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

[Ppan13]

This is fundamentally what I’m trying to get at: I think your axiom that there is a hard and fast interpretation of ‘fair’ is wrong. The regulator has now clarified its stance as far as price-walking goes, and therefore the profession abides by it, but that doesn’t mean that every actuary who didn’t speak out against it prior to the FCA’s ban on it was being unethical. In effect, it is the FCA, and by extension the IFoA, who are steering the profession on what the agreed position is with regards to this now.

Was it unethical to be using gender as a pricing differentiator BEFORE the ECJ gender directive banned it? Or did we come to view it as unethical because of the ECJ directive? Why is it considered ethical now to still use age as a rating factor but not gender, if both are protected characteristics as defined by the Equality Act 2010? Sexism is not fair but ageism is? Is there only one “fair” answer to all these questions, per Joe Ordinary Public? Or does the perception of what is fair vary by societal segment, and change over the years?

 

[pjlee01]

Thanks for the further responses/comments. I will reply on here when I have time, but in the meantime, a similar discussion can be seen at https://www.reddit.com/r/Actuary_news/comments/tim09v/list_of_defences_suggested_so_far_for/.

 

[pjlee01]

Fantastic news! See https://www.reddit.com/r/Actuary_news/comments/ttwcje/great_news_on_this_auspicious_day_insurance/

 

[Ppan13]

Fantastic news! See https://www.reddit.com/r/Actuary_news/comments/ttwcje/great_news_on_this_auspicious_day_insurance/

Hi! I see that a view somewhat similar to mine on this topic (as I expressed in my previous post on this thread, re: interpretation of ‘fair’) was incorporated into the ‘disclaimer’ at the bottom of your April Fool’s satire, but nevertheless, in all seriousness it doesn’t really address analogous situations like ‘Was it unethical to be using gender as a pricing differentiator BEFORE the ECJ gender directive banned it? Should actuaries be penalised for having used gender as a rating factor then? And why is it still ethical NOW to use age as a rating factor but not gender, when BOTH are protected characteristics according to the Equality Act 2010?”, which is how I challenge the notion that the perception of fairness is universal and static.

Anyway, my reason for this post here is I wanted to share an excerpt of what the SA3 core reading says in the section about “Treating the customer fairly” (chapter 4: legislation).

“There is no precise method of defining what customers were led to believe at the inception of a contract, but it is generally accepted that the main influencers on policyholder expectations are:

• Statements made by the provider, especially those made to the client in the marketing literature and other communications
• The past practice of the provider
• The general practices of other providers in the market.”

I think you would find the current Stage 2 Professionalism Course interesting in the sense that it presents us with different open-ended (or seemingly not cut-and-dried) scenarios of questionable ethics/ professionalism breaches and gets us to comment. (I’m not touting for the course, though lol. And I don’t work for IFoA nor Acted for that matter; in fact I’m still a student member, hence my keen interest in SA3 core reading!!)

 

[Busy_Bee4422]

I am not sure the ECJ directive is a good parallel in this scenario. At the heart of the ECJ issue was the exemption insurers enjoyed on sex discrimination because it was based on statistical evidence. Also, the use of sex was/is a universally accepted risk factor in most markets. Even the ONS still reports life expectancy by sex. As it is the ECJ directive is more of an idiosyncratic position.

In reverse, price walking was an acceptable practice in our market but it isn't a universally accepted insurance practice across EU let alone in global markets for personal insurance. It was an idiosyncratic issue with our market. The other aspect of price walking is it isn't statistical but rather it is one of those soft issues that can easily end up involving profiling people with lower bargaining power or greater information asymmetry. It can then be easily dressed up (deceptively) as client inertia. If the matter ends up being decided on soft issues ethics should be one of the considerations.

