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"PriceWalking": a failure that happened on the IFoA's watch

From an article in the FT in December 2018 (https://www.ft.com/content/c8a4bc0c-f7e7-11e8-8b7c-6fa24bd5409c):

"According to Citizen’s Advice, 12.3m householders pay a “#loyaltypenalty” for their home insurance, for example, and it costs them over £708m per year."

So actually the cost of home + motor insurance compensation from #loyaltypenalty #pricewalking unethical practices is likely to be > £1b per year, from at least 2015 to 2021.
 
IFoA enjoy telling us how important acting in the public interest is to them. Here is the big test of that. Any actuaries involved in pricewalking should come forward and speak up as is required from them as a duty under the actuaries code.
 
Personal view:

This is hardly a scandal. It's a standard business approach of using a loss leader or just a cheaper price to get new business used in every industry. Why would any new customer change business if they don't get a cheaper price? This is basic behavioural economics.

Each year, the policyholder can change their insurance to another company that charges less, they are not under any obligation to continue with the existing company. And it's never been easier to compare and change insurance companies using online aggregators/price comparison sites.

In addition, insurers are required to publish the price their customer paid last year - so the customer is fully informed.

I personally don't think that any such compensation demand would not make it through court.
 
John Lee said:
Personal view:

This is hardly a scandal. It's a standard business approach of using a loss leader or just a cheaper price to get new business used in every industry. Why would any new customer change business if they don't get a cheaper price? This is basic behavioural economics.

Each year, the policyholder can change their insurance to another company that charges less, they are not under any obligation to continue with the existing company. And it's never been easier to compare and change insurance companies using online aggregators/price comparison sites.

In addition, insurers are required to publish the price their customer paid last year - so the customer is fully informed.

I personally don't think that any such compensation demand would not make it through court.
Click to expand...

Thanks for the response.
I think you are taking an interesting position but one which I think you are likely to find uncomfortable to defend.

Basically you are saying "insurance is just like any other business, just like say mobile phone contracts".
Except that it isn't: other businesses don't have "Treating Customers Fairly" rules, don't have highly paid members of a profession (actuaries) with a duty to "act in the public interest" , and to "speak up" if unethical practices occur.
If insurance really is just the same as any other business, why do actuaries need to be members of a profession, with a code of ethics? Is the IFoA's Royal Charter still necessary/useful?
Are actuaries just there to make sure that insurance companies never go bust, i.e. never undercharge? Doesn't a public interest duty, a "treating customers fairly" duty imply that actuaries have a responsibility to stop insurers overcharging too?

You say "the customer is fully informed": no, s/he is not: while they have been reminded what they paid last year, they have not been told what a new customer would be charged.

Are you really saying that no harm has been done? If so, you are contradicting both the FCA, and the IFoA Immediate Past President. Both have admitted that "harm" was occurring in the industry. The Consumers Association has accused insurers of "sharp pricing tactics" and of imposing "eye watering price increases" on loyal customers.

I look forward to your reply!
 
Ian Senator said:
For the interested students, the pros and cons of 'price-walking' were examined directly in Sept/Oct 2020's Subject SP8 and SA3 exams.
Click to expand...

Given that the public interest in this, it would be useful if details of this could be made available please?
 
So what do you think the insurance industry should operate?
If there is no scope of cross-subsidising why bother with insurance?
Isn't pooling of risk the principle of insurance? somebody pays more and somebody pays less
I don't understand why people don't take an extra effort to check what they are paying (even with insurer posting / emailing near renewal date) but instead complaining about things. This is sooo "first world".
So what FCA is going to do? Is it going to impose rules to make insurance quote similar if not the same between the renewed and new business.
What happen then is everybody pays more in average so that insurers can make margin and still be around for those that need the most!
 
wwatson said:
So what do you think the insurance industry should operate?
If there is no scope of cross-subsidising why bother with insurance?
Isn't pooling of risk the principle of insurance? somebody pays more and somebody pays less
I don't understand why people don't take an extra effort to check what they are paying (even with insurer posting / emailing near renewal date) but instead complaining about things. This is sooo "first world".
So what FCA is going to do? Is it going to impose rules to make insurance quote similar if not the same between the renewed and new business.
What happen then is everybody pays more in average so that insurers can make margin and still be around for those that need the most!
Click to expand...
No one said anything about ending pooling of risk, just that (as the FCA are now demanding) new and existing policyholders with the same risk pay the same (or at least very closely the same) premiums. If 1000 such people pay premium P, and a proportion p of those have claims during a year, then the premiums of the 1000*(1-p) who don't have claims help to pay the claims of the 1000*p who have claims, so pooling still occurs.
There is also no reason why "everybody pays more on average": the average premium just adjusts to a value between the (previously artificially low) average premium for new policyholders, and the (previously overcharged) average premium for existing policyholders.
 
