Vulnerable consumers have been in the spotlight recently, following some research papers issued by the insurance regulator. And many insurance firms will have taken the occasion to check on how robust their policies and procedures are for those less able than most. Yet for many firms, the ‘devil will be in the detail’. Will they find it? I fear some won’t.
The Financial Conduct Authority describes a vulnerable consumer as “someone who, due to their personal circumstances, is especially susceptible to detriment, particularly when a firm is not acting with appropriate levels of care.” Many insurance firms have taken steps to ensure that their customer service is tuned into the needs of vulnerable consumers and this will, I’m sure, improve the experience many such people will have when engaging with their insurer or broker.
That’s important, but just as important are some of the deeper seated ways in which insurance firms affect the lives of vulnerable consumers. Last year, I wrote a couple of blogs about price optimisation. This involves an insurer applying predictive analytics to its bank of big data, to identify those consumers whose online behaviours indicate that they will be less likely to shop around at renewal. Such consumers find their renewal premium edging up year after year until insurers have them paying a price just below what might drive them to start looking elsewhere.
It’s said that about half of UK motor insurance business is being priced according to some form of price optimisation. That’s a lot of policyholders and it seems likely that as premiums become too complicated to understand, cheaper policies more difficult to access, the cover harder to work out, those policyholders who find insurance more of a challenge than most will be the ones who find themselves paying more because of price optimisation.
Price optimisation analyses where policyholders live, what they buy, what they read, how old they are and a hundred and one other pieces of data. Yet these can also be indicators of vulnerability. So while the canny, educated, younger policyholder will be regularly courted by a myriad of insurers offering very competitive premiums, those older, less educated, less computer literate consumers will find their premiums steadily rising, yet feel ill-equiped to take on the complicated and confusing task of switching.
And late last year, we saw a clear example of how pricing algorithms can react to profitable opportunities, when the taxi booking firm Uber raised fare prices to four times their norm during a deadly café siege in Sydney, Australia. Suddenly people working near to the café siege found that their sense of vulnerability became someone else’s pricing opportunity.
So don’t think that price optimisation is devoid of ethical issues – far from it. And those impacted by it could be you, could be members of your extended family, could be people in your local community. How will you explain the fairness of price optimisation to them, face to face?
Warren Buffet once said that “it takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently”. Insurance firms need to think carefully about how they use price optimisation and in particular, how they exercise effective oversight over it. As the Sydney incident showed, we can all be vulnerable at some point in time.