An actuary’s guide: tackling loyalty penalty

Across five industries — insurance, mobile, broadband, mortgages and savings — a £4.1bn annual price tag has been attached to the act of discounting new customers, known as loyalty penalty.

Insurers and brokers know that dual pricing has long been in the firing line. Many insurers have actively been trying to tackle the issue, especially to avoid regulatory action, not always successfully. So, what action can insurers take to tackle the loyalty penalty?

Why is the loyalty penalty making headlines?

As insurers compete fiercely for new business, this often means offering cheaper prices and sometimes selling the first year’s policy at a loss. But in 2018, research by Citizens Advice into dual pricing and the loyalty penalty found that:

The FCA, meanwhile, launched its own market study on pricing at the end of 2018 on which it has been consulting. A report is promised later in 2019.

What actions can insurers take?

1. Offer higher levels of transparency

Insurers are considered faster-acting than other industries currently in the firing line. However, whilst under scrutiny, it’s suggested that insurers offer greater transparency on their pricing systems and clearly inform customers of price differentiations. 

This includes being more up front with policyholders on price plans when they make a claim, and advising them how their premiums will increase. This can be achieved through a well-considered customer communication strategy and maintaining a clean database of customer information.

“There may be something around bringing in greater transparency over discounted pricing.” Alex Cross, product and proposition director at Saga explained. “We don’t fear transparency. Our whole proposition is about being transparent around cover and pricing.” 

2. Consider a price guarantee or incentive

To give both your loyal and prospective customers peace of mind, why not offer a price promise? 

Aviva Plus, for example, offers a renewal price guarantee, by which it confirms that a policyholder will not pay more than if they were a new customer. It also offers discounts for loyal customers who use Aviva for more than one of their insurance products. Saga has launched a home insurance product that guarantees the same premium for three years providing there are no claims.

More Than, meanwhile, takes a different approach. The insurer has launched a new cashback scheme to help loyal customers offset the cost of renewing their insurance. 

3. Set targets on pricing 

In 2018, the Association of British Insurers (ABI) and the British Insurance Brokers’ Association (BIBA) launched a set of Guiding Principles and Action Points for general insurance pricing.

As part of the principles and action points, members were requested to set pricing targets, going forward. This approach is to ensure that price differentiation is not excessive. It also suggests insurers review the pricing of their customers of over five years.

But how can insurers do this consistently and accurately? 

An analytics platform like SAS Viya, for example, is dedicated to harnessing multiple data sources and converting them into actionable insights. Such technology gives insurers information to provide fast, accurate pricing to customers. And importantly, it allows insurers to outline a clear level of control for regulatory governance. 

4. Know your customers better

According to FCA reports, the most vulnerable to the loyalty penalty are the elderly and low-income consumers. In order to safeguard these policy holders, insurers could take steps to garner more accurate customer intelligence.

Such insight would allow insurers to speak directly to their customers and make price recommendations based on their circumstances or preferences.

“Rather than a one-size-fits-all approach, firms should be considering it their proactive duty to make sure vulnerable customers are on the best deal for their circumstances. A good starting point is having confidence that they aren’t charging their vulnerable customers a loyalty penalty,” said a Citizens Advice spokesperson. 

At the same time, many customers actually enjoy shopping around and securing a good deal. A balanced approach, facilitated by intelligent insights and analytics, would help insurers keep more customers happy and prevent regulators from stifling customer choice.

What’s the bottom line? Data

All this said, many insurers are a step ahead of the super complaint, and plenty can show they 

took action well in advance of the announced market study by the FCA. However, in order to meet new requirements, insurers must fiercely defend their pricing processes.

In many cases, improving data sources and deploying smart analytics to understand this data will go a long way towards improving pricing transparency. But open source programs, whilst accessible, aren’t usually the most effective means to achieving this goal.

A technical partner like Demarq with extensive knowledge of SAS analytics software tailored specifically for insurers’ needs, provides sufficient control to insurers whilst helping them to defend their workings to regulators. With consolidated data and accurate analytics, insurers can form a full view on the type of cover that best suits the individual customer. 

Keen to transform your pricing processes and tackle loyalty penalty head on? Get in touch with Demarq to find out how they’ve done exactly that for other actuaries like Covéa Insurance.