Two regulators are involved - the Equalities and Human Rights Commission (EHRC) and the Financial Conduct Authority (FCA). They’re quite different beasts. The former is strong on social justice but weak on technology. The latter is weak on social justice but strong on technology. Both admitted so to Parliament in 2019. By signing a Memorandum of Understanding in February 2021 (here), they appear to have combined their strengths.
Given the evidence both regulators gave to the Treasury Committee in 2019, during a session specifically about discrimination in insurance pricing, it seems pretty inconceivable that they will not respond in some way to the Citizens Advice (CA) research. That response is likely to be on two levels.
The more direct and obvious level will be for the regulators to launch a combined investigation into CA’s allegations. This constitutes the more immediate exposure for insurers, in terms of possible fines and sanctions under the FSMA, the Equalities Act and more specifically the SMCR.
For simplicity, I’m ignoring that exposure. This analysis is about the second of those two levels of regulatory response: the potentially very disruptive indirect exposure.
That indirect exposure lies in the exemptions that insurers currently enjoy in equalities legislation. I examine the nature of those exemptions and how the CA’s work on both the loyalty penalty and the ethnicity penalty put them at risk. I also look at how those exemptions could be influencing the ABI’s approach to the challenge presented by the CA research. And I end with a look at the huge risk that I think the ABI’s likely approach could create for insurers.
The CA research is about two things: discrimination and price. While I can’t image the main thrust of the regulatory response being shaped around anything other than equalities legislation, it’s best to first clarify why this is the case.
The regulation of price in financial markets has a chequered history. Prior to the ban on price walking currently being implemented across the insurance market, price controls were rarely implemented and often didn’t succeed. They were usually driven by two factors. Firstly, where political pressure existed, as in the case of pensions and mortgages. And secondly, where vulnerable consumers dominated take-up of the product, as in the case of high cost short term credit and rent to buy.
The ban on price walking happened to be influenced by both of those factors. On the one hand, political pressure would have been brought to bear by CA lobbying, and vulnerable consumers (particularly in relation to age) were a big segment of those impacted. Remember that last point – I’ll return to it shortly.
The Problem with the Loyalty Penalty
The problem with CA’s campaign on the loyalty penalty was that it was addressing a pricing technique that the market was in the process of moving on from (more here). So while the implementation of the ban will affect the market to some degree, new pricing techniques are being used to work around and beyond the ban.
The ethnicity penalty report addresses those new pricing techniques more head on. So if the ethnicity penalty campaign is successful (and given the success of their loyalty penalty campaign, it would be a bold person to assume it won’t succeed to at least some degree), the new pricing techniques will be directly challenged.
Given this ‘pricing background’, what then distinguishes a regulatory response centred around equalities legislation, from one centred around a pricing intervention? To put it simple, equality legislation has been tested in the courts, is orientated around outcomes and for insurers, is influenced by exemptions. Pricing interventions look pretty second best by comparison.
Let’s concentrate on those exemptions now, but please bear in mind that I am not a lawyer and this is not legal advice. Those exemptions are unique, orientated around underwriting and gained after considerable lobbying by the sector. They’re based on fair discrimination and a reasonable actuarial basis. Some things do not fall within these exemptions though. Race has long fallen outside of the exemptions for direct discrimination and more recently, following Test Achats, gender has as well.
Let’s not forget what Test Achats tells us though. It tells us that those exemptions are not set in stone. If they’ve been changed before, it’s fair to say that they can be changed again.
Clauses and Sub-Clauses
So how might they be changed? Let’s bring back in that earlier comment about vulnerable consumers and the recent pricing review. This quote is from the FCA’s final report:
“We also looked at the characteristics of consumers who are of longer tenure and so, on average, pay higher margins as a result of price walking. The main factor correlated with tenure is age.”
Yet was it legal for insurers to do so under equalities legislation? A quick look at those exemptions for insurance indicates yes. A closer look indicates no. Insurers are not allowed to use sensitive information other than when it is…
“... both relevant to the assessment of the risk to be insured and from a source on which it is reasonable to rely, and it is reasonable to do that thing.”
