Jul 23, 2019 3 min read

Politicians are burying the loyalty penalty: so what comes next?

While we do not yet know the detail of the UK regulator’s much anticipated report on retail insurance pricing, the political landscape within which their final deliberations are being made has become clearer in recent weeks. Announcements from across the UK political establishment are pointing the regulator towards a preferred line of response. It would take a brave and very confident regulator to ignore those signals.

Who in political circles has not yet come out in opposition to what Citizens Advice have labelled the ‘loyalty penalty’? Not many. The Prime Minister (at least up until today), the relevant Secretary of State, the Home Affairs Committee and the Treasury Committee have all made clear their distaste for the practice.

As I said a few months ago in this quote from the economic sociologist José Ossandón: in established and competitive markets, “profitability is found mostly in regulatory struggles. In insurance, business means politics”.

That regulatory struggle now appears to be in its final stages, with consumer representatives looking like the clear winners. I’ve been pointing out the strength and diversity of Citizens Advice’s political network to clients for several months now. And so it comes as no surprise that their views have captured political minds.

Two Important Doubts

For the regulator, this political clarity allows them to set their ‘levers of response’ with a lot of confidence. Except that there will be two important doubts lingering in their minds. The first doubt will be around unintended consequences. And the second doubt will be around legal challenges.

The UK regulator does not like price regulation. In their minds, it is rife with unintended consequences. So just because the political establishment and consumer groups are pushing for a strong response to that ‘loyalty penalty’, the FCA will be worried that that response might backfire in the not so distant future.

This could be in the form of supply side problems such as rate increases across the board, more rigorous personalisation of pricing, or a tougher approach to claims. If as Citizens Advice say, the household market makes most of its profit from that ‘loyalty penalty’, then insurers will seek to recapture it through other means. Or there could be more of a demand side response, with greater switching or even a surge in compensation claims.

A possibility of a legal challenge will also be on the regulator’s mind, particularly if the regulator’s response involves some direct form of intervention in how prices are set. That would undermine their timetable for pricing reform and sour relations with the market. I don’t think this is likely, largely because going down the ‘direct pricing intervention followed by legal challenge’ route would deliver little more than a pyrrhic victory for either party.

The clue to what will lie at the heart of the regulator’s pricing response lies in the oft repeated word ‘accountability’. And what I believe is most likely to catch the market out is the scope of what the FCA will point to insurance firms and executives being accountable for.

The challenge for the regulator will of course be around identifying those situations when insurance firms and executives have done something  that they may need to be held to account for. And that is where the public announcement last week of the FCA’s partnership with the Alan Turing Institute (ATI) comes in. The ATI is a formal collective of the UK’s foremost data science academics, drawn from 12 partner universities.

Big Resource

The FCA and ATI have actually been working in partnership for the last three years, but only gone fully public about it now. So ATI are definitely not coming too late to the pricing review. Where their influence is likely to have been most important is in shaping the use of data science in the post pricing review period. And in Professor Luciano Floridi (Oxford and ATI), they have the UK’s foremost data ethicist as a strategic adviser. Overall, these puts the FCA’s data science resources well ahead of anything the big four consultancies can offer their insurer clients.

One further point is worth bearing in mind. After the FCA publishes their pricing review, one part of the regulator will watch how the market responds. Another part, and probably the larger part, will move onto their next piece of diagnostic work. Over the next month or two, my research into what that is likely to be in the post pricing ethical landscape for insurance firms will be concluded, ready for incorporating into your ethical risk assessment process for 2020.

In the meantime, I’ll be taking August off from blogging, in order to concentrate on this research. See you in September.

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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