Citizens Advice (CA) issued its original discriminatory pricing report in March 2022, about how people of colour were paying more than white people for car insurance. Their research labelled this the ‘ethnicity penalty’ and after stripping away possible explanations, came down to one big question for the regulator and the sector: please explain why this is happening.
It’s clear that in the intervening nine months, that question has not been answered. For sure, there will have been lots of possible explanations and these the consumer group has been mulling over with the regulator and the UK Government’s Centre for Data Ethics and Innovation. The outcome of all this is an agreement that the FCA’s new consumer duty will be the vehicle for firms and the regulator to address discriminatory pricing.
At first glance, this may look like a case of the issue being ‘kicked into touch’ – in other words, put into a slow lane and addressed as part of a big, new and cumbersome regulatory initiative. Yet on the very first page of their new report, CA has this to say…
“Whether we continue to find evidence of discriminatory pricing will depend on the success or failure of how the Consumer Duty is implemented.”
It’s clearly a warming, for it’s the only sentence in the report that is in bold. What it’s saying is…. ‘if everything we’ve been promised about the consumer duty is correct, the issue of discriminatory pricing will be managed out of the pricing system.’ All fine and good if it happens, but CA will still be doing their own monitoring to look for evidence of discriminatory pricing. They’re giving the sector and the regulator time to deliver the results.
It’s clear that during 2022, CA has been provided by insurers with a variety of possible causes for their findings. Yet it doesn’t seem to have convinced them…
“For insurers to take serious steps towards providing an adequate explanation of unequal outcomes, they must go beyond platitudes, assertions or hypotheses and build a robust data driven understanding of the problem.”
The language is clearly signalling frustration, along the lines of ‘why can’t you tell us what is actually happening, and if you can’t, isn’t that a problem in itself?’
CA go on to set expectations…
“Regardless of the process used we would expect industry and regulators to come away with plans for increased corporate accountability, changes to governance and an outline of how they might regulate algorithmic bias in the future.”
In other words, nothing they have seen on these fundamental themes has seemed good enough. And CA go on to identify this as a “first testing ground for how to get market fairness right in our digital age’. They’re treating insurance as a test case for other sectors’ handling of bias. That points to them putting weight behind this initiative, to drive it to the type of conclusion that will send signals to other sectors.
How to Suck an Egg
Their report moves on to propose a framework for addressing the problem, having four steps of monitor, explanation, justification and mitigation. Now, this is not in any way rocket science, and it does come across as the consumer group deciding to show the sector and its regulator how to suck an egg. I wonder if this might not have come out of a frustration that for all the complexity said to be associated with bias in digital systems (about which I expect they heard a lot), in their view the way forward was pretty simple. Yet they still felt the need to spell it out.
Reading between the lines, I get the impression that CA found little evidence of a managed approach to dealing with the risk of discriminatory pricing...
“An investigation based on a proxied understanding of consumer outcomes can be a valuable first step towards understanding the experiences of different groups of consumers”.
What this points to is that firms appear to have been more interested in governance processes and less interested in outcomes.
One of the big risks now for insurers is to continue that imbalance. The consumer duty lays all sorts of expectations upon insurers and there is the very real danger (because it happened before with TCF) that firms will go down a path of boiler plate compliance, using generic language to convey reassurance. It’s a temptingly easier path, but what it lacks is critical thinking and challenge.
CA give a warning in relation to this….
“This would need to go beyond suggesting plausible hypotheses for what could be driving different outcomes.”
Is the Willingness There?
In a particularly cutting paragraph, the CA talked about some of the explanations insurers had come up with for the pricing differences, such as crime rate, on street parking and proximity to a repair garage. CA’s response…
“We have yet to see, however, a statistical analysis of whether these factors do in fact explain the differential outcomes. Such an analysis is not outside the competence of insurers, indeed the skills needed to analyse the drivers of risk and cost are central to their business model. What may be lacking is the willingness to take that work forward. We hope that the Consumer Duty will provide greater incentive to carry this work out - indeed, this is how its success should be judged.”
Ouch. And double ouch, given that CA’s own analysis had confirmed that age, gender, income, crime rate, population density and deprivation indices were shown not to account for the differences in price.
Have Insurers Been Acting Like Ostriches?
