EIOPA supervisory statement on differential pricing in non-life insurance
Irish non-life insurers should take note of EIOPA’s recent supervisory statement on differential pricing practices, as it applies to all classes of non-life insurance business and is therefore broader in scope than the Central Bank (Supervision and Enforcement) Act 2013 (Section 48(1)) (Insurance Requirements) Regulations 2022, which chiefly dealt with price-walking (a sub-type of differential pricing) in the consumer home and motor insurance markets.
Differential pricing practices arise where customers with similar underwriting risks and costs of service are charged different premiums for the same insurance product. The supervisory statement applies to all non-life lines of business, as these typically need to be renewed on a regular basis.
Differential pricing practices are not new, but EIOPA points out that a number of factors (such as the deployment of AI, big data and sophisticated analytical tools) now enable insurers to increasingly tailor premiums to personal behaviours and characteristics that are not related to underwriting risks, allowing insurers to implement differential pricing practices at scale.
EIOPA places particular emphasis on price-walking practices (i.e. where the premium is repeatedly increased at renewal stage based on factors other than underwriting risk or cost of services), which result in unfair penalisation of loyal customers, particularly vulnerable customers who may have a low propensity to shop around and low price elasticity.
While the supervisory statement does not prohibit non-life insurers from engaging in differential pricing practices, it emphasises that supervisory authorities should ensure that such practices do not result in unfair treatment of, or detriment to, customers.
The product oversight and governance (POG) process appears to be the key focus for EIOPA in this regard. Price is a product characteristic and therefore falls within the POG process. Some of the key points set out in the statement are:
- Product approval process – final approval of product design relying on differential pricing should be at a sufficiently high level within the insurance manufacturer, to ensure accountability for appropriate pricing. Adequate measures must also be in place to ensure identification, prevention and mitigation of the main drivers of conduct risk, and adequate levels of human oversight will be particularly important when differential pricing practices rely on complex algorithms and technologies.
- Target market – assessing whether differential pricing practices are compatible with a target market should take into account that customers might not be aware of the existence of such practices and that the capacity of insurance product manufacturers to determine propensity to switch and price elasticity will give them a disproportionate information advantage.
- Product monitoring and review – product manufacturers should identify and monitor whether the target market is adversely impacted by differential pricing practices over time and, in case of detriment, take appropriate remedial measures.
- Distribution channels – distributors should be provided with a high-level explanation of how product pricing may develop at renewal and the existence of differential pricing practices, to allow them to act in the best interests of customers and provide customers with all relevant information to make informed decisions.
If an insurance product manufacturer fails to comply with the above requirements and the others set out in the EIOPA supervisory statement, this may lead to regulatory action based on failure to comply with the requirements of the Insurance Distribution Directive and the POG Delegated Regulation.
Link to the full statement: EIOPA supervisory statement.