Dual Pricing for Insurance: Discussion

Today, we have the first of three meetings that will address the practice of dual pricing for insurance. To assist us in considering this matter, we are joined by Ms Derville Rowland, director general, Ms Gráinne McEvoy, director, and Mr. Domhnall Cullinan, director, from the Central Bank of Ireland.

I advise our guests that by virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of their evidence to the joint committee. However, if they are directed by it to cease giving evidence on a particular matter and continue to so do, they are entitled thereafter only to qualified privilege in respect of their evidence. They are directed that only evidence connected with the subject matter of the proceedings is to be given and asked to respect the parliamentary practice to the effect that, where possible, they should not criticise or make charges against any person or entity by name or in such a way as to make him, her or it identifiable. Members are reminded of the long-standing parliamentary practice to the effect that they should not comment on, criticise or make charges against a person outside the Houses or an official, either by name or in such a way as to make him or her identifiable.

I invite Ms Rowland to make her opening statement.

Ms Derville Rowland

I am joined by Ms Gráinne McEvoy, director of consumer protection, and Mr. Domhnall Cullinan, director of insurance supervision. I thank the committee for the opportunity to speak today about the Central Bank’s work in regulating and supervising the insurance industry and specifically the practices of differential pricing and dual pricing.

Insurance serves a critical role in the functioning of a modern society, through reducing uncertainty by protecting people and businesses against the risks of future events. Policyholders rely on insurance to provide support in the event of loss or serious accident, plan for retirement, enable them to confidently invest in and run their businesses and much more besides. Consequently, a functioning financial services system that sustainably serves the needs of the economy and its consumers requires fully functioning and trustworthy insurance markets and firms.

We are responsible for the prudential supervision of insurance companies and overseeing compliance with the Central Bank's conduct of business rules. We are also responsible for the supervision of conduct of business in Ireland, including in the context of consumer protection. Prudential supervision seeks to ensure that insurance firms remain solvent. That is to say, that insurers are able to pay claims in full as they fall due. Given that claims are paid long after the premiums are set, this requires a forward looking assessment with respect to the entire business of the insurance company, including its solvency.

Our risk-based supervision of insurance firms seeks to ensure that the system, as a whole, and individual firms operating within it, are appropriately resilient. It seeks to ensure that regulated firms have the following: sufficient financial resources, capital and liquidity, including under a plausible but severe stress; sustainable business models to enable them to operate through the economic cycle; are well run, appropriately governed, have effective risk management and control functions and appropriate cultures; and can recover if they get into difficulty or can be resolved without significant taxpayer support.

The Consumer Protection Code 2012 protects the interests of consumers in their dealings with insurers and is central to our conduct of business mandate. Regulated insurance firms, which underwrite and sell insurance, must act honestly and fairly in the best interests of both their consumer and the integrity of the market. Firms must fully disclose all relevant information, including charges, in a way that seeks to inform their customers. In particular, we expect firms to focus on delivering fair outcomes for customers and not solely on maximising shareholder return and ensure that all consumers are treated fairly at all stages of their relationship and that treating customers fairly is an integral part of the good governance and corporate culture of all firms.

Our prudential and conduct supervisory tools include on-site inspections, thematic reviews and regular engagement with industry, including board and senior management. Over the past two years, in particular, we have focused on mitigating potential risks to consumers from a hard Brexit scenario, and addressing cross-border emerging risks. Other core work includes focusing on emerging issues such as cyber risk and recovery and resolution. Our 2018 annual performance statement specifies the work undertaken, in particular, to protect consumers from the risks of disorderly failure and inadequate reserving at certain firms. In addition, in line with the report of the cost of insurance working group, the Central Bank has set up the national claims information database, which will provide further public information about the relationship between insurance premiums and related costs.

In recent weeks, we have further strengthened protections for consumers in two key areas. On 1 November, the Central Bank introduced new regulations requiring insurers to provide individual policyholders with details of the premium paid for private motor insurance renewals in the previous year. This information must feature prominently on the same page as the renewal premium. Motor insurers must also now provide a quotation for each policy option available to the customer such as comprehensive, third-party fire and theft cover or third-party only. In addition, insurers must also extend the renewal notification period from 15 to 20 working days for motor, health, damage to property and general liability insurance to allow policyholders more time to seek comparison quotes. These measures provide greater transparency to customers and will help them to make more informed decisions and allows policyholders more time to seek comparison quotes.

In September, we introduced new rules to ensure transparency of commission arrangements between financial intermediaries, such as brokers and financial advisers, and product producers such as banks and insurance firms, and to minimise the risk of conflicts of interest relating to commissions. From 31 March 2020, intermediaries will be required to publish details of the commissions they receive from product producers on their website. The Central Bank will no longer permit intermediaries to describe themselves and their regulated activities as independent where they accept and retain commission in circumstances where advice is provided. Free hospitality for intermediaries such as golf trips and sporting event tickets will also be prohibited under the new rules.

The Central Bank does not have a role in setting prices of insurance policies or in the approval of proposed increases in premium rates. However, insurance firms must treat customers fairly and comply with the consumer protection code.

We are on record, through our behaviour and culture report, in hearings with this committee and through numerous other channels, as to the culture we expect to see in the financial services firms we regulate, including insurance firms. In our supervisory engagements with chairs and chief executives of insurance firms, we drive home the message that culture is set from the top down. Boards and senior management must ensure that firms' pricing practices are compliant with the code. The Central Bank also requires boards to be aware of, have oversight of and be able to stand over pricing and underwriting strategies.

In 2018, the Central Bank conducted a thematic review, examining a sample of the pricing and underwriting information supplied to boards at 12 general insurance firms. We found that two thirds of this sample required improvement. As a result, we instructed firms to improve their oversight and governance of pricing strategies to ensure that they are subject to appropriate board challenge and scrutiny, and meet the high standards required.

As with all the sectors we regulate, our assertive risk-based supervision of insurance firms is underpinned by robust regulatory and enforcement action. In February 2018, we directed an insurance firm to cease writing business with immediate effect and successfully applied to the High Court to appoint a provisional administrator. In December 2018, we fined and reprimanded a leading insurance firm after finding the firm failed to establish and maintain technical reserves in respect of underwriting liabilities, and failed to have administrative and accounting procedures and internal control mechanisms that were sound and adequate.

Before describing our work in the area of differential pricing in more detail, some context may be helpful. Differential pricing differentiates between customers on considerations other than the cost of claims and expenses. It describes a range of techniques that combine information about expected claims experience, customer behaviour, tendency to renew or shop around. Differential pricing techniques are being widely used across many industries. For example, airlines, hotels, telecoms and online retail sites.

While differential pricing has been used in the insurance industry for some time, in more recent years the tools available for differential pricing have become increasingly sophisticated with greater access to big data, more granular assessment and more accurate modelling techniques brought about by new technology. The environment is increasingly complex and the Central Bank, in common with other national competent authorities, is adjusting its supervision of insurance firms to oversee changes in pricing practices from a conduct perspective.

Dual pricing is one example of when firms seek to charge customers with similar insurance risk profiles different prices for the same or similar insurance policies. It is important that such a practice is consistent with the need for firms to act fairly as set out in the code. Our review into differential pricing will focus on motor and home insurance as the most widely held insurance products in Ireland. It will be carried out in the following three phases: market analysis; quantitative analysis and consumer insight; and findings and recommendations.

The review will seek to establish the impact of differential pricing on consumers, while at the same time establishing the drivers of consumer behaviours, including how consumers engage with the insurance industry and it will assess the extent to which these pricing practices lead to outcomes that are consistent with the consumer protection code. A comprehensive data-gathering and analysis is essential in order to move beyond anecdotal evidence or individual case studies which, while potentially pointing to problematic practices, do not establish a comprehensive view across the industry. The consumer insight phase will include meetings with consumers to understand their experience of switching or choosing to stay with their providers. We will shortly write to the chief executive officers of the relevant insurance firms setting out our terms of reference and expectations for the review, and we will provide the committee with a copy of that letter. We will liaise directly with the UK’s Financial Conduct Authority, FCA, on the work it is doing in this area, and we will engage with key domestic stakeholders, including the Competition and Consumer Protection Commission, which has a competition mandate, as part of this review. We will consider the potential range of policy responses, if any are required, once we have sufficient evidence to hand, in line with our domestic and European legislative mandates.