Unfortunately, we as the actuarial profession got here because of historic issues in the gi market. These include but are not limited to the following

• actuaries came in force to the GI party later than in other practice areas so the actuarial price may not be as hard as say life insurance where the rate book is gospel;
• pricing may have previously fallen to other roles e.g. underwriters who priced and managed their portfolio profitability. The practice may have continued even when actuaries became more involved with final price not being an actuarial responsibility;
• this technical price in personal lines has been evolving. The use of glms is not that old;
• the personal lines market is very price competitive making price walking attractive; and
• historically regulators have been more involved with pensions and life insurance, among other reasons.

I wish this matter was handled in the context in which the practice developed without putting a disproportionate amount of the blame on IFoA and actuaries. Unfortunately, it is now a political bullhorn for some. In conclusion when the price walking discussion began if an actuary had advised their company to stop the practice how likely would they have prevailed?

 

[Ppan13]

I am not sure the ECJ directive is a good parallel in this scenario. At the heart of the ECJ issue was the exemption insurers enjoyed on sex discrimination because it was based on statistical evidence. Also, the use of sex was/is a universally accepted risk factor in most markets. Even the ONS still reports life expectancy by sex. As it is the ECJ directive is more of an idiosyncratic position.

In reverse, price walking was an acceptable practice in our market but it isn't a universally accepted insurance practice across EU let alone in global markets for personal insurance. It was an idiosyncratic issue with our market. The other aspect of price walking is it isn't statistical but rather it is one of those soft issues that can easily end up involving profiling people with lower bargaining power or greater information asymmetry. It can then be easily dressed up (deceptively) as client inertia. If the matter ends up being decided on soft issues ethics should be one of the considerations.

Unfortunately, we as the actuarial profession got here because of historic issues in the gi market. These include but are not limited to the following

• actuaries came in force to the GI party later than in other practice areas so the actuarial price may not be as hard as say life insurance where the rate book is gospel;
• pricing may have previously fallen to other roles e.g. underwriters who priced and managed their portfolio profitability. The practice may have continued even when actuaries became more involved with final price not being an actuarial responsibility;
• this technical price in personal lines has been evolving. The use of glms is not that old;
• the personal lines market is very price competitive making price walking attractive; and
• historically regulators have been more involved with pensions and life insurance, among other reasons.

I wish this matter was handled in the context in which the practice developed without putting a disproportionate amount of the blame on IFoA and actuaries. Unfortunately, it is now a political bullhorn for some. In conclusion when the price walking discussion began if an actuary had advised their company to stop the practice how likely would they have prevailed?

Hi!! Thanks for your input! A couple of things came to my mind when reading it:

1. Are you saying that the ECJ ruling was NOT a reflection of an *ethical* objection to using sex as a rating factor (given its use prior to the ban was said to contravene gender equality) ?

2. You said, “In reverse, price walking was an acceptable practice in our market but it isn't a universally accepted insurance practice across EU let alone in global markets for personal insurance. ”

Firstly that supports the point I was making that what is deemed ‘acceptable’ or not isn’t universal, but varies depending when, where and who you ask. Secondly, that is in line with the point I was trying to make previously , that prior to the FCA taking a stand against price walking, it was deemed acceptable in the U.K. : therefore pricing actuaries (at the time) were performing their roles in line with the accepted practice (including what was deemed ethical or not) in their market at the time.

 

[Busy_Bee4422]

I totally agree with you on those points but the two issues played out totally differently in the public space. The main reason is that in one situation the ECJ is being idiosyncratic therefore no reputational damage to the profession and in the other, it's those doing the pricing hence all this brouhaha.

Edit: Whilst where the ethical line is drawn may have changed, being idiosyncratic is questionable on general principles. This is the essential lesson of the Equitable Life saga as well. Don't get comfortable when you are engaged in idiosyncratic behaviour. It may bite you.

 

[Ppan13]

I totally agree with you on those points but the two issues played out totally differently in the public space. The main reason is that in one situation the ECJ is being idiosyncratic therefore no reputational damage to the profession and in the other, it's those doing the pricing hence all this brouhaha.

