Apr 8, 2015 4 min read

Why fairness will be central to the insurance response. Financial inclusion pt2

The chief executive of the UK’s Financial Conduct Authority said back in October 2013 that fairness would be the dominant theme of 21st century financial services, for both the regulator and for business. So how does this thing called fairness help us answer a key question in financial inclusion: ‘what insurance is it we need?’ This is the question we reached in part 1 of this three part blog series.

We can think of it this way. Every person is of equal worth and so it is fair that everyone should have an equal opportunity to access the insurance that they need. That’s not the same however as everyone being treated in exactly the same way at that point of need. Fairness needs to take account of merit as well: if you keep on submitting claims, is it fair that other people have to keep on paying more as a result?

Social Mechanism for Sharing

Insurance has traditionally relied on risk pooling and differentiated premiums to deal with this. And just as risk pooling is a financial way of spreading risk, it is also a social mechanism for sharing risk. It helps make insurance more accessible to those who need it. So it would seem fair that risk is pooled in order to make it more accessible to those who particularly need it (“that could be me being burgled like that”), but only to a certain degree, before that ‘merit’ dimension to insurance acts as a brake.

Yet when buying something like contents insurance, how do people work out whether an quote is fair or not? The regulator seems a bit remote and ‘high level’. Some people do a basic ‘smell test’, which relies more often than not on a general sense of trust. If they look around a bit, they’ll find a professionally qualified person to boost that level of trust, but a legacy of mis-selling doesn’t help when weighing up their advice.


Greater professionalism and more clarity about the status of the person offering advice help as well. The Chartered Insurance Institute has 115,000 members, nearly ten times that of its banking equivalent. Yet if recent surveys show insurance people as still less trusted than banking people, even after the recent financial crisis, then something still seems to be missing.

Have all those good, clever people in insurance just made the product too intimidating? Wordings longer than many classic novels; pricing so complex even underwriters don’t know how it’s calculated; marketed through complicated websites. The question must often be asked: ‘why can’t I get the cover I need, for a price I know is fair, through someone I can trust?’

Will the new digital era of insurance help answer that question? Unfortunately, the signs are not good. Take price optimisation for example (more on it here). Over half of UK personal motor premiums are now being priced according to what insurers sense you’re prepared to pay, rather than what your risk warrants.

Headwinds of Change

And take personalisation as well (more on it here). Insurers are distancing themselves from risk pooling and offering premiums tailored more and more around an individual’s claims. Surely it’s fair that you don’t pay for the losses of your accident prone neighbour, insurers say, which is fine, so long as you’re not the one claiming, or thought to be more likely to claim through the insurer’s predictive analytics. The FCA’s idea of fairness as the dominant theme for UK insurers may face some sustained headwinds.

Navigating those headwinds of market change will rely on ethical leadership by UK insurance executives. I think insurance people do have their hearts in the right place and want to tackle inclusion, yet ethical leadership is more than about wanting to ‘do the right thing’. It is about understanding the language of ethics, setting a clear ethical vision and getting your people to work to it, and configuring your organisation so that it can deliver on that vision.

Equality and Customers

Take a recent survey I undertook on how six leading insurers dealt with equality and customers, not on a one-to-one basis, but on a one-to-many basis (more on the survey here). I was interested in how these insurers guided their ‘behinds the scenes’ underwriters and claims people on factoring equality issues into how they sifted and sorted all that ‘big data’. What I found was mixed: of the six, only one insurer had picked up on its responsibilities to customers as a whole and it was still at the ‘thinking about how to do it’ stage. The rest based their thinking on equality around employees, despite the law encompassing responsibilities to the public as well.

At the same time, what this doesn’t add up to is a lack of concern about discrimination. People I meet with talk about their firm being wholeheartedly against it. And that’s great, but it’s not enough. Insurers need to see that inclusion has more than one side to it: if you’re inclusive when it comes to staff, then you have to be inclusive when it comes to consumers. After all, every one of the hundreds of thousands of people working in UK insurance is a consumer as well.

Competitive Market

Every insurance executive will point out that their responsibilities also have more than one side. If ethical leadership is on one side of that coin, then they’re acutely aware of a highly competitive market being on the other side. And it’s important that insurance firms are able to provide a reasonable return on the investments made in them, for if nothing else, a healthy market delivers the returns that help fund all those payments due on long term policies.

Yet, there are structural changes underway in the UK insurance market that seem to point to inclusion becoming even more difficult to deliver than in the past. Price optimisation and personalisation have been outlined above: the question of social sorting is also an issue. And if this is the case, and even if the FCA does not have its inclusion objective widened, then I think that the regulator will still look to the themes it holds dear (like fairness and market confidence) and trigger some form of intervention. And it could be seismic. Rather strong? I’ll explain why in the last post in this blog series, out in a few days time.

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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