The UK insurance sector is grappling with the repercussions of a ban on their main model for pricing retail products. At the heart of the review that lead to the ban was the fairness of those pricing practices. The danger for many insurers is that they see this fairness debate as over, when in fact it is only just starting. What we are now beginning to see is a more complex, more political debate about the equality of fairness. It is a debate for which insurers need to grasp ‘the big picture’, in order to manage the implications it has for their digital strategies.
In 2013, the then CEO of the UK insurance regulator said this…“for leaders today – both in business and regulation – the dominant theme for 21st century financial services is fast turning out to be a complicated question of fairness.”
Fairness is indeed a complex thing, and his words were prescient, for it is probably only recently that we have been seeing fairness spread out and dominate regulatory expectations. Sure, their ‘treating customers fairly’ initiative put fairness on insurers’ compliance radar some years ago, but its impact was narrow and far from game changing. What we’re seeing now is fairness move from a concern for how you deal with individual customers, to a concern for how your portfolios are structured and what your strategies aim to achieve. We’re talking bigger picture here, with bigger implications.
Fairness is About More than Merit
Traditionally, insurers have concentrated on one particular dimension of fairness – that of the fairness of merit. That is based upon the idea that we each pay premiums according to the risk we present. It was only fair, this idea goes, that higher risk policyholders should always pay a higher premium than lower risk policyholders. It was a simple idea that resonated well with policyholders. Who wants to pay for the claims of their accident prone neighbour, went the narrative.
Back in 2013, I warned insurers not to be lulled into a false sense of security around fairness. It was more complicated than just merit. Two further dimensions had to be considered: fairness of access and fairness of need. These saw fairness as just as much about insurance being available to those who need it, and accessible to all who want it.
What we’ve seen since 2013 is the emergence of two key regulatory initiatives: vulnerable consumers, and access to insurance. Both are clearly aligned with fairness of need and fairness of access. And the scale of this overall fairness debate was made clear in early 2021, when the FCA published its latest Financial Lives Survey. This confirmed that 27.7 million people are vulnerable in some way as consumers of financial services.
A Fourth Dimension to Fairness
Since 2013, I’ve also been tracking a further dimension to fairness. And it is something that I have only found mention of in the academic community. It is fairness over time. What fairness over time represents is the notion that the time scale over which you judge fairness is critical to the conclusion you draw from it. So if I think of the fairness of a situation within say a month’s time period, my view of say the risk presented will be quite different compared to if I had looked at the fairness of that same situation over say 5 years. For example, my claim for damage to my house from a lightning strike looks OK over 5 years, but bad in the month in which it happened.
So, to summarise, fairness has four dimensions – merit, need, access and time. It sounds pretty simple, doesn’t it, until that is, you start to bring them into balance. Then the complicatedness of fairness becomes clear.
We will see this complicatedness come to the fore over the next few years, as insurers seek to balance their traditional adherence to fairness of merit, with regulatory expectations in relation to retail pricing, vulnerability and access to insurance. Think about this for a while, and what becomes apparent is that we’re talking here not just about commercial considerations, but political ones as well.
Fairness is Political
What the pricing review showed us is that the question of fairness of pricing is not determined by supply and demand, but by a host of related parties. Academics refer to such parties as actors, as in this 2015 quote from the economic sociologist José Ossandón: insurance pricing is… “not simply a matter of supply and demand, but rather the product of a wider range of actors, including regulators, lawyers, policymakers, members of parliament, consumer associations and representatives of the industry.”
Let’s bring two things together – equality of fairness on the one hand, and the two key trends in digital insurance, personalisation and behavioural fairness, on the other hand. The insurance market has built its digital revolution upon a version of fairness based around personalisation and behavioural fairness, and it appears to be, to all intents and purposes, on a collision course with equality of fairness. The singularity and primacy of merit in the former stands in contrast to the multi-dimensionality of the latter.
How will this be resolved? As Ossandón indicates, it will be resolved through the political interaction of a number of powerful actors. And the pricing review was a foretaste of the much wider re-evaluation of fairness within insurance that is to come. What is extra-ordinary about this is that the sector looks set to have to defend, again, key features of its digital revolution.
So what can individual insurers do? I think their priority should be to understand what I often refer to as the landscape of this debate, where they stand on it, and where they want to get to. I’m minded of the three Vs of big data – volume, variety and velocity. As ethics and consumer trust start to reshape the digital landscape of insurance, perhaps the three Vs need to be replaced with the three Ds – direction, destination and determination.