The code sets out that firms must act honestly, fairly and professionally in the best interests of their customers and make full disclosure of all relevant material information. Our review will look to establish the facts. Once the facts are established, we will then establish what action, if any, needs to be taken.

We have to vacate this room by 3.45 p.m. so I suggest we take 20 minutes each initially and if we have room then for a second round of questions we will do so.

I welcome our guests from the Central Bank of Ireland back to the committee. I know they were with us just last week so I appreciate them coming back again. I am delighted the Joint Committee on Finance, Public Expenditure and Reform, and Taoiseach has started our own process of having hearings on dual pricing. When I asked the committee to carry out this type of investigation on 24 September, at that stage the Central Bank was not carrying out its own investigation. The following day I wrote to the Governor of the Central Bank requesting an investigation into dual pricing, including the practice and the prevalence of dual pricing in the market, the cost of dual pricing to customers and what direct intervention could be made to protect customers from price discrimination. I welcome the fact that on foot of that request and on foot of the 130-page submission I made the following month, which is available to this committee as well, that the Governor of the Central Bank and the Central Bank have agreed to carry out the work Ms Rowland has outlined and I welcome the promptness of that response. I met the Governor last week and I was satisfied to hear about the work Ms Rowland has now outlined to the committee.

My view is clear. I believe dual pricing needs to be banned. We know insurance companies in Ireland are using big data and complex algorithms to set artificially high prices for insurance, particularly for those who are deemed less price-sensitive or for those who are more likely to renew with the companies. We know it targets customers who are less likely to switch. We can see from evidence that was gathered in Britain, and many of the insurance companies who operate here also operate in Britain, that the loyalty premium affects and hurts vulnerable customers. It particularly identifies the elderly, those with mental health problems and those in low-income households as those who are affected as a result of this.

The general manager of AIG appeared before this committee a number of weeks ago and he confirmed, while acknowledging his company does not operate dual pricing, that dual pricing is a policy that punishes loyalty with higher premiums. We know from the report of the FCA that was concluded just over a month ago that this affects 6 million consumers in Britain at a cost in overcharging of about €1.3 million per annum. We also see from some of the statistics, and unfortunately we do not have the statistics for Ireland but I welcome the fact the Central Bank is doing the analysis, that if one is renewing with an insurance company one is likely to be hit by a loyalty premium of 20% if one has renewed on four occasions or more and of 40% if one has renewed ten times or more.

I take on board the point Ms Rowland made that as opposed to individual case studies, we need to look at what is happening right across the industry and that is appropriate but it is important to put on record some of the case studies I have provided to the Central Bank, and we have numerous case studies. Take Ray for example, because this goes to the core of it. He renewed his motor insurance with Liberty Insurance and he got a renewal premium of €1,420. He entered the exact same details on Liberty Insurance's online website and he got a quote for €680. That is a 109% difference. Alex from Waterford works part-time and he renewed his motor insurance with AA. He received a renewal premium of €871. When he entered the exact same details on the AA website, he got a quote for €400. That is a 118% difference. There are many other examples I have been inundated with and I welcome people giving us their examples to show how unfair this practice is. It is known to hurt individuals. The Citizens Advice report in Britain in 2017 identified that it hit particular vulnerable groups such as older people, people with mental health problems, people with health problems and those with lower levels of formal education.

I want to ask the Central Bank some questions about the work it is proposing to do on foot of the request I made. To make sure we are on the same page, can I confirm quickly that the Central Bank will look into the practice of dual pricing by the insurance industry?

Ms Derville Rowland

I thank the Deputy for his remarks. Yes, I confirm that as part of our risk-based supervision, we had previously identified big data and the innovative techniques that are available as a risk for customers and because of that and as part of our work at a national level in the focus on the cost of insurance, we have already taken policy measures that I referred to in my opening statement where the price of previous premiums in motor insurance have been disclosed. As a part of our continuation of that work and as part of our 2020 work programme, we are doing a wide and deep market analysis of the practice of dual pricing because big data brings the possibility of analysing information. This is not only in the insurance industry. As the Deputy well knows, it is a widespread-----

Ms Derville Rowland

-----practice of price differentiation. We are particularly focusing on the practice as it applies in the insurance industry. We have already been doing our preparatory work on that but we expect to formally commence the first phase of that work in 2020. We will establish a multidisciplinary team. Does the Deputy want me to take him through a bit of the detail of that?

We might get to that because I want to find out exactly what the scope of this is. The Central Bank will investigate this in industry at large. Will it investigate its prevalence in the insurance market?

Ms Derville Rowland

As a first phase, we will establish the nature and scale of the practices of differential pricing. I would like to observe that this has been ongoing for a long time, as the Deputy will know, not only in the insurance industry but in a lot of industries. The FCA has concluded, and we are of the conclusion, that it is not necessarily a negative thing because there can be significant winners and losers and this is a complicated area where some people can get a good price for them if they switch provider and that can be a good thing. Also, we need to establish the prevalence and the impact of this practice in the industry to see what the impacts on groups of customers can be. We would expect to acquire detailed information from a relevant group of insurers. In our view, in excess of 70% of the market for motor and home insurance would have to be covered with a representation of the main insurance providers and some of the key brokers because they will all have complex business models and they will be selling different types of insurance through different insurance channels. We will have to look at their pricing strategies and we will have to look at how that is applied in the business, how it is applied in the board, how they deploy it through their system, how they satisfy themselves they are in compliance with our expectations for regulatory requirement and how it is deployed. That is not in one document. It is in many different places and our experience with firms is this can be iterative. In the end, what we will have to do to get a line of sight on the decision factors and decision points they are using, is to do walk-throughs of the business models and see how they apply through that.

This is a significant, wide and detailed piece of work, the aim of which is to identify the decision factors they are using and the groups of customers that are affected. That will lead us into phase 2, which is the detailed granular data analytical request about the groups of customers, the characteristic points and those things that can only be formulated after we have established the prevalence, practices and impacts in place in phase 1. There is another part to that work if the Deputy would like me to go on.

I understand that phase 1 will gather that data and phase 2 will look at the impact on customers. Will this include the impact on vulnerable customers?

Ms Derville Rowland

The second part of that will be the impact on customers. That will include characteristics of the customers. As part of that we also need to contact a representative group of customers to find out what is motivating those customers in their circumstances and what are the operating factors in their own decision-making. When this problem is looked at, we have seen that there are a number of very different and important dimensions in terms of the cause. One important factor, which I will put out there straight away, is the very important responsibility on the part of firms to comply with the regulatory frameworks and our expectations. It is very important. That is our role and we are going to discharge it. It is also important to note that complex competition effects are in place here and that is not our role. It is the role of the FCA in the United Kingdom, it is not ours. That is not to shy away from our responsibility, but it is just to be plain that this is a highly complicated topic. The third complicating factor is the way individuals respond. As the level of sophistication of big data increases, the ability of firms across all industries to inform how to use information in the system with nudges through behavioural economical insights becomes an important factor.

The Competition and Consumer Protection Commission, CCPC, with which the committee has been in contact, is going to carry out a study into consumer behaviour but we too must do a deep piece of work about what is operating with customers. Only through that will we be able to identify any concerns regarding groups of customers who may have characteristics of vulnerability and to see what, if any, impact is being caused to them and any action that may flow from that.

Before I talk about the CCPC, will Ms Rowland clarify whether all options relating to phase 4 - what I would call the recommendations - are on the table, including the banning of dual pricing?

Ms Derville Rowland

Absolutely. It is an evidence-based piece of work. The right thing to tell the Deputy is that the way we approach our work is to acquire the evidence, understand the impacts, understand what is going on with the customer and then we move to conclusions and findings, and what, if any, policy prescriptions may be needed or required to fit the circumstances. I was plain at the beginning that the mere fact that dual pricing occurs is not something we are against per se, nor is the FCA against it, as can be seen from its findings. The FCA has set out a menu of options for consideration but its work will continue into next year. We would not prejudge the issue. We will look at that. It is why we are doing such an enormous piece of work.

I will give the committee an idea of the scope of what we are dealing with. It is 2 million motor policies per year and 1 million home insurance policies, but those may include buy-to-let. This is a very big piece of work with lots of people who get better prices by requoting and switching. That impact needs to be carefully considered in order that an unintended intervention which does not treat the cause of any issue that arises is not made. We have an open mind and we think it is an important topic. To be plain, we think it is an important topic right across the board and not just in financial services because of the impact on competition, on new entrants to markets and on consumers generally in terms of GDPR, their behaviour on the Internet and whether they know how their information is being used.

