Regulatory efforts to ban loyalty penalties in Australia’s insurance industry could have unintended effects, according to new research from UNSW Business School.
Dr Xingyu Fu (pictured), a lecturer in the School of Marketing, cautioned that while these rules aim to ensure fair pricing for policyholders, they may worsen outcomes if the market lacks sufficient competition.
Loyalty penalties occur when insurers charge existing customers higher premiums while offering discounts or lower rates to attract new policyholders.
In sectors like home and motor insurance, this practice is increasingly under scrutiny, with some estimates showing it costs Australian consumers billions each year.
Fu said consumers usually expect companies to reward their loyal customers with perks like discounts or premium services. However, the current trend shows long-term customers facing higher premiums.
“Nowadays, penalties on loyal customers, such as secret price increases for existing consumers in the telecommunications industry, challenge this conventional wisdom,” he said.
In 2019, the Australian Competition & Consumer Commission (ACCC) called for reform in loyalty schemes, including those in insurance, due to concerns that long-term customers often face unfavourable pricing.
More recently, the ACCC has been looking at how financial institutions, including insurers, set deposit and premium rates as potential loyalty penalties.
However, new research from Fu and his colleagues warned that banning loyalty penalties without addressing the broader competitive landscape could unintentionally lead to higher prices across the market.
Their paper, Fairness Regulation of Prices in Competitive Markets, argued that while price fairness rules may work in highly competitive environments, they could enable monopolistic behaviours in less competitive ones.
“This potentially leads to collusive high prices that are detrimental to consumers and society,” Fu said.
Loyalty penalties are a particular issue for vulnerable populations, according to the study.
For example, in the UK’s insurance market, 32% of those penalised by loyalty pricing are over 65, compared to 23% of the general population. Other affected groups include low-income individuals and those with health challenges.
The UK government’s decision to ban loyalty penalties in home and motor insurance followed a 2018 inquiry by the Competition and Markets Authority (CMA). This led to reforms requiring insurers to provide equitable pricing for all customers, whether new or existing.
In Australia, some insurers and platforms have begun adopting pricing mechanisms aimed at avoiding loyalty penalties, according to Fu.
For example, the online mortgage and insurance platform Athena offers an “automatic rate match” to ensure that loyal customers receive the same rates as new clients with similar policies.
Fu’s research suggested that concerns about the impact of fairness regulation on insurers’ profitability might be overstated.
In competitive markets, he noted, fairness regulations can reduce the need for aggressive pricing strategies and potentially lead to greater profitability.
However, in less competitive markets, these regulations could enable companies to raise prices collectively, harming consumers in the long run.
The research recommended a dual regulatory approach, combining fairness rules with price caps to prevent price collusion and protect consumers.
Fu emphasised that regulators must consider market conditions before implementing such policies.
“Firms can benefit financially by following these fairness regulations and pricing fairly, but well-intentioned fairness regulations may have adverse effects on consumers,” he said.
The findings brought to light the Australian insurance industry’s efforts to protect consumers, including reforms in the General Insurance Code of Practice.
