How your insurer gets the price they offer you has always been a mystery. Comparison portals ask you all sorts of questions when applying for insurance, but how they are used to calculate your price remains hidden from the customer.
And it’s not just the information you give them that ends up in the black box. Some insurers also use information about you that you have not shared with them, such as information from your credit history or supermarket loyalty card.
There is no transparency in this area—and most in the insurance industry believe there shouldn’t be. Every insurance company’s pricing algorithm includes their intellectual property—their secret sauce. And as long as the market is competitive, why should it matter? If an insurer uses your credit report, occupation, and Nectar card information to price your insurance, there’s still a good chance you’ll only buy from them if their offer is competitive.
But if there is no transparency about what goes into pricing algorithms, how can we know that insurers are treating their customers fairly—or not? unfair punish certain groups of customers? Insurers are no longer allowed to set prices based on your gender.
The Equality Act is also intended to prevent you from taking into account other protected characteristics such as your sexuality or ethnicity. But since there’s no way to verify their pricing formulas, it’s hard to trust that those rules are being followed.
Last year, Citizens Advice published a controversial report which found there was an ethnicity premium in insurance, with black and minority ethnic people paying significantly more for their insurance than white people.
The serious finding was that insurers, intentionally or not, discriminated against minorities.
In fact, I don’t believe their research backs up their claims, but the lack of transparency in the market has made it difficult for insurers to provide strong protection.
The basic principles of insurance pricing are all about risk. Insurers want to use the data to calculate the likelihood that you will get into a car accident or be broken into. To achieve this impossible goal—providing an accurate price that matches each individual’s risk level—insurers are using increasingly large data sources. For example, if their claims history shows that people who work in recreation centers are more likely to get into car accidents than daycare workers, they will value the former more highly than the latter.
But there can be no reliable cause-and-effect relationship between these jobs and the trend in car accidents. So by using these broad statistical correlations, they penalize people for whom the correlation is completely wrong.
The best example of this is how insurers treat customers who have been involved in an accident through no fault of their own. Many will charge these customers more next year because statistically you are more likely to have another accident. It’s not that difficult to understand why this is the case. For example, people with better reflexes may be more likely to avoid an accident, so those who are hit by another driver have slower reflexes on average.
What about accidents in which quick reaction would not matter – such as excellent drivers who are hit while standing still? Costs could also rise next year if statistics lead insurers to the wrong conclusions.
It’s time to set limits on what insurers can—and cannot—use to set prices. In addition to banning the use of non-causal data such as B. your profession – we also need to look at how we measure low-income families. In many cases, families in poorer areas have to pay more for insurance because the risk of theft or vandalism may justifiably be higher.
Likewise, younger drivers pay much more for insurance because they have more accidents. But is it fair to charge more to those who have the least? The early days of insurance were about pooling risks, and the remainder of the pool may have to cover some of the costs of some high-risk customers to ensure they continued to have access to insurance.
When it comes to ethnicity, Citizens Advice are undoubtedly right when they say that ethnic minorities pay more for insurance, but they are wrong when they say this is due to discrimination. In fact, the higher prices paid by non-white buyers are more related to the correlation between ethnicity and income. Recent research by the Institute for Fiscal Studies found that more than half of black African households in the UK are in the bottom 20 percent of household income and live in poorer areas where claims rates are higher. The same applies to many other ethnic groups.
Instead of pushing its case on race, Citizens Advice might be better off joining the Barrow Cadbury Trust’s Fair by Design campaign, which is advocating for the abolition of the poverty premium.
The debate on how to solve these problems must start with our politicians. I hope the recent increase in auto insurance prices can be a catalyst for a broader conversation about how we can make insurance fair and affordable for everyone.
James Daly is director of consumer group Fairer Finance
Source: I News
I’m Jeffery Bryant, and I’m an experienced author specializing in automobile news. For the past several years, I have been working as a writer in a well-known news website. During this time, I’ve written hundreds of articles covering automotive trends and developments both nationally and internationally.