The question I asked was if the option of banning dual pricing will be on the table if the analysis and evidence suggests it. Ms Rowland is saying that all options are on the table at this point.

Ms Derville Rowland

Yes.

I have sent my complaint to the CCPC also and I have met with the director of consumer protection there. There is a memorandum of understanding between the Central Bank and the CCPC where they can carry out joint work. Is this piece of work not a shining example of where the CCPC can assist the Central Bank in the investigation that the Central Bank is about to undertake on the effect the practice of dual pricing is having on consumers?

Ms Derville Rowland

We certainly will liaise with the CCPC. It is undertaking a wider piece of work across a number of industries around switching and behaviours of customers. I have already spoken with the CCPC and we will liaise with them. In the course of our own work we will consult the CCPC in relevant aspects but it will make its own decisions with regard to the actions it proposes to take. We are clear that we are going to carry out a market study on this to establish the prevalence and impacts of this practice.

Ms Rowland referred to the FCA, which found very clearly that dual pricing was affecting vulnerable customers. Would that be correct in the-----

Ms Derville Rowland

Actually, I do not think that is what the FCA found. It did a very comprehensive piece of work that is ongoing and it issued an interim report. I read the Deputy's complaint to the Central Bank, so I know that he has studied the FCA work. The FCA found differences in pricing and increases that seemed to peak at the five-year point and levelled off thereafter . The FCA analysed the groups of customers and some of the characteristics of the customers who seem to be in the higher price brackets. It found that older customers-----

I appreciate that. My time is limited but I will read a part of the FCA-----

Ms Derville Rowland

I have the report in front of me.

-----report for Ms Rowland. It states:

1 in 3 consumers in our consumer research who paid high prices showed at least one characteristic of vulnerability, such as having low financial resilience or capability. For consumers who bought combined contents and building insurance, lower income consumers (below £30,000) pay higher margins than those with higher incomes.

This is one of the findings in the executive summary.

Ms Derville Rowland

Yes, I have the report in front of me and that is right. The FCA observes some consumers having some characteristics of vulnerability but that does not correlate to a conclusive finding in the report, or that this in fact matches their characteristics of vulnerability in total. I am not in dispute with the Deputy. The FCA has issued an interim report stating that there is concern in this area and that it is thinking about what to do. The FCA said it will do more analytics and perhaps issue a consultation paper next year around options and proposals. Appended to this the FCA has clearly pointed out that in its findings it sees older customers over represented in the group that holds insurance policies for longer. These are customers who perhaps do not like to use online channels. The FCA has also found other things where customers have some of the characteristics the FCA has defined as a vulnerability. We are not in disagreement that this is a big topic that has many dimensions to it.

One of the active considerations and proposals, among others, from the FCA is banning dual pricing.

Ms Derville Rowland

Pardon?

One of the active considerations from the FCA is the banning of dual pricing.

Ms Derville Rowland

That is true. In that FCA paper and in many of the other papers it is pointed out that this may not be the preferable option. The FCA talks about collars, positive nudges and disclosures to customers. The authority talks about that because the FCA has produced other literature on this topic to do with the United Kingdom finding that bans can act as a dampener to competition and can increase pricing, which can be bad for those at the more marginal end who could do better where they are price sensitive and could shop around. They were using the utilities interventions in England as an example where they saw a price ban acting as a depressant on competition and it did not improve pricing. They unwound that. I simply say this because it is a very complicated topic. The overwhelming evidence is that one needs to get underneath why this is happening and get to the cause of it in order to build an intervention that can deal with it.

It is true that all of us would want to see consumers getting good deals with products that suit their needs and that pay out when events happen at prices that are good for them. There is a significant competition dimension to it.

I appreciate that Ms Rowland has a lot to say but my time is limited so I will-----

The Deputy has one minute left.

Let me go through this quickly. I ask Ms Rowland to be as brief as possible. Does she agree with the statement in the White Paper on the task force in 2015 in the US, which said that two insurance customers with the same risk profile should be charged the same premium for the same coverage? That task force led to the banning of dual pricing in at least 17 states in the hotbed of capitalism and the free market. Does Ms Rowland believe in this statement?

Ms Derville Rowland

I am aware that the US-----

Does she believe in that statement? I do not want to push her but I need-----

Ms Derville Rowland

I need to be able to say that the US legislation is framed entirely differently from our legislation.

I am not asking Ms Rowland about the legislation. I am asking her whether she believes in that statement. Does she believe in that principle? I just want to figure out from where she is coming.

Ms Derville Rowland

I am coming from the consumer protection code in Ireland and the Irish regulatory framework. The US framework is entirely different. A total of 17 states have banned in different ways because they work in a different legislative framework.

Forget about legislation, I just want to know whether, in principle, Ms Rowland believes in the statement that two insurance customers having the same risk profile should be charged the same premium for the same coverage.

Ms Derville Rowland

Our starting point is that price differentiation is not wrong per se. What we focus on is fairness over the lifetime for the customer, which is an important driving principle. We expect the fair protections of the consumer protection code to be discharged and we will look at this issue to see if there has been a new adaptation and assess the impacts of that in an evidence-based way.

That is fine. Ms Rowland said that the consumer protection code of 2012 is central to the Central Bank's conduct of business mandate. We know that firms must fully disclose all relevant information, including charges, in a way that seeks to inform their customers and act fairly in the interests of customers. I gave Ms Rowland two examples earlier. One involved Ray who had a renewal premium of €1,420 when the same company offered it for €680 online. The other example involved Alex from Waterford who was charged €871 when the same company offered it for €400 online. We are talking about differences of 100%. How could we argue that those companies are in compliance with the consumer protection code of 2012, which is the law of this State, in the context of acting fairly when it comes to Alex or Ray regarding the prices they were charged because there was no disclosure that the companies were operating dual pricing? Perhaps people do not know that companies are using big data and algorithms to basically impose a loyalty premium. It is not about what is the best price the company can offer a customer. it is about how much it can get away with charging the customer. That is the approach here. How could these companies be in compliance with the consumer protection code regarding their requirement to act fairly towards their customers when we see two different prices for the exact same risk profile from the exact same company?

Ms Derville Rowland

It is precisely because we think that dual and differential pricing is a priority that we are doing the work on it. With regard the examples given by the Deputy, it is impossible for me to come to a conclusive answer. I do not know what distribution channels are being used, if there was a claims history change and the particular facts. What I can say is that the examples raise the issue and we are doing a huge piece of work across motor and home insurance precisely to get a lot of information about this. It raises the issue. However, I cannot be conclusive in an answer without looking at this, which is precisely why we are going to do this very detailed and comprehensive piece of work.

If there is time at the end, I will bring Deputy Pearse Doherty back in.

I welcome Ms Rowland and her colleagues and thank them for coming before us. Just to get the terminology right because terms like price optimisation, dual pricing, differential pricing or price differentiation are used broadly to describe the same thing, what is the correct term as Ms Rowland sees it? Can she define what it is that the Central Bank is conducting its review into?

Ms Derville Rowland

A lot of different authors and actors use different phrases depending on who they are. It is not a specific defined term. Marketing material is used by some and they are calling it different things. We see it as differential pricing. In other words, charging similar risk and applying different prices for cost channels. For us, it is a focus on the different mark-ups being charged because it is this that is changing.

So "differential pricing" is the term the Central Bank is working to.

Ms Derville Rowland

That is the term we are using. Lots of people use lots of different terms in subsets of what that means in different variants.

How long as the Central Bank been examining differential pricing? When did it decide to do a formal review?

Ms Derville Rowland

It has been a risk that we have identified in our consumer protection risk assessment in the context of big data and innovation. For example, it was identified in our 2018 consumer protection risk assessment. Our process is to gather all relevant information about risks consumers face, some of which are outside our competence, but it is good and important that we have an awareness of the threats posed to customers. From that, we do a prioritised work programme to address specific and particular risks. The risk of differentiated pricing or that issue has been well known for long before that but the big data innovation has come in more recent times. Some of that is to the benefit of customers because innovation can bring cheaper prices. Telematics can be applied to someone's driving to get him or her cheaper policies while genetic testing can be good for some and bad for others so the availability of new information to make decisions can produce personalised pricing, which can be good or bad. As a result of that, we developed our work programme on insurance. Clearly, a key focus in Ireland is Brexit and the threat to insurance customers. We have been working on that but as part of our work on the cost of insurance problem at national level, we also developed policy initiatives to address this issue in part, which we did during the course of this year. For 2020, we have decided that this is work we would now develop in this way.

