Banning loyalty penalties in insurance could backfire, expert warns
Banning loyalty penalties in insurance could backfire, expert warns | Insurance Business Australia
Insurance News
Banning loyalty penalties in insurance could backfire, expert warns
Combined regulatory approach highlighted
Insurance News
By
Roxanne Libatique
Regulatory efforts to ban loyalty penalties in Australia’s insurance industry could have unintended effects, according to new research from UNSW Business School.
Dr Xingyu Fu (pictured), a lecturer in the School of Marketing, cautioned that while these rules aim to ensure fair pricing for policyholders, they may worsen outcomes if the market lacks sufficient competition.
Loyalty penalties occur when insurers charge existing customers higher premiums while offering discounts or lower rates to attract new policyholders.
In sectors like home and motor insurance, this practice is increasingly under scrutiny, with some estimates showing it costs Australian consumers billions each year.
Loyalty penalties in the Australian insurance industry
Fu said consumers usually expect companies to reward their loyal customers with perks like discounts or premium services. However, the current trend shows long-term customers facing higher premiums.
“Nowadays, penalties on loyal customers, such as secret price increases for existing consumers in the telecommunications industry, challenge this conventional wisdom,” he said.
Actions against loyalty penalties in Australia
In 2019, the Australian Competition & Consumer Commission (ACCC) called for reform in loyalty schemes, including those in insurance, due to concerns that long-term customers often face unfavourable pricing.
More recently, the ACCC has been looking at how financial institutions, including insurers, set deposit and premium rates as potential loyalty penalties.
Impact of banning loyalty penalties
However, new research from Fu and his colleagues warned that banning loyalty penalties without addressing the broader competitive landscape could unintentionally lead to higher prices across the market.
“This potentially leads to collusive high prices that are detrimental to consumers and society,” Fu said.
UK insurance industry bans loyalty penalties
Loyalty penalties are a particular issue for vulnerable populations, according to the study.
For example, in the UK’s insurance market, 32% of those penalised by loyalty pricing are over 65, compared to 23% of the general population. Other affected groups include low-income individuals and those with health challenges.
Australian insurers avoid loyalty penalties
In Australia, some insurers and platforms have begun adopting pricing mechanisms aimed at avoiding loyalty penalties, according to Fu.
For example, the online mortgage and insurance platform Athena offers an “automatic rate match” to ensure that loyal customers receive the same rates as new clients with similar policies.
Impact of fairness regulation on Australian insurers
Fu’s research suggested that concerns about the impact of fairness regulation on insurers’ profitability might be overstated.
In competitive markets, he noted, fairness regulations can reduce the need for aggressive pricing strategies and potentially lead to greater profitability.
However, in less competitive markets, these regulations could enable companies to raise prices collectively, harming consumers in the long run.
Dual regulatory approach in insurance industry
The research recommended a dual regulatory approach, combining fairness rules with price caps to prevent price collusion and protect consumers.
Fu emphasised that regulators must consider market conditions before implementing such policies.
“Firms can benefit financially by following these fairness regulations and pricing fairly, but well-intentioned fairness regulations may have adverse effects on consumers,” he said.
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