So why do insurers appear to have been sticking their heads in the sand on this issue? Why did CA feel the need to state in plain English that insurers seem to lack the willingness to tackle this. It seems to be because of insurer concerns about what they may find. CA again…
“We are aware that there may be reluctance from some firms to come forward to the regulator where they have found discriminatory outcomes. Several stakeholders highlighted concerns that there could be a ‘first-mover’ disadvantage in taking steps to address this issue. Until specific guidance is issued by the regulator, there would be considerable uncertainty for firms around what the consequences would be of raising issues to the regulator around discriminatory pricing. Despite this, there is a need for firms and regulators to look at ways to identify and address discriminatory pricing now.”
If ever a word carried the impression of a finger being thumped down on a table for emphasis, it is that last word ‘now’. In other words, further prevarication is not an option.
Money versus the Law
I’ve had the ‘first mover’ concern put to me by senior insurance executives on several occasions. For example, ‘if my firm stopped doing this, we’d lose £XXm in business to other firms’. Yet those experiences had not involved circumstances where the pricing issues have specifically been about compliance with clear legal requirements. Race is a protected characteristic specifically not included in insurer exemptions to the Equalities Act. The sector comes across as not wanting to check if they’re abiding by the law, because what they find might loose them business.
Yet have not all insurers signed up to principles like integrity and abiding by the law, in the regulatory handbook, in the profession’s code of ethics and in their own firm's code of ethics? I don’t recall ‘first mover disadvantage' being a caveat in any of their documents. It feels like insurers see market forces as a sort of ‘get out of jail free’ card. Harsh? Perhaps, but not as much as how serious a situation this is.
Jumping Beyond First Mover Disadvantage
CA recognise that the sector has stuck itself into a first mover rut and offers this way forward, orientated around the risk of regulatory sanction…
“This is essentially a regulatory barrier to firms taking innovative action on a new problem. We think that the tools developed by the FCA to address similar issues around innovation (including Tech Sprints and Sandboxes) could have a role here in creating a safe space for firms and the regulator to collaborate openly to solve this important problem.”
I would disagreed strongly with discriminatory pricing being a new problem. I have been talking about it since 2015, when I conducted a small survey of how insurers were managing the risk of discriminatory outcomes for customers (more here). Putting that aside however, the suggestion that tech sprints and sandboxes could overcome this ‘regulatory barrier’ is a good one. One wonders why the regulator hasn’t done this before.
One possibility that the regulator will face in setting up a tech sprint or sandbox to find ways forward on discriminatory pricing is the danger of unearthing a toxic problem. In other words, that an insurer has not just been indirectly discriminating on a protected characteristic that they’re not exempt from, but directly discriminating as well. Based on what I’ve been told, this is a real possibility, and the regulator needs to prepare for it. They won’t be in a position to ignore it.
Options on the Horizon
The insurance sector has been given time. I would estimate about two to three years at the most. If significant progress is not seen (and corroborated) to have been made, then I suspect Citizens Advice will scale up their challenge very significantly. So how might they do this?
One option would be for them to seek appointment as the statutory consumer advocate for personal lines insurance (more here). That is what I would call the ‘working with the sector’ approach, likely to be adopted if progress has been made on discriminatory pricing, but which CA judge as not having been enough. The problem for CA is that this option does not give them the sort of signal they may want from insurance as a test case for discriminatory pricing, to use as pressure on other sectors.
Another option is to resort to the courts and seek some combination of penalty and redress for consumers. The publicity for insurers would be absolutely horrendous.
Some insurers may think another super-complaint would be more likely than the court route, but I disagree. All another super-complaint would do is hand the situation over to the regulator to investigate and resolve, but the regulator is just as much part of the existing situation as the sector itself.
What this adds up to then is just how important it is for insurers to address discriminatory pricing, both individually and collectively. The consequences of not doing so, or not doing nearly enough, are such that even investors would blanch at the prospect.
Can the Sector Deliver?
Insurers have got a huge task ahead of them, for the reality is that their systems are now complex and interwoven. The prices quoted at inception and renewal will be influenced by counter fraud, claims and underwriting systems. Even marketing systems will determine whether a quote appears at all. And many insurers also draw on the third party systems of data brokers, software houses and organisations like the Motor Insurers Bureau and the Insurance Fraud Bureau.
Furthermore, the challenge also goes beyond the systems themselves, encompasses the specification risk, in which the designers of these systems convey what they want the systems to do. That risk is invariably wound up with cultural, performance and compliance expectations, all of which (as I have experienced) can tie a firm up in knots. That said, organisational change is often most influenced by the necessity for that change, so insurers may well find themselves ‘moving mountains’ on discriminatory pricing.