When did the Central Bank decide that?

Ms Derville Rowland

We decided that during the course of this year. It was a continuum from work we had already started.

How long will this take?

Ms Derville Rowland

This is a long piece of work that will be multi-annual in nature. I have no doubt that this piece of work will take all of next year. It will develop into further work programmes. It will probably be a feature of our work in different guises. We anticipate that the first two phases of the work on the insurance industry and dual pricing will take most of next year. Depending on what we find and the level of complexity, in all likelihood, there will be work into the following year. The FCA has been doing work on this for a number of years and anticipates that its work programme will go on for a number of years so we think that is a likely prediction of the time.

When will we and, more importantly, consumers hear outcomes from what the Central Bank is doing?

Ms Derville Rowland

It would be our intention to publish interim results of that work at some point towards the end of the phase two work. That would be an important thing to do and we certainly would expect to do that.

When is that likely to be?

Ms Derville Rowland

Next year.

Will it be towards the end of next year?

Ms Derville Rowland

Yes.

It will be towards the end of 2020 before we see any outcome.

Ms Derville Rowland

The reason for that is because we are looking at the motor insurance market, in which more than 1 million policies are sold. We must take a relevant analysis of the market participants, the different business models they have, the different business lines they have, the costs supporting that and the strategies. We must ascertain the impacts on customers and directly contact those customers to find out the impacts on this so this is a wide and complex piece of work ranging across a number of dimensions. If the Deputy wishes, I could ask Mr. Cullinan to talk to him in detail about the complexity of the market in respect of which we must do the analysis.

Not right now, if Ms Rowland does not mind. I just want to get through a few questions first. The Central Bank was also the regulator of banks.

Ms Derville Rowland

That is right.

We have banks operating in Ireland that use differential pricing. The Central Bank does not need any big investigation. It can go online and see there are better deals for new customers than they are willing to offer their existing customers. Why is the Central Bank not dealing with that issue?

Ms Derville Rowland

That is why we strengthened the regulatory framework in respect of banks by introducing new requirements so additional transparency and information was provided to customers about better prices they can receive with regard to mortgages. I can ask Ms McEvoy to give the Deputy more detail.

To cut to the core of that, it is not about transparency or communication. If a person is a customer of Permanent TSB and wants to be on a fixed rate, he or she is paying a higher fixed rate than a new customer of that bank. It is not about transparency. The person is paying more and has no option but to do so.

Ms Gráinne McEvoy

The initiative we introduced in June 2018 dealt with exactly that issue. We required the firms to communicate to their customers on an annual basis if they had a better product available, particularly a mortgage product, and if it was a cheaper product, they had to write to and inform the customer of that product. All of that was within the mindset of encouraging the customer to switch. We know from our evidence that there is a very low level of switching within mortgage products. This was introduced exclusively for that reason, namely, to encourage customers to switch. We were very clear and transparent, based on the research we had undertaken, about the savings that were available to customers in one, two or ten years down the line. It is a very real saving. It is an initiative that came into effect on 1 January 2019. As yet, we do not have the evidence to show whether it has yielded or given rise to greater degrees of switching in that space, but it is an important measure that will actively encourage consumers to switch.

I hear all of that. However, I am making the point that differential pricing in our banking system is happening under the nose of the Central Bank. The bank to which I refer advertises a discounted managed variable rate for a period for new customers which is not available to existing customers. Existing customers can only move once to a managed variable rate, they cannot update the valuation and avail of a lower rate and if they want to be on a fixed rate, they are paying a higher fixed rate than a new customer. It is classic differential pricing and I do not see anything in the initiatives the Central Bank has undertaken to deal with that.

Ms Gráinne McEvoy

With respect, the initiative we introduced in 2018 deals with exactly that. It requires the firm to communicate to its customer where it has a cheaper and better product available within its suite. That was the sole purpose behind that initiative.

We are on the matter of differential pricing, which, in effect, boils down in many cases to a new customer getting a better deal than is being offered to an existing customer who is keeping his or her business with that bank or insurance company. That is happening right now in parts of our banking system, although not all parts, and I do not want to tar all of the banks with one brush in respect of this issue. However, if we take that particular example, it is classic price differentiation.

Ms Gráinne McEvoy

I do not disagree. Ms Rowland noted in her opening statement that this is a practice that applies right across a multiple of sectors.

Including some sectors regulated by the Central Bank.

Ms Gráinne McEvoy

Indeed, but our focus in this case is very much on the insurance sector, where it has been identified as a key risk, and it is something we are going to address.

To come back to insurance, there is one critical question. If the insurance company believes a customer is not going to move his or her business or switch, is it acceptable for the insurance company to charge that customer more than it otherwise would because of that fact? It really comes to down to that net question of whether, from a consumer protection point of view and looking at the terms of the Central Bank's consumer protection code, it is acceptable. That is what they are doing.

Ms Derville Rowland

What we are focused on is protection over time for the customers. Precisely because this is an issue that needs to be looked at in greater detail, we are doing this significant piece of work. They are required to adhere to the high standards of the conduct of business requirements, and that is precisely what they have to do. There are winners and losers in this, for sure, and that is what happens. I am aware some businesses do not price differentiate at all and some businesses give existing customers cheaper prices to stay with them. There are now flash sales occurring in insurance whereby there are windows of additional discounts being given to people if they move their business to others. There are cheaper prices online. There is a complex set of circumstances here. We have to look at this in the life cycle of the fairness over time to customers, and that is precisely what we are going to do.

I hear all of that. The Central Bank is the guardian of the consumer protection code and that requires the firms to act honestly and fairly in the best interests of both their customers and the integrity of the market.

Ms Derville Rowland

That is right.

If a firm knowingly charges a customer more because it believes, based on recent experience with that customer, that he or she is not going to move, and will probably not even shop around or price an alternative supplier, and it charges more as a consequence, is that really acting fairly and in the interests of the customer?

Ms Derville Rowland

We are not going to prejudge this matter. We are going to acquire the evidence. What we have to do is look at the impacts on the customers and the behaviours of the market, and that is what exactly we are going to do. We are very clear that we expect high standards and we expect adherence to the consumer protection code, and nothing changes there. This is a complex issue where lots of different pricing is occurring, with lots of different variants within that and, as stated, with more price-sensitive, younger customers who have the ability and the desire to shop around and get better pricing for themselves, which can be seen as a good thing. Some of this is as a competition strategy, not a pricing strategy, but we have to test that and we have to test what, in fact, is going on.

How long has the practice of differential pricing been going on within insurance in Ireland, to Ms Rowland's knowledge?

Ms Derville Rowland

I might ask Mr. Cullinan to deal with that.

Mr. Domhnall Cullinan

Price optimisation, or whatever terminology one wants to put on it, has been going in the insurance industry right across the world for decades, and that is the reality. How long it is going on here, and the various levels of sophistication the different companies are applying, varies. We have seen some that has been relatively recent. Some only introduced it in the last couple of years whereas others have gone back as far as ten years in terms of price differentiation.

Therefore, it has been happening for decades around the world and in Ireland, and the regulator would have a general awareness that this has been the case over that period, presumably. Mr. Cullinan is saying it is almost an accepted norm across the industry and not just in Ireland.

Ms Derville Rowland

I want to differentiate between two things. It is our understanding that very many industries, including financial services, have charged different prices for a very long time. That is long-established, it is a matter many competition regulators look at and it is something that our competition regulator is also looking at. With regard to price differentiation or dual pricing with respect to consumer attitudes in the UK, the UK competition regulator has been looking at that, as well as the FCA, which also has a competition mandate. We are looking at it from the perspective of a consumer protection mandate. However, price optimisation and big data is a more recent innovation and level of sophistication with respect to that phenomenon. The idea of personal pricing, arising from information on people's behaviours on the Internet, for example, when they click the box saying they are okay with their information being shared, has brought about far more sophistication and ability of the firms to slice data in a different way. Some of that innovation can be to the advantage of customers because it may be that we can get personalised pricing to our advantage, but it could be that techniques could be deployed in a way that is changing over time. That needs to be looked at to see what, if any, impacts there are on customers and what, if anything, should be done about that.

