Insurance pricing - have we seen the demise of capping and cupping?

Short answer - no

ASIC has commenced court proceedings alleging QBE Insurance (Australia) Limited (QBE) misled customers about the value of discounts offered on certain general insurance products.

My analysis of the proceedings is for the purposes of compliance education only & is not intended to be a reflection of the practices of QBE, an organisation [& their people] that I greatly admire.

Various pricing mechanisms are used by insurers to apply a floor and ceiling to manage the movement of premiums due to discounts & loadings or otherwise.

These pricing mechanisms are designed to manage the impact of premium fluctuations on customers, ensure all customers contribute to the premium pool & meet insurers target loss ratios.

Summary of facts as per the Concise Statement

• During 1 July 2017 & 24 September 2022 (relevant period), QBE offered commercial and private customers a range of general insurance products, including householder (building and/or contents for residential, strata and landlord), motor (commercial and private), motorcycle, caravan, farm and marine (pleasurcraft). (QBE insurance products).
• In offering these products, QBE made statements promising discounts to the premium otherwise payable for QBE Insurance products.
• QBE’s statements about the Discounts were made in product disclosure statements and/or supplementary product disclosure statements, and/or letters & notices sent to customers to renew their QBE Insurance Products.
• During the Relevant Period, the Pricing Mechanisms (minimum premium, cupping & capping) and Discounts formed part of QBE’s process for calculating the premium payable by a customer for QBE Insurance Products.
• The practical effect of QBE applying pricing mechanisms after the Discounts was that the value of the Discounts was reduced (including to nil) in certain circumstances.
• The Pricing Mechanisms were applied after the Discounts and, as a result, they operated to reduce the value of Discounts in certain circumstances

ASIC's pleadings - legal grounds for the relief sought

Primarily, ASIC alleges that QBE contravened s 12DF(1) of the ASIC Act.

A person must not, in trade or commerce, engage in conduct that is liable to mislead the public as to the nature, the characteristics, the suitability for their purpose or the quantity of any financial services.

ASIC is seeking the relief set out in the accompanying Originating Process, comprising declarations, pecuniary penalties, adverse publicity orders, and costs.

What does this mean for pricing mechanisms such as minimum premiums, capping & cupping.

This is a case about failing to deliver on a promise.

It is not about pricing mechanisms that can serve a purpose to buffer customers from the effect of premium variations from 1 year to the next.

ASIC Deputy Chair Sarah Court said (Media Release 24-234MR)

‘The failure by insurers to deliver on pricing promises is a key priority for ASIC and we will continue to take action to hold insurers to account. Where insurers make discount promises to renewing customers, they need to have robust systems and controls in place to make sure their customers receive the discounts they were promised.’

The importance of full disclosures in discount offers and pricing promises

Legal advice should be obtained however I would suggest, as an example, a typical pricing promise could be worded.

• A discount of [xx% ] may be applied to your quote/renewal subject to the operation of our pricing mechanisms. The effect of these mechanisms may mean that you receive a reduced discount or no discount at all;
• Pricing mechanisms could then be descibed in plain english such as what capping and cupping is; and
• Worked examples could be included showing the impact of capping & cupping.

The tension between marketing and compliance

These proceedings again emphasise the inherent tension between marketing and compliance. A desire for punchy, impactful statements such as '10% loyalty discount' and the legal/compliance requirements for fuller disclosures and disclaimers; that may impact the overall impression of the marketing material & arguably, its effectiveness.

A strong governance process is required for pricing promises so that the inherent tensions are considered, debated & full awareness and understanding of the legal consequences of non-compliance. This enables pricing and discounting decisions to be made , approved & signed-off, based upon the firms risk appetite.

Its is also critical that end-to-end pricing algorithms and mechanisms are considered in context of delivering on pricing promises including extensive user-acceptance testing prior to going live.