The draft EU directive on equal treatment could herald a new era of transparency, but are regulators, let alone insurers, ready for it?
The equal treatment directive would allow insurers to differentiate between risks on the basis of age and disability if they pass two hurdles: one is about actuarial principles and reliable data (the subject of my previous post) and the other is about transparency and proof: the subject of this post.
Here’s what the draft directive has to say on transparency:
“…providers of financial services who decide to apply proportionate differences of treatment on the grounds of age or disability shall, upon request, provide information to customers and relevant judicial and complaints bodies on the reasons explaining those differences of treatment.”
So for example, if the Financial Conduct Authority wanted to be more confident that certain categories of consumer were being treated fairly, it could ask insurers to, in effect, explain “…those differences of treatment.” Underwriters would have to justify the basis of their underwriting. Actuaries would have to show that actuarial principles had been properly applied, that their interpretation of fairness was appropriate in both scope and depth. And here in the UK, all this would be happening against a background of chief underwriters and chief actuaries being held personally accountable for the decisions they take.
Yet openness such as this is becoming part and parcel of insurance now. Insurers expect ever more access to data about their policyholders, either directly from the individual herself or indirectly from brokers of the ‘data exhaust’ generated as part of normal life. It doesn’t seem so out of balance for insurers to be subject to something similar.
Yet does the EU really understand how explaining “…those differences of treatment” would work in practice? Those involved in the drafting of the equal treatment directive talk as if this would involve sitting round a table looking at a report. That may have been the case ten years ago, but underwriting models have expanded exponentially since then and will continue to do so over the next ten years. Think less in terms of a report and more in terms of room sized piles of paper. I’ve heard of one US regulator who asked about how representative of an insurer’s rating were the 300 micro-categories of risk they had presented and was told that it was only a small faction: it would have required two million pages to print off details of everything in their rating models.
What this is pointing to is something I’ve previously referred to as ‘panoptic regulation’, where the insurer is in constant receipt of data streams from policyholders and the regulator is in constant receipt of data streams from insurers. The recommendations in the price optimisation white paper issued in November 2015 by the US coordinating body for state insurance regulators, the NAIC, also point in that direction. Indeed, one leading figure in US insurance told me that the recommended restrictions on price optimisation in that NAIC white paper would be less of a worry for insurers than the recommendation to state regulators to require insurers to open up their rating models.
Insurers are being moved through an accountability process familiar to other business sectors, from ‘tell me’, through ‘show me’ and into ‘prove to me’. Public expectations are rising, which is, if you think about it, just another facet of a competitive market. And if you’re in any doubt about this, look again at the draft directive, for its current wording states that “…it shall be for the respondent to prove that there has been no breach of the prohibition of discrimination.” The burden of proof will be with insurers.
In my fourth and final post on equal treatment of age and disability, I’m going to stand back from the detail of the draft EU directive and consider the bigger picture of equality, insurance and fairness: one that could make the directive largely irrelevant.