I want to raise a couple of other issues relating to insurance.

The CCPC and the competition directorate of the European Commission are conducting probes into alleged anti-competitive practices in the insurance industry. Does the Central Bank have a role in those? Does it provide information or assistance to the European Commission or the CCPC?

Ms Derville Rowland

We do not have any role in competition whatsoever. Were we ever called on to support or assist investigations, we would of course play our correct part in those.

I will ask a couple of quick questions. Where do we stand with the national claims information database?

Ms Derville Rowland

It has been a significant job for the Central Bank this year. The database is particularly focused on motor insurance. It is expected that information will be published before the year's end. Discussions on widening the information to other types of insurance are ongoing, for example, liability insurance. This is important work for us and we expect to report on it shortly.

What will we see in the database in its published form before the year's end?

Ms Derville Rowland

I do not have that detail with me, but we will be before the committee again on-----

To put it another way, what use or benefit will the database be to bringing more openness and transparency to the industry and claims environment? Will it provide information on awards through the various settlement channels, for example, the Personal Injuries Assessment Board, out-of-court settlements and court awards? We need a proper handle on the data so that we can draw lessons from them.

Ms Derville Rowland

We agree that the overarching objective is to produce efficient information about the claims and their cost so that we can have transparency on the matter. I will ask my colleague, Mr. Cullinan, to provide more detail about what we anticipate.

Mr. Domhnall Cullinan

The database covers all of the issues mentioned by the Deputy and Ms Rowland. It will break down the claims channels and payouts via them. The idea is to provide more transparency. It was a massive undertaking. The data request went out in April of this year. Perhaps not unlike the investigation we are about to go into, it involved multiple companies using multiple channels and so on to look into the matter. It will shed light on the aspects that the Deputy mentioned. It will also shed some light on the profitability of the motor insurance industry.

The Central Bank is not working on a fraud database.

Mr. Domhnall Cullinan

A working group on that has been established, which was one of the recommendations of the cost of insurance working group. We are not members of it, though. Its work is ongoing.

Ms Rowland referred to the 2018 thematic review of the pricing and underwriting information supplied to the boards of 12 firms. Two thirds of the sample required improvement. What types of issues requiring improvement arose in that review?

Ms Derville Rowland

I might ask Mr. Cullinan to answer.

Mr. Domhnall Cullinan

We saw examples across the industry of the use of commonly used cross-subsidisation between business lines of particular groups of policyholders. We also saw examples of firms' reliance on data and services from third parties or groups to support pricing and underwriting decisions. In that context, there may be issues around price optimisation. The real point was that there was a requirement under the Solvency II directive for the actuarial function to provide an opinion underwriting to the board on an annual basis. We did a great deal of work on clarifying exactly what our expectations were in that regard. We expect the opinion provided to each board to get into the issues of pricing so as to increase oversight and transparency to the board itself in order for it to be satisfied about its own pricing strategies.

Ms Derville Rowland

That could be an example of dual pricing at work, that is, business lines being run at a price that is lower than what is called the technical pricing, that is, profit pricing. It could result in some people initially getting a price less than the cost of the risk and other costs but seeing their payments increasing over time to more than that. This is an example of where the cross-subsidisation that Mr. Cullinan referred to - winners and losers in the internal pricing models of the business - could be at play.

In the mortgage market, the Central Bank has acknowledged that there is differential pricing. It should continue its work in that regard. Most banks are not engaging in it with the exception of the upfront cashback offer, which we have discussed previously. In terms of actual rates, though, there are still examples of clear differential pricing. In the interests of consumers, it should be ended. I suggest that the Central Bank examine the matter. Perhaps it could get a quick win and not have to wait until the end of 2020 or 2021.

Ms Derville Rowland

We agree with the Deputy that there is inertia or differential pricing in existence. We are not a price point regulator - that is not our role - but I can agree with the Deputy that giving the best offers to one's customers is best for everyone and something that we would support.

There is also a statutory code that has to be upheld.

Ms Derville Rowland

We are conscious of the regulatory framework and the high standards that we require. In the context of our role, we take those seriously.

I do not doubt that, but the Central Bank should consider the examples I have given through the prism of the requirements under the consumer protection code.

Ms Derville Rowland

We always do so.

I thank Ms Rowland.

I thank Ms Rowland for her opening statement. That the Central Bank is undertaking this review leads one to presume that it suspects or has cause to question whether the insurance companies have been acting honestly and fairly, ensuring which is the Central Bank's remit. If the Central Bank has been conscious of these behaviours for decades, why is the review only being undertaken now?

Ms Derville Rowland

We examine risks to consumers for many reasons. The Senator cited one. As part of our work, we perform a risk assessment every year in which we draw in all of the relevant risks to consumers. Some touch on actions that we can take, some do not, but it is important that we see the threats and risks to consumers. Price differentiation has been in existence across economies and markets for a very long time. It predates our involvement by decades. It is a widespread phenomenon. The risk that we have captured in more recent times is a big data AI risk.

I understand that.

Ms Derville Rowland

It is a more recent risk. That variant has brought about a focus on innovation and the opportunities and threats it presents. It is why we are undertaking this particular piece of work. We see that-----

I need to ask Ms Rowland a question, as we only have a limited time for questions and I want to get to the bottom of why we are where we are. Is Ms Rowland saying that Deputy Pearse Doherty's questioning of the insurance industry concerning dual pricing has nothing to do with why the Central Bank is undertaking this review?

Ms Derville Rowland

We noted that the Deputy had been questioning the insurance industry. We also noted the work of the Financial Conduct Authority, FCA, and have been in touch with it. We had already cited this risk and have been taking action on it. It forms part of our 2020 work programme because it is a risk on which we were cited. When choosing our work programme for this year, we focused on our work in the cost of insurance working group. We also focused on this issue by taking the action that we started a year ago in terms of formulating a policy, which is now in place, on customers being told about the price of their previous policies-----

This was always going to be done.

Ms Derville Rowland

-----which is a continuum of work.

This is just business as usual.

Ms Derville Rowland

We welcome Deputy Pearse Doherty's focus on this. We are aligned on this being work that should be done.

It is important. When will the Central Bank finalise the terms of reference?

Ms Derville Rowland

We are working on them now and anticipate writing to the CEOs of the relevant companies within the next few weeks. We anticipate changing or adding detail to the terms of reference over time as we find particular details. In phases 2 and 3, the terms of reference will probably develop further as we learn more from phase 1.

Will the Central Bank furnish this committee with a copy of the terms of reference?

Ms Derville Rowland

We will be happy to furnish the committee with that information.

Ms Rowland states interim reports will be produced. On the point about interim reports, will the Central Bank be in a position to establish the sanctions that may be brought about? At what are we looking in terms of how soon they will have an impact on customers? If the Central Bank finds six months into next year that something is becoming blatantly obvious, will it be in a position to issue sanctions?

Ms Derville Rowland

That is a separate matter. The structure of the work is that we must make the market assessment with respect to a significant proportion of the 1 million home policies and the 2 million motor policies issued. We must examine most of the firms, their business models and approaches. We can then have the data requests related to the impact on customers and we will also contact customers. That is the flow of work involved. If, during the course of that work, issues arise that are pertinent to our normal supervisory work, we will deal with them in that context. That will happen as is normal in every piece of work we do. Where issues arise, we deal with them. This is a huge piece of work, with which we will proceed. Where we have cause for concern, we will in our supervisory role deal with those issues in that context and separately from this matter. The report will probably be at the end of phase two. We may produce an interim report because we will need to have a certain amount of information to be able to report meaningfully on what is happening and the meaning of impacts. We may move twardso a policy prescription, if required, in that context.

Does the Central Bank have extra capacity to do this work?

Ms Derville Rowland

We will put a dedicated team together. This is our approach in working cross-functionally. Our insurance expert colleagues, the insurance supervisors, will form part of the work, with expert conduct supervisors and actuaries in the Central Bank. We will have project managers for governance and oversight of work streams. If we need to seek expert support in doing the work, we will seek it. We always work cross-functionally by putting large-scale teams together for such work and then disbanding them. We might add different work streams as the work flows through, as we might need a lot of data in one phase and many insurance experts and actuaries in another. We will need conduct supervisors at another stage and perhaps policy experts in yet another. We roll them in and out of the work streams, as required. My colleagues can speak more about the structure, if required.

