Q&A: How does dual pricing hit your pocket?
What is dual pricing?
This is a practice that is widespread in the insurance industry. It involves insurers signing up new customers on artificially low premiums for the first year and then quoting hugely inflated premiums to renew policies. The practice has been described as a sinister attempt to exploit customers and play on their inertia.
Why is it a problem?
Consumers don’t know that they are being cheated. This is because the cost of motor and home insurance is based on the risk the insurance company attaches to a driver and their vehicle, or their home.
This risk-based pricing means you never know in advance what you will pay until you are given a quotation, whether you are a new customer or a long-standing one.
So motor and home insurance is a one-sided transaction.
Customers do not know how the price was arrived at or what other customers are being charged for a comparable risk.
This information asymmetry gives rise to all sorts of price variations. What sorts of price variations are there?
The difference between a year-one premium and year two can be between 10pc and 90pc.
This means that someone taking out a home insurance policy with a new insurer can get the cover for €400.
The insurer is prepared to discount the cost of the cover in year one to get the business. But when it comes to renewal time, the quote suddenly goes to €700.
Brokers have revealed that they are told by insurance providers that policies will be cancelled by the insurance company if brokers offer new business discounts to people who are renewing a policy.
What can be done?
The existence of dual pricing shows how much premiums are padded up. The fact that new and existing customers are priced differently shows up shoddy practices in the industry.
In Britain, the Financial Conduct Authority, the regulator that ensures consumers are protected, has told insurers not to disadvantage existing customers over new ones.
But the Central Bank here says it has no role in the pricing decisions of insurance companies. It has, however, called on whistleblowers in insurance firms and in brokerages to come forward with information in relation to allegations that consumers are being deliberately disadvantaged by dual pricing.
The Consumers’ Association here has called on the Central Bank to come down heavily on the practice.
For consumers, you must shop around every time your policies are up for renewal and switch to another provider if you are not getting a good deal.