May 22, 2025
This article represents our view on the recently published article[1], 8 April 2025, by the Dutch Authority for the Financial Markets (AFM): 'Call to insurers: ensure a fair premium for loyal customers', and its potential impact on non-life insurers in the Dutch market.
After EIOPA’s supervisory statement on differential pricing practices (SSDPP)[2] dated 22 February 2023, the Dutch Authority for the Financial Markets (AFM) has now provided further insights on its direction for the coming years.
The recent publication by the AFM highlights a trend in the insurance industry: loyal customers at some insurers pay more premium for their non-life insurance than comparable newer customers.
The AFM’s message may initially raise concern, the AFM itself is concerned about the findings of the research, but it is in line with trends we see in various other markets. In this article we discuss the potential industry- and regulatory responses to this observation in the Dutch market.
It is important to understand that the AFM's message offers insight into the Dutch market and provides guidance on the AFM's direction, rather than introducing new regulations. These elements are already encompassed under the Insurance Distribution Directive[3] (IDD).
The AFM recently conducted an extensive investigation into margin personalisation practices among Dutch insurers. This investigation saw participation from a diverse group of 18 insurers, representing a total of 31 brands. The investigation included three product groups: private cars (27 brands), home contents (28 brands) and liability insurance (26 brands).
The AFM's research reveals that, based on the criteria set by the AFM, in the product groups private car and home contents insurance, there is a group of participants with higher average profit margins for loyal customers. A higher average profit margin from loyal customers[4] was observed for 19% to 30% of the brands offering private (TPL, Casco, All Risk[5]) and 23% of those offering home contents insurance.
This discrepancy raises questions about the fair and careful treatment of customers, particularly for customers who have remained loyal over the years. The questions insurers need to consider, to see how well they align with the regulatory expectations, are still the same as those following from the SSDPP[6].
The AFM study follows on from EIOPA guidance from 2023 which was principles-based and offered a broad framework for insurers across Europe. The recent publication by the AFM provides more specific insights into the status and direction of differential pricing practices in the Netherlands, highlighting the country's approach to ensure fair treatment of loyal customers.
Insurers will recognise the potential harm caused by the increasing profit margins for loyal customers. Such practices can undermine trust and loyalty, leading to dissatisfaction and potential regulatory scrutiny. That is why it is crucial for insurers to ensure that their pricing strategies are transparent and fair, taking into account the interests of all customers, regardless of their tenure.
Our view is that pricing interventions by regulators are necessary regardless of the sophistication of pricing approaches. Strategies like profit-maximising and renewal pricing, regardless of the sophistication, can yield higher margins for loyal customers. A profit-maximising strategy can produce higher margins for higher tenures, due to the correlation between price elasticity and customer tenure. A simple renewal strategy such as raising prices at renewal above the rate of inflation, often results in higher renewal prices. Companies focused on maximising returns typically maintain successful strategies unless regulatory interventions mandate changes. In these strategies improving sophistication can in fact help insurers to understand the issue more clearly and to protect customers more effectively.
We believe it is of great importance to adopt a holistic approach that considers all aspects of fair value and customer outcomes. Special attention should be given to potentially vulnerable customers to ensure they receive equitable treatment.
We've encountered similar situations in various markets with developing regulatory regimes. For instance, in the UK, we have supported over 15 clients across more than 20 projects related to the FCA's General Insurance Pricing Practices (GIPP).
The support includes designing algorithms (including optimisation algorithms) to ensure renewal premiums are not higher than new business premiums, in compliance with GIPP. This stringent requirement can only be met when integrated into the rate-setting process. Assuming profit margins are similar for both renewal and new business, random variations may lead to higher average profit margins for loyal customers in some products.
Additionally, we provide support in rebuilding rating structures, which is more focused on governance, designing and implementing testing procedures, and reporting to create potential market scenarios following regulatory guidance.
Our extensive experience has given us valuable insights into effective practices and potential pitfalls to avoid.
Loyal customers, especially those with limited digital skills or who rarely switch providers, may be at a disadvantage. The AFM's findings suggest that these consumers could be paying higher premiums without any difference in risk profile, which may violate legal standards on product governance. Insurers need to address this issue to protect vulnerable consumers and maintain a fair market.
We have helped design and implement strategies that support value generation and make the strategy explicit, while treating customers fairly. This approach not only ensures fairness is embedded in the process, it avoids the need for additional and distracting parallel workstreams and also provides reliability and transparency to your customers and the authorities.
The AFM's call to insurers is a timely reminder of the importance of fair treatment for all customers. We all know how important it is to ensure that policyholders receive fair premiums through clear communication, appropriate product design and fair pricing with special consideration for potentially vulnerable policyholders.
If you have any questions or require further clarification, we encourage you to reach out.