There is a clear need to have a team examining ethics within the process. The way people's data are being used is similar to the way they were used in the Cambridge Analytica issue in examining people's behaviour and using the information to exploit them.

Ms Derville Rowland

The Data Protection Commissioner is the relevant commissioner. If issues arise in that context, we will, as we would with anybody, refer them issues to the commissioner. This is a big issue that extends well beyond financial services. It has a major impact on competition and is a serious data issue. It is a very serious conversation for the citizens of any country to understand when they click on links on the Internet. There is an ability to analyse and predict behaviour with behavioural economics; therefore, people must understand on a broad scale what can be done with information. We set up a behavioural economics unit in the Central Bank this year and it is examining these matters. It will support us in our policy and thinking about what modern interventions need to be made in dealing with what we call "evil nudges" or "positive nudges".

We want customers to act in their own best interests, which is why we made the policy improvement of giving customers information on the previous year's premium. It has been tested in the field and seen to have had two very powerful effects. The first is that when people who might not normally seek a better price see the previous year's figure, they change their behaviour and obtain a quote to see if they can do better. It also has an impact on the pricing of firms as they are now conscious that they must communicate previous prices to customers. It can have a very powerful cash saving effect for customers. These policy interventions are required. We will review the consumer protection code in a fundamental way next year. We are thinking about digitisation and innovation as part of the way the code needs to be constructed.

The fear is we are playing catch-up. The tools used to analyse the information are sophisticated and the data are already being used as a force to fleece customers. That is the problem.

Ms Derville Rowland

The Financial Conduct Authority is large and its policy framework is not significantly further developed than ours. We have key protections in place in this jurisdiction, including the communication of previous pricing in offering motor insurance cover to customers. The authority's work is in development. It has nothing in place with respect to the list it has suggested, except a discussion document, on which it anticipates undertaking further work and analysis into next year.

We are in a position where there is wholesale exploitation of customers in the insurance industry. We cannot sit here and say customers are being protected and that we have a hold on the problem. It really does not give me confidence. Deputy Pearse Doherty has all of the examples. I tried to get a quote and believe the insurance industry is even catching on to this. I cannot obtain a quote without giving the postcode. There is ongoing manipulation. In designing terms of reference the Central Bank needs to have an awareness of what is going on.

Ms Derville Rowland

Until we do the work we cannot identify precisely what is going on. We agree that there is a risk and that the matter should be examined and we are doing so. The terms of reference for phase one are clear in that we must establish with a high degree of accuracy the pricing strategies, the models and approaches being employed by businesses. It is our intent to cover more than 70% or 80% of the motor and home insurance industry in Ireland. We will cover the industry providers, some of the brokers and the branches with delegated authority for pricing. We will move across all of their business models and make walk-throughs. We will meet the boards to ascertain precisely what is going on in order to identify what, if any, decision-making factors are employed in the course of dealing with the dual pricing issue in order that we can be very clear about the next phase of the work involved. It is an enormous, complex, wide and deep piece of work.

I appreciate that, but why has it not been done before?

Ms Derville Rowland

We are a risk-based supervisor that prioritises the work of the Central Bank according to the threats posed to customers. We have prioritised our very important work in the cost of insurance working group and on the national claims database. That work will shortly produce very important information. We have prioritised the strengthening of the policy framework that was put into place on 1 November that will enable people to receive the prices of their policies in the previous year, which is linked with this matter.

I appreciate that and hope it will prove helpful.

Ms Derville Rowland

We have done extremely important work on Brexit that required us to deal with the threats posed to Irish customers. Many Irish people buy their policies from the United Kingdom and a cliff-edge outcome would have led to them not being able to claim or receive money under a policy.

Ms Derville Rowland

We had to support the development of national legislation in order that those policies would continue to protect people.

Is Ms Rowland saying the Central Bank did not have the capacity to do this piece of work until now?

Ms Derville Rowland

I am not saying that. I am saying we are a risk-based supervisor that has done enormous amounts of work to protect consumers and it is right for us to do so.

We have not protected them.

Ms Derville Rowland

This is very important work. We have taken key policy actions in respect of it and are going to do more work on the issue.

I appreciate that and welcome the taking of such action. We have failed Irish consumers across the board, while the Central Bank has failed to ensure the insurance industry acts honestly and fairly with its customers.

That is the problem. People cannot see it when they get their premium. When they are charged, they try to get another quote and they see that dual pricing is at work. I need to ask Ms Rowland a specific question-----

Ms Derville Rowland

I accept that Irish people are concerned about the price of insurance and a lot of work is ongoing on that. Dual pricing is a separate and specific issue. It is important and we are looking at it. We have already done work in this regard.

It still takes money out of people's pockets in a very unfair and quite devious way, using algorithms and other methods to target particularly vulnerable customers.

Ms Derville Rowland

We will be working to establish if and how that is happening and to what extent. As I say, differentiated pricing has been in existence for a long time. A lot of people in Ireland are price-motivated and change insurance companies regularly when they get their quotes. That is an important consideration in the wider context of dual pricing. However, we agree that this is an issue that needs to be looked at and we are doing very significant work to establish the facts. We are an evidence-based policymaking institution.

I understand that it is important to have the evidence but we all know where we are with the insurance industry, not least the people who have to pay all the time. How will companies that provide services in both the UK and Ireland be impacted if Britain introduces harsher regulations before we are ready to do so?

Ms Derville Rowland

My colleague would like to reply to that.

Ms Gráinne McEvoy

By way of background, any UK entity operating in Ireland does so on a freedom of service or freedom of establishment basis. The UK authority, the Financial Conduct Authority, FCA, would write to the Central Bank of Ireland in such a case and notify us that one of its firms wished to provide services into Ireland on a cross-border basis. In the absence of some very radical outcome, Brexit will inevitably mean that will no longer be possible. That will mean that from the end of January next year, individual firms that are providing services from the UK into Ireland on a cross-border basis will no longer be permitted to do so unless they have implemented contingency plans or made arrangements to seek an authorisation in Ireland or any other EU jurisdiction. Those firms' ability to continue to provide services here post Brexit will depend on an EU domicile. If the FCA introduces new regulation, its rules will apply only to the entities it regulates. If those UK-based firms are not allowed to provide services on a cross-border basis, those regulations will have no bearing on any activities that take place here.

I wish to refer to an important piece of information which was mentioned earlier-----

I wish to finish this point, just to get it clear in my head. Could an insurance company operate differently in Britain and in Ireland if it fell under harsher regulations there than here where dual pricing is concerned?

Ms Derville Rowland

That is the case right around the world. On a global level, any provider will have to comply with individual countries' requirements.

Yes, but how will we ensure that we are not operating under more lenient rules than those that apply in the UK, given the fact that the British authorities are doing this piece of work?

Ms Derville Rowland

In our policy formulation we look first of all to make sure that any rules or approaches we take are in line with the European Union. Britain will be taking a different approach. The rules we make here in Ireland are based on what is happening in the Irish market. We also look at best practice that can inform us but our work has to be evidence-based and bespoke to our own market. We do not want to introduce rules here that have no effect or positive protective impact for our own markets but of course we look at best practice globally when we are looking at policy formulation.

Ms Gráinne McEvoy

The Senator should bear in mind that if a UK firm provides services here, it is subject to the Irish regime. If a French, German or UK firm operates on a cross-border basis to provide services to Irish customers, it is subject to the Central Bank's code of conduct in relation to its engagement and interaction with its Irish customers.

I understand that. I was just wondering if there could be a situation in which the Central Bank was more lenient towards dual pricing than the authorities in Britain. What would happen then?

Ms Gráinne McEvoy

We have clearly articulated-----

As part of this work, will the Central Bank ensure that-----

Ms Gráinne McEvoy

We certainly will ensure that.

----- the learning from Britain is-----

Ms Gráinne McEvoy

We have kept a very close eye on the actions taken by other regulators, including the FCA, as we articulated earlier. We will closely monitor that to ensure that we act proportionately across the board.

Ms Derville Rowland

In this jurisdiction, we have a very well-developed consumer protection framework compared to very many others. There is a large degree of consumer protection which other countries do not afford their citizens. We take that very seriously. Our policy work always looks at what is out there globally but it must be bespoke for our own jurisdiction on the basis of appropriate evidence in order to have a positive effect on our own system. In financial services, it is particularly noticeable that different markets operate differently with different practices and preferences. It is very important that these considerations are assessed in our own context.

