Central Bank of Ireland's proposals for amendments to the Consumer Protection Code 2012
On 21 July 2021, the Central Bank of Ireland (CBI) published its final report following its review of differential pricing in the home and motor insurance markets in Ireland (the Report). Differential pricing occurs where customers with a similar risk and cost of service are charged different premiums for reasons other than risk and cost of service. The CBI has made a number of proposals which it intends to implement through the addition of new provisions to the Consumer Protection Code 2012 (the Code). In this note we highlight some elements of the report that are of particular note for Irish insurers.
The Review of Differential Pricing
The CBI's review incorporated a market analysis of 11 insurance providers (including 44 inspections), an analysis of 11 million policy records and consumer insights from a survey of circa 5,500 consumers.
It found that pricing practices applied by insurance providers could result in unfair outcomes for some consumers in the private car and home insurance markets. These pricing practices include "price walking", where consumers are charged higher premiums, relative to the expected cost, the longer they remain with an insurance provider. The Report indicates that the CBI considers this practice to be unfair, a point emphasised in the press release accompanying the report. The Report found that long term customers who stayed with the same insurer for 9 years or more, paid on average 14% more on private car insurance and 32% more on home insurance than the equivalent customer renewing for the first time.
Consequently, the premiums paid by certain policy holders differed significantly from the expected costs of the policy to the insurer. The CBI also found that insurers' oversight of pricing practices are lacking and that automatic renewal processes lack transparency.
In its Report the CBI has made the following proposals to strengthen the consumer protection framework:
- A ban on "price walking" for subsequent renewals. Banning this practice would remove the “loyalty penalty” on consumers who remain with an insurance provider. Therefore insurers could not charge customers who are on their second or subsequent renewal a premium higher than they would charge a year one renewal customer with similar risk and cost of service.
- Requiring insurers to disclose new business discounts to new customers where such customers are offered a lower price to secure their business.
- Requiring providers of motor and home insurance to personal consumers to review their pricing policies and processes annually. This would ensure that insurance providers maintain focus on their pricing practices and the impact of such practices on their customers, while also ensuring adherence to new pricing provisions and the fair treatment of consumers. The CBI highlighted that there was insufficient evidence of a customer focussed culture in respect of pricing decisions.
- 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 proposed new provisions require written consent from a personal consumer prior to entering into an automatic renewal process and a right to cancel an automatic renewal. Insurers will also be required to issue a notification to a personal consumer in advance of the automatic renewal date setting out when the policy will renew and how to cancel the automatic renewal, together with any changes to fees and terms.
Whilst the CBI is critical of the practice of price walking, interestingly it has not recommended a complete ban on differential pricing as it found that this practice can bring benefits for consumers by encouraging competition, discounting and innovation. As first noted in its Interim Report, the CBI raised concerns that insurance providers were not considering the impact of differential pricing models on their customers. Following engagement with these providers during the review, the CBI is satisfied that insurers have considered the impact of their pricing practices and cautioned that these insurers have no excuse for failing to put consumers to the forefront of their considerations.
The CBI believes that its proposals will continue to allow insurers to offer discounts to consumers who shop around for the best prices, while ensuring those who remain with the same insurer for a number of years are not charged a "loyalty penalty".
The CBI has launched a consultation process seeking submissions on these proposals from interested stakeholders by 22 October 2021. The CBI expects that the measures outlined above will be implemented and apply to insurance providers from 1 July 2022.
In a statement issued following publication of the report, Minister of State for financial services, Sean Fleming, suggested that insurers should change their practices before the consultation has completed. The Minister said that "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".
Separately the CBI is considering additional measures in relation to complaints resolution, vulnerable consumers, customer engagement and transparency. These measures will be included in a review of the Code which is due to be published in the coming months.
In the meantime insurers should consider the implications of the CBI's proposals together with the CBI's expectations of insurers in relation to differential pricing, as outlined in its 'Dear CEO' letter issued on 8 September 2020 and its final report. Insurers should be alive to the prospect of ongoing monitoring and engagement from the CBI in relation to their pricing practices and board oversight of such practices.