Differential pricing is the practice of differentiating between customers for reasons other than the expected cost of claims and expenses
The bank’s interim report on the practice of differential pricing also found that dual pricing, where new and renewing customers are charged different premiums for reasons other than risk and cost of service, is evident across the private car and home insurance markets.
The study, which began last year, has also concluded that there are significant differences between what different groups of customers pay relative to their expected cost, with the most loyal paying the most.
It also found that insurance providers have failed to demonstrate consideration of how these pricing practices may impact certain groups of consumers differently and the potential for certain consumer groups to be impacted more than others.
The probe was launched after concerns were raised that insurance customers were being discriminated against and disadvantaged at renewal because of the use of the practice by some insurance firms.
Differential pricing is the practice of differentiating between customers for reasons other than the expected cost of claims and expenses.
Those who use the practice, including insurers, utilise sophisticated data analysis techniques to build up a profile of customers.
They can then use that information to, for example, charge customers who are less likely to shop around at renewal more than other clients who are more likely to seek alternative quotes.
The research carried out by the bank has involved interviews and inspections with 11 of the main insurers operating here, covering 90% of the home and motor insurance market.
11 million policy records over a three year period have been gathered, with 60 data points across each analysed.
In September, the Central Bank said its initial analysis had established that while some firms were claiming that they do not use differential pricing, the majority of firms do actually utilise it through various techniques.
It also said at the time that it was concerned about weaknesses it had identified in the pricing practices used by some insurance companies, and that some firms were not adequately considering the effect of their pricing practices on their consumers, potentially leading to poor customer outcomes.
Today the regulator published an interim report, including a progress update on its findings to date following completion of the second phase of the review.
It also includes initial observations from consumer research it has carried out in parallel with the probe of insurers including.
They show that consumers tend to show a clear preference for staying with an existing insurance provider.
The study found that often consumers compare prices with other insurance providers to help to negotiate a better price with their current provider, rather than actually switching.
Consumers tend to have limited knowledge of how insurance operates, it discovered, due to the complexity of the subject matter, leading to less involvement and a tendency to believe it is easier to stay with a current provider rather than switch.
Although customers are generally aware of the legal requirements of insurance, they do not see it as a discretionary purchase, it is frequently considered in largely negative terms, the bank found, resulting in both a lack of trust and lack of interest.
Private car insurance is considered more involving, while there is a higher level of inertia towards home insurance, the researchers also discovered.
The Central Bank said it intends to continue its review and will publish its final report next year.
Although a ban on differential pricing would require Government action, Derville Rowland, Director General Financial Conduct at the Central Bank said there are a number of things the bank could do following the completion of the final report in 2021 to deal with problems it has identified.
“I actually think there is a lot that can be done, but it depends on what the problems are that you find and what is going on in your own market,” she said.
“I welcome the recognition in the Programme for Government that any action that may be needed will be taken at Government level. Of course there are bans that are available, but you would have to take a high degree of care that a ban doesn’t result in the whole market charging more to customers across the board, so that you don’t have lots of losers and very few winners.”
She added that if customers feel disengaged or that they don’t understand the market, the insights gained from the research can act as an important behavioural analytics tool around what helps customers understand the information they get from their insurers.
Sinn Féin has said it will publish legislation this week to ban the practice of dual-pricing in the insurance market here.
Sinn Féin’s Finance spokesperson Pearse Doherty has long called for a ban arguing it will reduce insurance prices for consumers.