I understand that but it begs the question of why we pay so much more for insurance than people in other countries.

Ms Derville Rowland

That is a big and complex topic.

I know there are many issues there.

Mr. Domhnall Cullinan

In this regard, I note that about eight insurance undertakings occupy between 70% and 80% of the motor and household insurance markets. Of those, six are authorised by the Central Bank. Two are not authorised by the Central Bank but operate on the basis of freedom of services into Ireland. One of those is Liberty Insurance, a Spanish firm whose ultimate ownership is in the USA. The other is AIG, a Luxembourg firm ultimately owned by an American firm. None of the big players passports into Ireland from the UK. The UK demands a completely different pricing model than Ireland, as it is a completely different jurisdiction.

I know it is. Insurance is a lot cheaper there. Do the witnesses foresee this dual pricing situation expanding from the motor and home insurance sectors into the other areas of insurance?

Ms Derville Rowland

We do not have a plan to expand this at the moment because people must have motor and home policies to protect themselves. We think that is the right place to put the focus of our current efforts on this topic. As we said, this is a significantly wide and deep piece of work. Our plan is to apply our resources to this and a great deal of expertise will go into doing so. We believe these are the right areas on which to focus from the consumer protection point of view as 2 million people in Ireland have a motor insurance policy and about 1 million have home insurance. These are very important products for families, who do not really have a choice on whether to buy them. That is where we are putting our focus.

People also do not have a choice about whether to have business insurance or many of the other types of policy. Many families feel they do not have a choice about whether to get health insurance because of the state of our health service.

Ms Derville Rowland

The remit of the health regulation is different to this.

I do not want to pick a fight but I think the presentation was not fair towards the FCA's work. The FCA has done quite a lot of work on this in the last two years.

Ms Derville Rowland

That is true.

The presentation, however, suggested it is still carrying out further analysis and so on. Let us be clear on the interim report before us. The next steps will be consultation on the proposals the FCA has outlined, which include banning dual pricing and automatically switching customers onto the best-priced policy. Those are the next steps. The FCA has come up with a suite of recommendations and it is now engaging with the industry and consumers on which one is the best. It has carried out all of the necessary evaluation of the impact on customers and vulnerable consumers and on the prevalence of the practice. It has completed work which the Central Bank of Ireland has not even begun. The FCA is now looking at feedback on its recommendations.

Ms Derville Rowland

If I might reply, I do not mean to make little of the work the FCA has done. It has carried out significant work over several years. I accept that. Everything the Deputy says about the FCA's work is right. It has set out a range of options. However, it is true to say that it is going to do more analytical work. It has said as much and it is true to say it expects to go into a consultation phase and consider that next year.

All of that is true.

The consultation phase is on the next steps to be taken.

Ms Derville Rowland

I accept that.

Does Ms Rowland have a view on the interim findings and the remedies on which we propose to focus, including a ban on dual pricing? What is her view on the potential remedies we propose not to focus on? What remedies should we be considering? Are there any other potential changes or innovations? While the FCA is carrying out consultation, it is doing so in the final stages of a large piece of work. It has done its analysis and come up with a suite of options and it is looking for feedback. I do not wish to waste time but I make that point because it would be unfair to suggest it is at the same stage as the Central Bank of Ireland. I welcome that the Central Bank is carrying out an investigation into the matter. I know from my meeting with the Competition and Consumer Protection Commission that it is looking at including this issue in its work programme for 2020. I encourage engagement and co-operation between the agencies.

I was a little concerned by some of the contributions on dual pricing and price discrimination or price optimisation or whatever one wishes to call it. Some would call it fleecing the customer. It was suggested that it is just about attracting new entrants. An insurance company that offers a 10% or 20% reduction for new entrants is following normal business practice and trying to entice new customers. The practice in the mortgage market is different. If Senator Conway-Walsh and I seek mortgages from Permanent TSB or AIB at the same time, we will be offered the same rate regardless of our personality or behaviour. Insurance companies do not just look at one's likelihood of renewal, which is the loyalty premium; they use big data analytics of a type and scale we have never seen before and about which customers do not have a clue. They are using artificial intelligence to manipulate those data, including images and videos on applicants' social media, to decide whether they will be hit with a bigger insurance premium. Is that not the case? Is that not what these sophisticated algorithms are doing?

Ms Derville Rowland

The concern is that the potential for that practice exists. That is why we must examine this in great detail. Concerns relate to big data and analytical abilities, what can be done, what is being done and how that affects customers. The Deputy and I are in agreement that there are many ways variants to which this can be deployed. They can be deployed for personal pricing. The work of the FCA refers price-walking strategies and other variants of these practices. There is potential for information from a range of activities in one's life to be used to predict behaviours and inform pricing. It is a big data concern and is exactly why work needs to be done to see what is happening in the Irish market.

While I welcome that the work will be done, does the Central Bank have information that any insurance companies in the Irish market are using social media information to inform their price structuring?

Ms Derville Rowland

I have no information on that.

Is Ms Rowland aware that the usage of artificial intelligence to manipulate unstructured data and take information from pictures, videos and other online content is a practice in the insurance industry?

Ms Derville Rowland

We are aware that businesses theoretically have the ability to do that.

It has been fairly widely reported that this happens in the context of pricing. Leaving aside dual pricing, there have been many reports of insurance companies using algorithms and artificial intelligence to inform the issues of pricing and risk in the insurance industry. I am sure Ms Rowland is aware that the European Insurance and Occupational Pensions Authority, EIOPA, carried out a significant analysis of 222 insurance companies across many European jurisdictions - I am sure some companies operating in Ireland participated - and the companies openly admitted that they are involved in this type of data manipulation. An insurance company may use artificial intelligence to access my social media and see that I was bungee jumping or scuba diving last week. This big data stuff is so sophisticated that the company would be able to conclude that I would be a higher risk than Senator Conway-Walsh, for example, who was out walking her dogs rather than jumping off a cliff with an elastic band tied to her ankles.

Ms Derville Rowland

Walking one's dogs could be very dangerous in Mayo. Perhaps it is just as wet in Donegal. The Deputy has identified an issue that was not previously a problem. It arises from the advent of modern technology and a change in our behaviour in terms of information sharing, such as surfing the web and clicking a box to consent to the usage of information in ways that people may not understand. In addition, technological advances in the manipulation of data and extraction of structured information from vast arrays of data from which we were not previously able to divine insights have changed the world in which we are living across all manner of industries. It is a topic of real concern, which goes far beyond financial services. The pricing of risk can be informed by many different fields. It is a slightly different matter but it goes to the heart of the same key topics, namely, innovation, our behaviour on the Internet, technological advances and information and how it is governed.

Many people watching these proceedings may think the data companies use and manipulate to try to determine one's behaviour and see whether one is susceptible to an increased premium are data which people give them. We give insurance companies a significant amount of data, including our Eircode postcode, as well as our job title, which influences one's price bracket. We tell home insurance providers the value of our house contents. Other data may be revealed by those seeking holiday insurance and so on. However, the companies are also able to access our publicly accessible data through social media. The Central Bank indicated it is not aware of any company in Ireland carrying out such practices but I presume it has not asked them. Has it asked?

Mr. Domhnall Cullinan

We have had discussions with firms regarding dual pricing. I mentioned two firms that are not engaged in it; we are aware of the companies that engage in it. There are various levels of sophistication but I am not aware of any company accessing social media in the manner the Deputy suggests. It is a wide and complex area. I do not know whether the Deputy is familiar with Lemonade, an American company. Customers make their claims online. The company looks at the claimant's face and can tell - apparently with a 96% accuracy rate - whether the customer is lying. I am aware of another American firm that asks 13 questions on its proposal form and looks at 300 data points in the background. The reality is that the level of data and sophistication available differs somewhat between Ireland, the UK and the United States. That is why we need to progress this investigation and establish exactly what is happening.

This runs a little deeper than price differentiation because there are other issues. Ultimately, insurance is about the pooling of risk. Things could get to a stage whereby risk is disaggregated to such an extent that a person who is a very low risk will get a very low price but other people may be completely priced out of the market. That would be of concern. Things have not yet reached that point anywhere. We need to pursue the investigation to look at current price differentiation in the Irish market and determine its extent. We are well aware of the ethical and fairness risks that exist.

