Insurers take stock ahead of EIOPA pricing recommendations  

European personal lines insurers are eager to understand exactly how EIOPA’s (European Insurance and Occupational Pensions Authority) planned recommendations on differential pricing practices will affect their business models – and look set to get the pertinent answers they need in the New Year.  

EIOPA issued a draft supervisory statement on differential pricing practices and launched a three-month public consultation period, which closed on 7 October. The plan is to publish its final supervisory statement in January 2023.  

The recommendations outlined in this statement are highly anticipated because, depending on how robust a stance EIOPA takes, they could have significant impact on how insurers across the whole of Europe price business and compete.  

EIOPA defines differential pricing practices as techniques in which consumers with similar risk and cost of service characteristics are charged different premiums for the same insurance products. This, it said, has been going on for some years and is a growing phenomenon in several member states.  

EIOPA highlighted one practice known as price walking – offering new customers heavy discounts then upping prices at multiple renewals – as having a particularly detrimental effect on policyholders who are unlikely to switch providers.  

Not only does price walking unfairly penalise loyal customers but it can also disproportionately affect vulnerable groups such as the elderly, EIOPA said. For these reasons, price walking is likely to be a key focus in EIOPA’s recommendations – just as it was in recent reforms in the UK.  

From 1 January 2022, the UK Financial Conduct Authority implemented a game-changing Pricing Remedy which mandated that renewal premiums for home and motor insurance must not be higher than premiums offered to new customers. It also introduced a Reporting Remedy which requires insurers to submit granular annual reports demonstrating compliance, adding significant paperwork for insurers.  

The level of pricing differentiation being employed by insurers – and the extent to which it is policed – varies across Europe from member state to member state. However, a trend of increased oversight is emerging, with the likes of the German The Federal Financial Supervisory Authority and the De Nederlandsche Bank in the Netherlands, issuing robust actuarial guidelines and the Central Bank of Ireland the latest supervisor to propose changes to eliminate price walking.  

EIOPA looks set to only issue its recommendations as ‘guidance’ so each member state’s supervisory body must decide how far to go in the implementation. However, history suggests supervisors and insurance companies will fall in line.  

​​​Implications for insurers ​​​​  

Earnix clients in Europe acknowledge the benefits EIOPA’s recommendations are likely to bring – namely increased protection for consumers and leveling up the playing field of actuarial approaches across the member states.  

However, firms operating in countries where robust ethical rules and actuarial practices are already in place are concerned the recommendations could add a significant regulatory burden while bringing only marginal benefits to consumers.  

If EIOPA recommends a similar regime to the FCA, in which new and renewal business must be priced the same, this will require a significant investment of resources by insurers to update everything from pricing algorithms to customer communications, in addition to increased reporting.  

It would also have an undoubted impact on competitive dynamics. A year into the reformed pricing rules, UK insurers appear to have shifted their focus to sustainable, long-term profitability over short-term growth; Earnix clients report a significant increase in renewal business and a sharp fall in new business as discounts, with far less incentives being offered to new customers.  

A similar environment could be on its way in Europe, with insurers having to think twice about any sort of price reduction, incentivisation or bundling of certain products if changes they make need to be replicated across their entire customer base.  

​​​Fairness goes beyond price walking​​​​