a survey of 5,500 consumers.

Following the initial market analysis phase of the review, a Dear CEO letter to insurance providers in September 2020, highlighting initial observations and requirements. An Interim Report was published in December 2020 and concluded that the majority of firms apply some form of differential pricing.

The Central Bank has now identified practices that are resulting in unfair outcomes for some consumers in the private motor and home insurance markets. These include instances where premiums paid by policyholders deviate significantly from the actual costs to the insurer of providing the policy cover. This actual premium to insurer cost ratio increases the longer a customer remains with their insurer. There is also a significant lack of oversight on pricing practices and a lack of transparency on automatic renewals.

Central Bank Proposals

The Central Bank has proposed a number of measures to strengthen the consumer protection framework by amending the Consumer Protection Code 2012 (the “CPC”). These include:

• Price Walking

The Central Bank proposes a ban on the practice of price walking in private car and home insurance, meaning that insurers cannot charge consumers who are on their second or subsequent renewal a premium that is higher than they would have charged them if they were a one year renewal customer at that point in time. Where new customers are offered a lower price to attract their business, it should be a requirement that this is clearly disclosed to them that it includes a new business discount.

• Oversight of Pricing Practices

Providers of motor and home insurance would have to review pricing policies and processes on an annual basis. A written record of the review would have to be maintained and actions taken to review any deficiencies identified.

• Automatic Renewals

New requirements would be introduced in relation to automatic renewals. This includes written consumer consent for the automatic renewal of insurance contracts.

In addition to these main proposals, the Central Bank intends to address specific additional problems in relation to complaints resolution, vulnerable customers and customer transparency as part of the overall review of the CPC, which is currently underway and a consultation on the CPC review is expected to be launched in Q4 of this year. The review raised concerns that firms are not classifying, categorising and recording complaints appropriately. While there was no evidence that vulnerable customers are specifically harmed by differential pricing, it was evident that firms do not fully consider the effect of pricing practices on vulnerable customers, potentially giving rise to adverse outcomes for them.

Next Steps

The policy proposals and text of the amendments to the CPC are set out in a public consultation document which is included as part of the report. The consultation process will be open until 22 October 2021. Submissions can be made by email to [email protected]. Following the consultation, the Central Bank intends to finalise the measures early next year and they will apply to insurers from 1 July 2022.