THE CENTRAL BANK has observed widespread use of differential pricing by firms in the motor and home insurance industry, a practice it has identified as a potential risk to consumers.

Insurers have now received a letter from the regulator, instructing them to “take responsibility at board level” for the impact of pricing policies on customers.

It comes after the first phase of a major Central Bank review of pricing in the insurance industry, which identified “weaknesses” with certain industry practices.

The regulator also observed that there is “insufficient evidence of a consumer-focused culture” in the industry when it comes to pricing policies such as differential pricing.

Insurers that are engaged in the practice charge different premiums to customers who they have assessed as having identical risk profiles. It means the insurance company differentiates between customers for reasons other than the expected cost of claims.

Last November, the Central Bank announced that it would conduct a review of the industry and consider a ban on dual pricing, which it said was a risk to consumers.

In particular, the regulator said that it was concerned by “the increasing sophistication of big data and modelling techniques within the insurance industry.”

That data might then be used to identify and subsequently charge customers who are less likely to shop around than those who might look for better quotes elsewhere.

First phase

During the first phase of the review process, which began earlier this year, the Central Bank conducted an analysis of the industry “to establish the extent to which differential pricing is in use within these markets”.

It found that while “a number of firms maintain that they do not utilise differential pricing… the majority of firms do” engage in it “through various techniques”.

Insurance companies have been told that they have “not sufficiently considered customer interests” when developing pricing policies. 

Overall, there is “insufficient evidence” of a “consumer-focused” culture in the insurance industry when it comes to issues of pricing.

In addition, the Central Bank said that “it is not always evident that Boards of Directors have appropriately considered or discussed the impact of their firms’ differential pricing practices on their customers.” 

The review found that there were “varying degrees of awareness” of pricing practices at the board level.

“In many cases,” the Central Bank found that “it was not evident that boards had appropriately considered or discussed the impacts of their firms’ differential pricing practices on their consumers. 

In a statement, the regulator said that “failure to recognise and or acknowledge the practice of price differentiation raises significant concerns about a firm’s ability to assess” the impact of it on consumers. 

Commenting, Director of Consumer Protection at the Central Bank, Gráinne McEvoy said: “While work on the review is ongoing, the issues we identified during our evidence-gathering phase are of sufficient concern that we are requiring action now from relevant firms.

“For this reason, we have written to firms instructing them to implement the Central Bank’s requirements with immediate effect.”

In the letter sent to the chief executives of insurance companies, the Central Bank has now asked insurers to assess their own policies against the regulator’s definition of differential pricing.

It recommends that if the firm does not consider its pricing practices to fall under the Central Bank’s definition, “the rationale for this should be clearly documented and agreed by the Board.”

Insurers should also “Take responsibility at board level for the impact of differential pricing on customers.”

The regulator has asked the companies to put in place “a robust governance framework” that ensures “appropriate oversight is in place” so boards can “take ownership” of the impact of those practices on their customers.

Additionally, the Central Bank has requested documented evidence that the firms have taken on board its recommendations and to demonstrate how their pricing practices “act honestly, fairly and professionally in the best interests of their customers and the integrity of the market”. 

Sinn Féin’s Pearse Doherty – who complained to the Central Bank last year about dual-pricing – welcomed the report today.

“What the Central Bank have uncovered during the initial phase of their investigation is absolutely damning and is of such concern that they have communicated to the CEOs of all insurance firms instructing them to implement immediate requirements on foot of their findings.”

He said the report confirms the “insurance industry is using dual pricing to rip-off their customers”. 

“There is only one way to regulate this practice and that is to ban it, as has been done in several States in the US. That is what I intend to pursue through legislation,” he said.