pjlee01 said:
Given that the public interest in this, it would be useful if details of this could be made available please?
Click to expand...
All past exams are freely available on the IFoA website. That wasn't the only time the topic has been examined, you'll find it elsewhere too. The topics of differential pricing / pooling of risk / inertia pricing / price walking / etc are pretty much fundamental throughout the general insurance subjects and have been for many years.
 
price is never a function of risk. don't over simplify it. what about expenses and margin? what about competition?
its a free market and everybody is free to opt out if they don't like
 
wwatson said:
price is never a function of risk. don't over simplify it. what about expenses and margin? what about competition?
its a free market and everybody is free to opt out if they don't like
Click to expand...

Maybe you should go to FCA and make a powerpoint presentation on the matter using the skills you learned from acted
 
Ian Senator said:
All past exams are freely available on the IFoA website. That wasn't the only time the topic has been examined, you'll find it elsewhere too. The topics of differential pricing / pooling of risk / inertia pricing / price walking / etc are pretty much fundamental throughout the general insurance subjects and have been for many years.
Click to expand...
Thanks for the reply.
I have downloaded the Sept/Oct 2020's Subject SP8 and SA3 exams and I see no mention at all in the SA3 Q3 Examiners' Report of "Treating Customers Fairly" (TCF), or of the duties under the Actuaries' Code (including to communicate clearly with policyholders), for a 32 mark question, so a substantial question dealing with subject in a lot of detail.
For SP8 Q7 the Examiners' Report makes a very brief mention of TCF (for only 1/2 mark of the possible 9 available), and again no mention of duties under the Actuaries' Code.

Is the low importance accorded to TCF/Actuaries' Code with regard to #loyaltypenalty #pricewalking in these questions representative, or did questions from earlier years give this more attention? How much reference is there in the tuition material to TCF and the Actuaries' Code duties with regard to #loyaltypenalty #pricewalking?
 
almost_there said:
Maybe you should go to FCA and make a powerpoint presentation on the matter using the skills you learned from acted
Click to expand...
I issued the following public challenge earlier this week:

"I challenge any IFoA President, General Insurance Board member, or senior actuary from a #loyaltypenalty insurance company to debate with me on @Moneybox or @WhichMoney whether that complies with "Treating Customers Fairly" & the Actuaries' Code Impartiality/ SpeakUp principles".

I've had no takers so far...
 
pjlee01 said:
Is the low importance accorded to TCF/Actuaries' Code with regard to #loyaltypenalty #pricewalking in these questions representative, or did questions from earlier years give this more attention? How much reference is there in the tuition material to TCF and the Actuaries' Code duties with regard to #loyaltypenalty #pricewalking?
Click to expand...

To be honest I can’t remember the prominence given to those topics in earlier questions. I suspect it will all depend on the relevance given the specific questions asked, and the syllabus at the time. The content of the Actuaries’ Code was not examinable until recently within SA3, being reserved for the Practice Modules and the IFoA’s Online Professionalism Courses. Also note that SA3 is not supposed to be UK-specific and so TCF could be considered an example of a regulation, not a must-do. The course/Core Reading does cover, to some extent, regulation and actuarial guidance, including the Actuaries’ Code. The full syllabus can be found on the IFoA website.
 
Interesting views. Do you think that past and current IFoA Board Members should be held to account then? What would you suggest as a 'punishment'? Expulsion from membership, a fine, a disciplinary tribunal? Do you think those who audited the management accountants who were aware of these practices should also be penalised?
 
The IFoA needs to explain why #pricewalking #loyaltypenalty was allowed to carry on for so many years, effectively discriminating against loyal policyholders (many of whom will be elderly), despite Treating Customers Fairly, and actuaries' responsibility to Speak Up if actions were unethical or illegal.
 
In years to come, will you say that the IFOA should explain their part in a "scandal" of young people being charged more than older people for car insurance? Shall we just stop cross-subsidies and pooling of risk entirely? Were you speaking out against this when you were a member of the IFOA?
 
RedCoat said:
In years to come, will you say that the IFOA should explain their part in a "scandal" of young people being charged more than older people for car insurance? Shall we just stop cross-subsidies and pooling of risk entirely? Were you speaking out against this when you were a member of the IFOA?
Click to expand...
I've already addressed this question above: noone is saying that pooling of risk should go. Instead what has been happening is that, despite Treating Customers Fairly, policyholders with identical risk have been charged very different premiums by the same insurer.
 
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