The insurance industry is pulling the wool over customers’ eyes with a recent promise to end discriminatory pricing – a regime that results in longstanding policyholders paying more than new ones with the same cover.
This is the damning view of a leading consumer representative in regulatory circles who accuses the industry of ‘giving the appearance’ of cleaning up its act while introducing new pricing strategies that ‘have nothing to do with treating customers fairly’ – and everything to do with ‘maximising profits’.
The consumer expert, who has spoken to The Mail on Sunday but wishes to remain anonymous, says the days of ‘really egregious pricing practices’ by leading insurers may well be drawing to an end.
A consumer expert has revealed that insurers are using a new-style of price optimisation, which involves using ‘big data’ to arrive at premiums for policyholders
This is as a result of a recent initiative from the Association of British Insurers to stop loyal customers being penalised.
But the expert says the new ‘devil in the making’ is the increasing use of sophisticated ‘customer optimised pricing’ – a more subtle form of price discrimination.
Rather than simply penalise loyal customers with ever-rising premiums at renewal – leading to prices far higher than for a new customer – new-style price optimisation involves using ‘big data’ to arrive at premiums for policyholders.
For example, an insurer will factor in how long it thinks a policyholder will stay with them and how likely they are to haggle over price at renewal.
Critic: Asif Bhatti, pictured with his family, is a scathing critic of the way insurance companies treat existing customers
So, the more passive someone is, the likelier an insurer will be to pass on big premium increases, confident in the knowledge they will not be challenged.
CASE STUDY: Loyalty is a word I do NOT associate with insurance
Accountant Asif Bhatti (pictured above with his family) is a scathing critic of the way insurance companies treat existing customers.
For the past ten years, the 49-year-old from Great Missenden in Buckinghamshire, has always changed home insurer when cover has come up for renewal.
He says that not one of the insurers he has bought cover from over the years – including Axa, Direct Line and HSBC – have tried hard to keep his custom.
It has meant him shopping around for an alternative provider and always finding a rival prepared to undercut the renewal quote provided by his existing provider. His home cover, for buildings and contents, is currently with Together Insurance, some 30 per cent cheaper than the cover offered by his last insurer.
Asif and wife Simone have two children – Zara, 12, and nine-year-old Eisa – and they have never once made a home insurance claim. Asif says: ‘I now have in my diary the date when I need to shop around. But it seems perverse that you can be a good customer, not claim and then be almost pushed away. Loyalty is a word I do not associate with insurance.’
The Chartered Insurance Institute will tomorrow launch a ‘public trust index’, aimed at gauging consumer confidence in insurance. Initial findings indicate that while insurers are doing a good job overall in settling claims, the disparity between the pricing for new and existing customers remains a consumer bugbear and is eroding trust.
Its research does not tackle the issue of price optimisation.
Equally, a customer who has a clear history of contesting any premium increase will be offered a keener premium to encourage them to stay. The expert adds: ‘This is all about maximising profits, pure and simple.’ She also argues that any form of insurance policy that is not priced on risk – the cornerstone of insurance pricing – is ‘wrong’. She believes the regulator must now intervene.
Hers is not a lone voice. James Daley is founder of Fairer Finance, an organisation that helps consumers make better product selections – and not just on price alone.
He says: ‘The use of customer optimisation is quite hard to prove but it is happening. Insurers are absorbing all the information they can find out about you – for example looking at your cookies and IP address – and then pricing products accordingly. If they think a customer is prepared to pay more, they will try it on. It is exploitative.’
Last year, insurer Admiral was forced by Facebook to abandon plans to examine posts on the social media network made by car owners before setting their premiums – the posts giving the insurer an indication of a customer’s personality.
In the US, some insurers have price discriminated against customers who bought cover using an Apple Mac – on the basis they tend to be wealthy individuals.
For years, insurance companies have offered new customers keener prices than existing ones. Last year, The Mail on Sunday launched its ‘broken loyalty’ campaign to prompt change, triggering a bulky mailbag of correspondence from angry readers.
It resulted in an announcement in May from the powerful Association of British Insurers confirming that companies would take action so that customers’ tendency to shop around at renewal would no longer lead to excessive pricing differences that ‘unfairly penalise long-standing customers’.
Early evidence indicates that despite these so-called ‘guiding principles and action points’, loyalty is still being penalised.
Research published tomorrow from the influential Chartered Insurance Institute indicates that the number one issue for consumers when it comes to trust in insurance products remains the perceived lack of loyalty from their insurer.
Sian Fisher, chief executive, says consumers are ‘fed-up’ with dual pricing that results in new customers being offered cheaper premiums than they are at renewal.
Insurers are loathe to talk about price optimisation practices. But such techniques have been widely discussed at industry conferences with experts acknowledging that their use will become a necessity to compete effectively. Implementation, they admit, will boost profits.
On Friday, the Association of British Insurers was asked for its thoughts on customer optimised pricing. Mark Cullen, head of strategy, data and analytics, said: ‘Insurance pricing is based on an estimate of a customer’s risk, but there are also other commercial considerations such as the cost of attracting new customers.’
Have you challenged your insurer – and got a better deal? Contact firstname.lastname@example.org.