Edit: Whilst where the ethical line is drawn may have changed, being idiosyncratic is questionable on general principles. This is the essential lesson of the Equitable Life saga as well. Don't get comfortable when you are engaged in idiosyncratic behaviour. It may bite you.

Do u know where I can find information on the permissibility (or otherwise) of price walking in other countries ? This headline and first paragraph here seem to suggest the U.K. was not alone in price walking (I don’t have subscription to be able to see the full article though) https://www.intelligentinsurer.com/...n-auto-household-suspect-discrimination-28343

 

[Busy_Bee4422]

Sorry for the late reply. I was trying to remember where I read issues on insurance regulation. There are reports by OECD and World bank/IMF that discuss insurance supervision across the world for example this one https://www.oecd.org/finance/insurance/1900939.pdf. There are others.

 

[Ppan13]

Sorry for the late reply. I was trying to remember where I read issues on insurance regulation. There are reports by OECD and World bank/IMF that discuss insurance supervision across the world for example this one https://www.oecd.org/finance/insurance/1900939.pdf. There are others.

hi busy_bee, thanks for the reply. I couldn't find any refer to price-walking in that document despite it's length (230 pages)! I searched on keywords like "renewal" (only appears 3 times, surprisingly), "loyalty" (0 entries), "penalty" (0 entries), "repeat" (0 entries), "discrimination" (0 entries).

Anyway, it looks like a really handy reference in general so thanks for sharing that and I will pore over it with interest. I'll keep googling for other potential sources too.

 

[Busy_Bee4422]

Do u know where I can find information on the permissibility (or otherwise) of price walking in other countries ? This headline and first paragraph here seem to suggest the U.K. was not alone in price walking (I don’t have subscription to be able to see the full article though) https://www.intelligentinsurer.com/...n-auto-household-suspect-discrimination-28343

Price walking is more commonly called price optimisation. If you search that you are more likely to get hits

https://www.namic.org/Issues/price-optimization
https://www.cga.ct.gov/2015/rpt/2015-R-0251.htm
https://www.naic.org/documents/committees_c_catf_related_price_optimization_white_paper.pdf

 

[Ppan13]

Price walking is more commonly called price optimisation. If you search that you are more likely to get hits

https://www.namic.org/Issues/price-optimization
https://www.cga.ct.gov/2015/rpt/2015-R-0251.htm
https://www.naic.org/documents/committees_c_catf_related_price_optimization_white_paper.pdf

thank you for this information !

 

[pjlee01]

thank you for this information !

"Price optimisation"? That's a nice euphemism but it seems to have been optimised only for insurers (and hence arguably their actuaries) and not for their loyal policyholders.

 

[pjlee01]

3 updates, most recent at top:

IFoA has referred the complaints to the Financial Reporting Council: https://www.linkedin.com/pulse/institute-faculty-actuaries-has-referred-pricewalking-lee

Why did UK supermarkets (unprotected by actuaries) treat loyal customers better than insurers (protected by actuaries and "Treating Customers Fairly")? : https://www.linkedin.com/pulse/why-have-uk-supermarkets-unprotected-actuaries-treated-lee/

Linked In poll, 94% thought price walking was unfair/unethical: https://www.linkedin.com/posts/patr...-insurance-activity-6921135693532381184-hfj4/

 

[Ppan13]

"Price optimisation"? That's a nice euphemism but it seems to have been optimised only for insurers (and hence arguably their actuaries) and not for their loyal policyholders.
....

3 updates, most recent at top:

IFoA has referred the complaints to the Financial Reporting Council: https://www.linkedin.com/pulse/institute-faculty-actuaries-has-referred-pricewalking-lee

Why did UK supermarkets (unprotected by actuaries) treat loyal customers better than insurers (protected by actuaries and "Treating Customers Fairly")? : https://www.linkedin.com/pulse/why-have-uk-supermarkets-unprotected-actuaries-treated-lee/

Linked In poll, 94% thought price walking was unfair/unethical: https://www.linkedin.com/posts/patr...-insurance-activity-6921135693532381184-hfj4/

Interesting. Is the sample size = 16 for the poll a credible, representative sample?