In my opinion, price walking fails those tests – price was being based not on an assessment of risk but on a willingness to pay. So alongside the case put forward by the CA that motor prices are being influenced by ethnicity, the FCA’s own evidence points to insurers using age outwith of the caveats found in the exemptions.
What this adds up to is this. If the CA campaign on the ethnicity penalty succeeds, not only will the sector be damaged for that, but it could also find its exemptions under equalities legislation put under review. This is because it would no longer look like a one-off.
Very Big, Very Red Warning Lights
Now some of you will be thinking ‘So what. It won’t have much impact on a motor portfolio’. And there’s some truth in that, but not enough. People need to think outside of their portfolio. A review of those exemptions would set very big and very red warning lights flashing in the offices of life, health and protection underwriters.
I’ve watched this happen over the years in relation to the EU’s Equal Treatment Directive, designed to extend existing anti-discrimination policies to the provision of goods and services, including insurance. Reinsurers and insurers have gone to great efforts to convince policymakers that insurance should be given exemptions there too.
Let’s bring in another angle, that of ‘legitimate aim’. Indirect discrimination is allowed when the underwriter can show that her pricing strategy was a proportionate means to achieving a legitimate aim. And the established view has been that a traditional 'risk plus costs’ pricing model which had an indirectly discriminatory effect was a proportionate means to achieve a legitimate ends. Yet turn that model from 'risk plus costs’ to ‘willingness to pay’ and that legitimate aim justification is jeopardised.
A key question therefore will be this. It’s obvious that the issue of price walking covered by the loyalty penalty was about ‘willingness to pay’ and so constituted an exposure to the exemptions. But what about the issue of discriminatory pricing covered by the ethnicity penalty? Are we talking about ‘risk plus costs’ or ‘willingness to pay’ here? In my opinion, that depends on the mix of factors used and the way in which they are blended into a price.
Here I’m straying to the edge of my understanding of the law, but if the pricing issues being addressed in the ethnicity penalty were a) more risk plus costs than willingness to pay, and b) more down to indirect rather than direct discrimination, then might the Association of British Insurers seek to base their defence on ‘legitimate aim’?
It would be a bold move, were they to attempt it, because they have to evidence that legitimate aim. Then again, the reputation damage from motor pricing being judged discriminatory would be enormous and perhaps then seen as worth such a bold move. The stakes are high, both for insurers, consumer groups and politicians.
And it may indeed be politicians who will influence the outcome of the CA campaign. Will they see the scale of premium difference identified in the CA research as big enough to override the legitimate aim angle? How will they judge the basis upon which the ABI lobbies for legitimate aim?
A can of worms then opens up. I suspect that the ABI will to a large degree base their case for legitimate aims around counter fraud. And should they do so, this could then open up for scrutiny the basis upon which the sector uses data and analytics to assess consumers and policyholders for fraud, particularly at the application stage. As CA identified in their research, the influence of counter fraud assessment systems on end prices is significant.
The ABI will appreciate that such an approach could struggle to gain acceptance if conducted in the glare of publicity. I’m not sure many insurance chief executives would be keen to argue for the ABI approach in a public forum.
So what could then emerge would be a drive by the ABI to achieve their aim through behind the scenes lobbying, and a drive by Citizens Advice to bring this debate out into the open. Given this interview by the FCA's director of insurance, the ABI may already have started. However, in the long run, I believe the ABI would lose such a struggle, for two reasons. Firstly, discrimination is something that attracts media headlines. Secondly, the Treasury Committee will push the FCA hard on this, especially given how the regulator's cards were marked on this back in 2019.
The exemptions that insurers enjoy under equalities legislation could provide the ground upon which some extraordinary legal arm wrestling takes place. A lot will depend on whether this is conducted behind the scenes or in the glare of publicity. The outcome could have a huge impact on the future of insurance pricing.