As Mr. Cullinan pointed out, there is a higher level of sophistication in certain other jurisdictions, including our neighbour. However, the EIOPA study showed a big increase in these practices. Many of the companies stated that although they are not currently using these techniques, they will begin doing so.

It is very timely, if not overdue.

The other data the companies use to profile our behaviour are third party data which they can legally hold, such as data from retail store loyalty cards, which provide lots of data on consumption. Are we aware that insurance companies are using any third party data?

Mr. Domhnall Cullinan

No, I am not aware of it, but the reason we are carrying out this study is to ascertain exactly what the level of this activity is, what level of sophistication is being used, what exactly the data sources are and for what means these data are being used.

Mr. Domhnall Cullinan

There are an awful lot of different things involved when one looks at pricing. In terms of distribution channels alone, there are direct channels, intermediaries and bank insurance channels. There are different models for each of those depending on the channel being used. It is, therefore, a huge task and undertaking. As already mentioned, there are more than over 2 million motor policyholders and more than 1 million household policies. It is important that we take time to do this study thoroughly and properly to ensure we have an evidence base from which to draw conclusions and make recommendations.

Returning to the consumer protection code, I am conscious that the Central Bank has to carry out an analysis of the industry. How can a person be charged significant extra fees by the same insurance company at renewal time despite no change in his or her risk? We know that people tend to roll over their policy and accept the renewal quote they receive, even though they could get a significantly reduced quote online. I have countless examples of this and I am a living breathing example of it. How can that be seen as fair in any way shape or form under the definition of the consumer protection code 2012, which places a responsibility on insurance companies to be clear and fair with their customers?

Ms Derville Rowland

We have to look at this in detail. We are not concerned with a single point in time but with fairness over time. We accept that, over time, one might get the benefit of a discount and we would expect to see fairness over time. I have read the dossier the Deputy has submitted and some of the different examples I have heard raise different questions for us. We have to get into the detail of that and look at those examples precisely. We have to check the conditions and parameters, the cost base and the channels to see what is going on. We have to look at the disclosures and the various issues. I cannot give the Deputy a top-of-the-head answer without looking at the detail. The important point is that-----

Ms Derville Rowland

I cannot give an answer without detail because it would not be an informed answer. As this raises the issue of how this is being applied and its impact, we have to look at this. For example, I read some of the-----

May I ask a question?

Ms Derville Rowland

Yes.

Ms Rowland stated her approach is to look at fairness over time. Where does she get that from? The consumer protection code does not say it will protect people over their lifetime but it is okay if they are shafted for about five years by certain sectors. That would be like me being charged €50 for a loaf of bread in my local shop and being told by the shopkeeper not to worry because if I come back in two years, he will only charge me 5 cent for it.

Ms Derville Rowland

That is not what I said.

Ms Rowland said-----

Ms Derville Rowland

That is not what I said. What I said-----

A product is taken out for one year. How can Ms Rowland suggest that Mr. A or Mrs. B will be supported over time given that those customers could move somewhere else.

Ms Derville Rowland

That is right.

The consumer protection code exists in the here and now to protect customers in the here and now. It does not deal with what a company may do to customers over the lifetime of their experience. I and many others have phoned our insurance companies to ask if a renewal quote is the best the company can offer. If it says it is the best quote and I ask why I can get a quote from the same company online for €274 less than the renewal quote, how is that company in compliance with the consumer protection code of 2012, under which it has a responsibility and legal obligation to treat me fairly?

Ms Derville Rowland

We are not a regulator of price. That is not part of our role.

That is not what I am asking.

Ms Derville Rowland

We are talking about car and house insurance products. These are products that are purchased by people year after year. We are talking about a market where different pricing is a permitted practice. The consumer protection code is about protecting all of the consumers. When we look at this, we have to look at the life cycle of the products and see how that plays out for customers over time. We have to see how that works for people. There is a significant group of customers who regularly get far better deals for themselves because they re-broker and move around every year. There are others who do not do so and we have to look at how they are treated over time and see what the impacts are for them. We believe it is very important to do that and to analyse any innovation or new practices that might develop in the approach to pricing that need to be addressed. We need to do the work in that respect. That is why we are undertaking this study.

Did the insurance company that I was with act honestly, fairly and with integrity in the interests of its customer, which was me, when it told me that the best price it could give me was €274 more than I would get from the same company online? In the case of a constituent who was being charged €4,000, when I inputted online her exact details - the exact profile the company sent out to her - she was offered a quote that was €1,200 less than the renewal quote. This was after she phoned the company and was told that €4,000 was the best price it could offer. How could those companies be acting, as is required of them, honestly, fairly and in the best interests of their customers and the integrity of the market?

Ms Derville Rowland

We agree that this is an issue that needs to be looked at. I cannot come to a conclusion based on single instances. We have to do the work and look at the detail, and it is important that we do so.

On a wider issue, the insurance market is completely and utterly broken for many people. The issue goes wider than dual pricing, which is just one element. We have a system under which people are legally required to have insurance to drive on the roads, and rightly so. That system is not in place in every country. I will give the example of a 19 year old who holds a provisional licence, which means he has to be accompanied by a qualified driver. He owns a car, which was registered in 2008 and is valued at €2,000. He tried to get insurance. I have emails from insurance companies stating that he falls outside their risk appetite and so on. He then contacted a broker to get the best price and the broker responded as follows:

Further to our conversation, I can confirm that we have obtained terms for the above type of insurance. The most competitive premium I have obtained is €12,319.78.

This quote was for a third party, fire and theft policy so it was not even fully comprehensive. That is what the insurance industry is doing to some people. This young man lives in a rural area. He wants to learn how to drive and has to be accompanied by an adult. The most competitive price he can get is €12,319.78. There is something seriously wrong in the insurance market when that is happening. There is huge frustration about this. I raise this case with Ms Rowland to elicit a comment from her but also to show that the Central Bank, which has a consumer protection role, needs to offer encouragement in order that people such as those to whom I referred are not fleeced. People I know only too well are being fleeced as a result of dual pricing, a practice which, to return to my earlier point, has been banned in over 17 states in the world of the free market.

Ms Derville Rowland

There are perhaps two separate issues in play there. Dual pricing is about the profit margin being priced differently on the underlying same product. The problem mentioned by the Deputy is of a young man who wants to learn how to drive and is finding it hard to get insurance at a price that anybody could possibly afford to pay. That is a distinct and separate issue because that is the way the companies are pricing the risk.

There may be more detail in that. However, they are separate issues. I might ask my colleague, Mr. Cullinan, to speak on the insurance quote. We are all sympathetic to young people who want to get behind the wheel of a car at insurance prices they can afford.

Mr. Domhnall Cullinan

Absolutely. I say this to try to be helpful. There is a declined cases agreement in place and if a person is declined by a number of different insurers, he or she can then go to the declined cases agreement and nominate somebody. I do not know if that is the result of that process but it might be worth-----

No, it is not. It is the best price from the market. He cannot go to Insurance Ireland because he has got a quote and, therefore, that option is not available to him. The quote is €12,300.

Mr. Domhnall Cullinan

All I can do is refer again to the working group that is looking at the cost of insurance and the various matters with which it is dealing. There are a number of different factors that have to be addressed.

I have two other questions. I am undertaking a series of public meetings in respect of insurance reform. One of the issues that arose at two of the meetings was that insurance companies are price discriminating on the basis of a full driving licence that is not an Irish driving licence. For example, people are entitled to drive with French driving licences but the companies increase the premiums. I intend to raise this with the European Commission. Is that acceptable? Does Mr. Cullinan know about this? When they increase the premium, what they tell the customer is that they price it in on the basis it is a provisional licence, which is ridiculous.

Mr. Domhnall Cullinan

I am unaware of the practice.

On an issue which strays from insurance but which deals with consumer protection, we had a call to the office of one of my colleagues, Deputy Adams, from a consumer who withdrew €20 from one of the new ATMs in a shop and was charged €23.95. Is the Central Bank aware of the new practice whereby a company - it is not AIB or Bank of Irelland - that is installing these ATMs in shops, garages and so on imposes a charge of €3.95 in respect of a €20 withdrawal?

Ms Derville Rowland

I am not aware of that specific practice but I would be happy for the Deputy to provide the details and we will look into it.

I thank Ms Rowland.

I thank our guests from the Central Bank of Ireland for attending. That concludes the business of the meeting.

The joint committee adjourned at 3.43 p.m. until Tuesday, 19 November 2019.