Price optimisation is a general term from microeconomics, which doesn’t only apply to price-walking but more generally refers to maximising pricing up to each consumer’s willingness-to-pay (sometimes called ‘reservation price’). Supermarkets use it to a degree where possible , e.g. when differentiating the prices of the same products sold through different distributions channels, ie. to people shopping in different areas. So Tesco Metro, Tesco Extra and Tesco Express may charge different price for the same item. This does lead to complaints at times, e.g. “In May, the supermarket giant announced a major overhaul of its stores across the UK, with 147 Metro stores turned into either Express or Superstores .The long-standing Tesco Metro in Canton, Cardiff, fell victim to this extensive revamp and was rebranded seemingly overnight as an Express store. With its shiny new sign having been installed on June 14, local residents and loyal customers of the Canton store took to social media to express their concerns about the change, especially in terms of the anticipated price hikes. Their concerns are not unfounded. Research by Which? in February revealed that shoppers at supermarket convenience stores - like ‘express’ branches - spend £320 more a year on groceries.” https://www.walesonline.co.uk/whats-on/shopping/shopping-prices-tesco-extra-express-20854575.amp

 

[pjlee01]

Thanks @Ppan13.
I said in my post that the sample size of 16 was small - The 2 polls I conducted were open to thousands of Linked In and hundreds of Reddit members to vote in - as always it is votes cast that count. I repeat my challenge to the IFoA in that post to conduct its own polls a) of its members, and b) of the general public.

I'm also not saying that supermarkets are perfect - just that they have been more honest (without actuaries) than insurers (with actuaries and "Treating Customers Fairly") towards loyal customers. Apart from preventing insurer insolvency, what good have actuaries been for such customers?

 

[Ppan13]

Thanks @Ppan13.
I said in my post that the sample size of 16 was small - The 2 polls I conducted were open to thousands of Linked In and hundreds of Reddit members to vote in - as always it is votes cast that count. I repeat my challenge to the IFoA in that post to conduct its own polls a) of its members, and b) of the general public.

I'm also not saying that supermarkets are perfect - just that they have been more honest (without actuaries) than insurers (with actuaries and "Treating Customers Fairly") towards loyal customers. Apart from preventing insurer insolvency, what good have actuaries been for such customers?

Thanks for explaining that.

In my previous post I pointed out that “Which” reports that price optimisation by location meant “ shoppers at supermarket convenience stores - like ‘express’ branches - spend £320 more a year on groceries.”” and gave an example of complaints of loyal Tesco customers at one Welsh branch being penalised by having their prices increased to the higher Express prices.

The impact of the differential in annual grocery spend is bigger than the average gaps between new and renewal customer spends of both motor and home insurance quoted in https://www.raconteur.net/finance/fca-ban-price-walking-rebound-consumers/

You could argue that no one is forced to shop at Tesco Express, but no one was forced to renew insurance either. And how aware are all shoppers that a Tesco Extra might have been cheaper for a particular product than in Tesco Express (is there a sign in Tesco Express explaining this)? Not sure I’m convinced by the “supermarkets are more honest than insurers” argument, therefore. In fact they are getting away with as much price discrimination that the price elasticities of demand allow them to. This is just basic microeconomic pricing strategy in operation. From an ethics perspective, though, should Tesco be forced to price identical products in all different branches equally in order to be “fair” to people living in different types of localities?

 

[Busy_Bee4422]

Thanks for explaining that.

In my previous post I pointed out that “Which” reports that price optimisation by location meant “ shoppers at supermarket convenience stores - like ‘express’ branches - spend £320 more a year on groceries.”” and gave an example of complaints of loyal Tesco customers at one Welsh branch being penalised by having their prices increased to the higher Express prices.

