Industry’s ‘pursuit of a perfect price’ penalising certain groups in society – Fairer Finance

The insurance sector’s pursuit of more data to inform ever more accurate pricing is having an unintended negative impact on some groups in society, according to Fairer Finance managing director James Daley. 

Speaking to Insurance Times, Daley explained that the use of increasing amounts of data to segment pricing without control has led to the issues for the industry, such as reputational harm from widespread reports of an ethnicity penalty. 

In its latest report from last year (March 2023), Citizens Advice research found that insurers were charging people of colour 40% more than white people for motor insurance on average, with the disparity rising to almost 49% for black customers. 

However, since it would be illegal under the Equality Act for an insurer to price based on race or ethnicity data, this is the result of proxy data points that are collected in pursuit of creating a more accurate, “perfect price”. 

Daley explained: ”I don’t believe in the ethnicity premium – while it is true that people from an ethnic minority background are paying more, on average, that is not a premium on their ethnicity. 

“It’s more the fact that these groups are more likely to live in lower income areas of postcodes and those are priced higher – it’s not insurers saying that some ethnicities are more risky than others.” 

Data restrictions? 

Daley explained that, even though the ethnicity penalty was not a result of ethnic discrimination, that people of colour were paying more for motor insurance pointed to a problem the sector must address. 

He said: “[Debate around the ethnicity premium] does point to a bigger problem, which is that in pursuit of a perfect price, you inadvertently end up penalising certain groups who are left scratching their heads.” 

Daley made the point that there were inevitable, unexpected outcomes to be had from the industry’s attempts to further segment customers – and suggested that some restrictions around data gathering should be applied by government or regulators. 

”There’s a case to be made that there should be some more boundaries around where insurers can price and where they cant,” he said. 

“At the moment, there’s only really the Equality Act and gender rules [that limit what data can be collected], everything else is fair game and there’s no transparency.” 

It would be better for the sector to admit that its use of proxy data was creating problems and promote more transparency around how data points impacted pricing, added Daley. 

“If insurers want people to trust them, then we need to have some clarity about what’s going into their [pricing] models and how that’s being used.”