Oct 3, 2023 4 min read

Fairness, Digital and Target Markets

Target markets are now a key feature of product governance. The problem is that they take shape on two levels. There’s the generic version for the regulator, and the decision systems one for consumers. In this gap can be found some of the key challenges being put to insurers.

target markets
Insurers need to be clearer about who they're targeting

The regulator defines a target market as a group of retail consumers who share common characteristics and needs that the insurer’s product is designed to meet. This needs to be done at a sufficiently granular level to ensure compatibility of product with consumer. On top of that, incompatibilities between product and other types of consumer need to be identified too.

An awful lot of form filling, some of you will be thinking. And that might be true for insurers running an analogue compliance programme within a digital business. For all other insurers, it should be a more straightforward procedure to understand who is most likely to buy your product. After all, this is what marketing departments exist for.

Of course, in the past, insurers created generic products that were sold widely across swathes of consumers. The problem now is that as underwriters use ever more granular data to segment and fine tune their rating parameters, what results is far from generic.

Is it really a problem though, you may be thinking. After all, isn’t the innovative personalisation of product, rate and distribution just what the sector needs? It enables tailored cover to be delivered at a personalised price, just when its needed. Customers love it, so the sector keeps saying.

And certainly many customers do like it. They don’t care about target markets, so long as they can find and buy the insurance product they need. However, it is in relation to that ‘so long as’ that the problem lies.

So Long As I Fit

So long as I can access the products to meet my needs. Turn that around and it means ‘so long as I fit into a target market’. That’s not a problem, think many, because the regulator will be looking at target markets as part of its Consumer Duty work and finding them broad and responsive.

Yet the reality is that a target market isn’t what the insurers writes in their product governance file. It’s to be found in how many of those in the target market so described can actually access that product. The reality is to be found in the rating system, inside which certain types of risk are to be given a competitive rate and others a ‘go away’ rate or none at all.

The net result is an actual targeted market smaller than what compliance people may have been led to believe. Insurers may seem to be spreading their nets wide, but are using nets designed to only catch certain fish. To continue the analogy, it’s what lands on the deck that matters.

Incompatibilities Count Too

So while the compatibility of a product is being set for a wide range of consumers, the incompatibilities of that product are receiving less attention. The former lies in product governance files, while the latter exist in the digital decision systems being used for underwriting. Very different accessibilities.

Who cares, is the sector’s obvious retort. And on the surface, it does seem a bit technical. Think about it though in the context of the challenges being faced by the sector. These challenges have at their heart some dimension of fairness.

There’s the challenge of meeting the needs of vulnerable consumers. That’s all about the fairness of need. Then there’s the access to insurance challenge, which is all about the fairness of access. Bring in the questions of fairness circulating around the impact of personalisation and you have a widening engagement by the public with the sector that makes the whole notion of target markets a pretty pivotal one.

Measuring the Net

There are concerns that stratification within the sector’s provision is resulting in certain segments of the public finding it more difficult to access the products they need. The question I’m raising here relates to how much of this may lie hidden behind insurers’ descriptions of their target markets and the reality of the net provision actually made available.

That’s a question that could be answered by some testing. Within the institutions of government, regulation and data science, it shouldn’t be too difficult to put together a fair sized database representative of the public and have this run through some underwriting decision systems. The gross net gap, between what’s on paper and the reality, should become clearer.

This would then equip the regulator to target its own interventions in order to tighten up sector practices around target market parameters. As a result, the regulations relating to target markets would become more enforceable. And it would also uncover the extent to which stratification is taking hold. This is something I suspect the regulator has little interest in investigating, except until its political masters start asking awkward questions.

To Sum Up

Insurers have long been familiar with the use of target markets for directing marketing and sales. Now that they’re required to embed them in product governance, the trend seems now to be towards a more generic version. The thinking is to keep options open.

Yet people tell me that the reality has underwriters using their digital decision systems to pull in the true boundaries of their target markets. This fits into a broader narrative in the public domain of a sector becoming more selective, of its products being less accessible, of markets becoming stratified.

The regulator needs to take steps to ensure that target markets doesn’t detach from reality and become just another box ticking exercise. Given how pivotal the notion of target markets are for fairness and the challenges raised by stratifying markets, they would be wise to put some of their much vaunted ‘expertise and resources’ behind this.

Duncan Minty
Duncan Minty
Duncan has been researching and writing about ethics in insurance for over 20 years. As a Chartered Insurance Practitioner, he combines market knowledge with a strong and independent radar on ethics.
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