The impact of the differential in annual grocery spend is bigger than the average gaps between new and renewal customer spends of both motor and home insurance quoted in https://www.raconteur.net/finance/fca-ban-price-walking-rebound-consumers/

You could argue that no one is forced to shop at Tesco Express, but no one was forced to renew insurance either. And how aware are all shoppers that a Tesco Extra might have been cheaper for a particular product than in Tesco Express (is there a sign in Tesco Express explaining this)? Not sure I’m convinced by the “supermarkets are more honest than insurers” argument, therefore. In fact they are getting away with as much price discrimination that the price elasticities of demand allow them to. This is just basic microeconomic pricing strategy in operation. From an ethics perspective, though, should Tesco be forced to price identical products in all different branches equally in order to be “fair” to people living in different types of localities?

Forgive but I can't help myself. IIRC the communication notes warn against using examples that may overshadow the main issue.

 

[Ppan13]

Forgive but I can't help myself. IIRC the communication notes warn against using examples that may overshadow the main issue.

Not totally sure what you mean here. Pjlee01 compared the treatment of customers by insurers and by supermarkets, so I commented on it in the context of price optimisation aka differential pricing, which is the heart of the discussion.

There’s nothing wrong with using analogies in my opinion, and they make us see the situation from different angles or at the very least may help him see the way it looks to me.

 

[pjlee01]

The point is that unlike insurance companies, supermarkets don't make grandiose claims that they comply with strict rules including "Treating Customers Fairly" (including "having fairness at the heart of their business model") and don't have professionals (actuaries) with an ethical code who are tasked with "speaking up" about anything that is unethical or any non compliance with regulations, and with the need to "communicate clearly" with users of their work.

We will find out in due course what the Financial Reporting Council make of this.

 

[Ppan13]

The point is that unlike insurance companies, supermarkets don't make grandiose claims that they comply with strict rules including "Treating Customers Fairly" (including "having fairness at the heart of their business model") and don't have professionals (actuaries) with an ethical code who are tasked with "speaking up" about anything that is unethical or any non compliance with regulations, and with the need to "communicate clearly" with users of their work.

We will find out in due course what the Financial Reporting Council make of this.

So it’s not so much about whether supermarkets are ethical or not, but that they are not claiming to be, so its fine for them to carry out price discrimination then.

“….and don't have professionals (actuaries) with an ethical code who are tasked with "speaking up" about anything that is unethical or any non compliance with regulations…”

Except till recently, price walking wasn’t against the regulations here, and (I would argue- as I have tried to in this thread) the ethics of it are not clear-cut, and a definitive position only crystalised in the UK with the FCA formally banning it. Even in the US, the NAIC only took a similar stance decisively against price walking around 7 years ago, which is pretty recent given the history of the industry. But by 2017 still only half of the States had actually banned it (not sure what the current number is). You still have websites like the US-based Insurance Information Institute stating upfront that there is nothing wrong or inappropriate with the use of price optimization (https://www.iii.org/article/price-optimization) And two years ago in Ireland, price discrimination in insurance was still being carried out in private motor and home insurance. Was it reasonable for UK actuaries at the time to regard price walking as an acceptable market practice then (prior to the FCA banning it)? I’d say yes.

By way of another example, Citizens Advice Bureau have just warned about an ethnicity penalty in insurance. (https://www.citizensadvice.org.uk/a...e-ethnicity-penalty-in-the-insurance-market1/) . They state, “The Financial Conduct Authority needs to investigate this issue, and make sure that no one is paying an ethnicity penalty in the insurance market. ”

According to your interpretations of TCF, should pricing actuaries in personal lines GI be raising objections within their companies NOW (before FCA intervention) against using location as a rating factor to remove indirect discrimination by ethnicity , such that South Asian postcodes don’t end up paying more on average than White postcodes, for example? (see p17 of the pdf in the link) . We already removed gender as a factor, after all…

In any case, I agree that regulator is the final arbiter of what is ethical or not for regulation purposes, by definition, and they are the final arbiters too when deciding whether TCF was breached or not (prior to any new regulation coming in) and what sanctions should be imposed, if any. So I'll "wait and see" what action they take.