Although officially released on March 16th, 2023, the front cover of the supervisory statement on differential pricing practices (SSDPP) is dated 22 February 2022… meaning that it has already been one year since its release to the insurance market!
Whilst the general feeling seems to be that nothing has really changed in terms of the way in which firms approach conduct within pricing, is this really the case? Have national authorities done nothing in response to it? Have insurer manufacturers just been waiting for something to happen?
Anniversaries are always a good moment to look back and reflect on what has (and has not) happened as well as to set the basis for the next year.
EIOPA defined differential pricing practices (DPP) as “those where customers with a similar underwriting risk and cost of service are charged for the same insurance product – with the same terms and conditions - different premiums.” The SSDPP did not ban discounts, methods or technologies widely used to determine and issue prices. The message sent across the sector was a reminder (and perhaps a clarification) of how prices should always have been set in line with the requirements of the Insurance Distribution Directive (IDD): firms should always act honestly, fairly and professionally in the best interests of customers. This includes providing them with objective and comprehensive information, and ensuring that insurers own Product Oversight and Governance (POG) frameworks and documentation demonstrate that all requirements relating to the product approval processes were met. These documents also need to ensure alignment with the needs, objectives and characteristics of the market, and that there are no adverse impacts on customer outcomes.
So, was EIOPA banning differential pricing practices? No, it was seeking to remind the sector that the output of pricing practices should not result in the unfair treatment of customers, as this would result in non-compliance with the IDD legislative framework.
A particular emphasis within DPP is so-called price walking…but what is price walking in reality, and for that matter, what does not constitute price walking?
Price walking involves the repeated increasing of premiums at the time of renewal based on consumer-specific characteristics other than those related to increases in risk or cost to serve, thus meaning that there is a heightened risk of unfair outcomes for the customer. You are price walking if you are increasing prices repeatedly, unexpectedly, or in a significant manner for non-risk or cost related factors. A clear example includes repeatedly raising premiums based on a customer’s lower than average propensity to shop around – a practice which may not be compliant with the requirements of IDD.
The past year has seen the European insurance industry become increasingly competitive and more rapidly adopt the use of advanced data and analytics across both its pricing and non-pricing practices. This, along with other trends across the market, could, if not managed carefully, drive actions that would lead to the unfair treatment of customers and non-compliance with the IDD.
EIOPA, through its principle-based statutory statement, has reaffirmed the importance that insurance manufacturers should place upon customer conduct and fairness. The SSDPP has not prohibited any methods, instead it promotes and encourages national authorities to supervise this topic closely (and so additional focus is expected during 2024). It has sought to clarify supervisory expectations towards the IDD and foster a convergent approach for competent authorities.
All of this means that in many European markets a closer supervision of conduct and compliance within the requirements of IDD will now be towards the top of the list that national competent authorities will focus on. Indeed, we have seen this trend across many markets during the past year. Some companies have already been under review, and whilst no specific remedial outcomes or actions have been required, this clearly serves as an indication of what is to come.
From the insurer manufacturer’s point of view, the SSDPP has raised awareness and the market has shown focus in ensuring that pricing-related actions are aligned with IDD and meet POG-related requirements. Where findings have shown that requirements are not being met, we have seen some manufacturers take action to remedy the situation. This however, reflects the minority, as there are still many firms that have decided not to take action and instead to wait for further communications or warnings from their competent national authorities.
Leveraging our experience in UK and Ireland (whilst recognising that there are specific differences to consider), waiting for clear rules should not be the path taken by firms. As an active player in the industry, insurance manufacturers should of course, at all times, ensure they align with the requirements of IDD and treat clients fairly. Additionally, our experience shows that firms not taking action during the early stages of regulatory change have found they suffer more disruptive and damaging change to their portfolio when rules or enforcement comes whilst proactive firms experience much smoother pathways. Awaiting further regulatory communications or clarification should not be a blocker to taking action now that can be refined later.
First and foremost, start taking thoughtful action. As EIOPA’s SSDPP is principle based and because each market, insurer, product and customer is different, there are many aspects of conduct-relevant pricing that need to be considered.
For example, the SSDPP does not specifically define what constitutes vulnerable groups as it considers that it is not possible to provide a precise list, instead leaving this to insurers to determine – who in turn should ensure adequate criteria, strategies and responses are in place to identify them and ensure their fair treatment.
As a critical first step, firms should seek to understand and validate how well they align with existing regulatory expectations. Important questions to ask include:
This article started by wishing a happy birthday to the SSDPP, recognising that 365 days have already passed since the statement was written by EIOPA. One year on, firms should be able to answer “yes” to all of the questions asked above. If that is not the case, as an insurance manufacturer, you should not let a single further day pass without seeking to tackle them. The longer it takes, the more difficulties will arise in not falling behind competitors in the wider market as well as with evolving regulatory expectations. Whilst there may have been little noise made around the market with respect to SSDPP, most proactive players have been silently taking action to ensure they are ready for whatever direction their own national authorities will take in the coming months.
