The practice of price optimisation, in which an insurer establishes individual profiles through analysis of data not directly provided by the consumer, may come under scrutiny by the Financial Conduct Authority as it can result in individuals paying widely different prices for the same insurance cover, according to Moody’s investors Service.
A growing number of U.S insurance state regulators have banned price optimisation in retail lines, on the grounds that it is unfair to consumers, and devalues insurance by emphasising price over quality of cover.
The widespread practice of dual-pricing in the UK, which results in a similar financial impact on consumers, can itself be seen as a form of price optimisation.
Moody’s expects the FCA to look closely at the rating factors used by insurers in their pricing models as part of its study, particularly as insurers are increasingly accessing more consumer data, and are continuing to invest in analytics tools to further optimise their prices.
The debate over fair pricing practices will likely extend beyond home insurance into lines such as motor as well as life and health, where the use of personalised rating factors could raise greater ethical concerns.
Should the FCA follow in the footsteps of its U.S state counterparts, insurers will need to adapt their pricing practices to ensure they comply with new regulations, while continuing to meet consumer demand for greater personalisation of products and premium rates.
Moody’s also believes the spread of subscription or usage-based cover may increase the risk of adverse selection, as such products could attract a relatively high proportion of riskier customers.
