ANALYSIS REPORT

8 APRIL 2025
A Fair Premium for Loyal Policyholders

In Brief
Insurers can increasingly personalize premiums for certain (groups of) customers. In some cases, this can lead to loyal customers paying higher premiums than newer customers, without differences in risk profile explaining this. This is also known as margin personalization and can be contrary to the fair treatment of customers and the standards for product development. We investigated how many insurers engage in this form of margin personalization for car, contents, and liability insurance. Nearly half of the examined non-life insurers have higher profit margins for loyal customers for at least one product group. The AFM will discuss this with the relevant insurers. We will continue to monitor developments.

ANALYSIS REPORT

Table of Contents
Summary 3

Introduction 4
1.1 Background of the investigation 4
1.2 Objective 5
1.3 Legal framework 5
1.4 Guide 5
Research Methodology 6
2.1 Research design and scope 6
2.2 Definitions and analyses 7
Results 8
3.1 Percentage of insurers where margin personalization occurs 10
3.2 Car insurance WA 11
3.3 Car insurance WA+ 12
3.4 Car insurance Allrisk 13
3.5 Contents insurance 14
3.6 Liability insurance 15
Conclusion and Follow-up 16
Appendix I Explanation of Request and Analyses 17
B1.1 Execution by Insurers 17
B1.2 Analyses 18
B1.3 Results for Benchmark Years 2021-2023 19
B1.4 Limitations 25
Appendix II Switching Behavior according to the AFM Consumer Monitor 26
B2.1 Switching Behavior 26
B2.2 Reasons for Not Switching 29

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ANALYSIS REPORT

Summary

Insurers can increasingly personalize premiums for certain (groups of) customers. This can be based on their risk profile, but an insurer can also charge a higher profit margin for certain (groups of) customers. The personalization of profit margins is also known as margin personalization. This means in this investigation that insurers charge higher profit margins for loyal customers than for newer customers. This is increasingly possible due to the use of data, combined with better data access and analysis.

The personalization of profit margins for non-life insurance can lead to undesirable outcomes and can be contrary to the fair and careful treatment of customers. Particularly potentially vulnerable consumers who do not or rarely switch can be disadvantaged. Following our report Technology towards 2033: The Future of Insurance and Supervision and previous investigations by other European supervisors, the AFM therefore conducts a market-wide investigation into margin personalization in the Dutch non-life insurance market. We investigate for 18 insurers – with a total of 31 brands – whether and to what extent there is a higher profit margin for loyal customers in private non-life insurance. The products investigated are private car (WA, WA+ and Allrisk), contents, and liability insurance. This investigation is based on premium data from 47.7 million policies.

We investigate whether there is margin personalization for non-life insurance by setting the profit margin charged by insurers against customer duration. Customer duration is the number of years a policy has been running, i.e., in management, with an insurer. To do this, we divide the premium that groups of customers pay (actual premium) by the costs an insurer expects to incur for these policies (technical premium), per group of customer duration. In this investigation, we speak of margin personalization for loyal customers when the profit margin on the group that has been a customer longer (9+ years) is at least 5% higher than on the group of newer customers (1-2 years).

In 2023, nearly half of the insurers showed margin personalization for at least one product group. When this is the case, it often involves an increase in the profit margin of more than 10% between customer groups 1-2 and 9+ years. For the three types of car insurance, between 19% and 30% of insurers show higher profit margins for loyal customers. For contents insurance, this applies to 23% of insurers. For liability insurance, there is virtually no higher profit margin for loyal customers. In the market average of all investigated insurance products, this is hardly visible. This is because the customer group 9+ years in some cases actually has a lower profit margin than the customer group 1-2 years.

The AFM finds it concerning that nearly half of the insurers charge higher premiums for loyal customers for at least one of their products, while there appears to be no reason for this based on risk profiles. The AFM expects that increases in profit margin after the customer group with a customer duration of 1-2 years do not occur, and that if these increases do occur, there has been explicit consideration in the product development process regarding the reason for this and that it is substantiated that the customer interest has been weighed fairly. The AFM will supervise this in the coming period.

The AFM has addressed the insurers where there was a higher profit margin for loyal customers on this and will enter into discussions with them in the coming period regarding compliance with the product development standard. If it turns out that more loyal customers pay higher premiums without actuarial or other justified reason, this may constitute a violation of the product development standard. Finally, the AFM will continue to monitor developments regarding margin personalization in the insurance sector, based on the product development standards, the Insurance Distribution Directive (IDD), and compliance with the duty of care. This ensures that even loyal policyholders pay a fair premium.

AFM
A Fair Premium for Loyal Policyholders
An investigation into margin personalization in the Dutch non-life insurance sector AFM.nl/hyperlink

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ANALYSIS REPORT

'Technology towards 2033: The Future of Insurance and Supervision', AFM, April 2023.
When we speak of 'customer duration' in this investigation, we mean how long a policy has already been running (in management) with an insurer.
'General insurance pricing practices', FCA, September 2020.
'Review of Differential Pricing in the Private Car and Home Insurance Markets', Central Bank of Ireland, July 2021.
'Do loyal policyholders pay more?', Finansinspektionen, July 2022.
'Supervisory statement on differential pricing practices in non-life insurance lines of business', EIOPA, February 2023.

1.1 Background of the investigation

Insurers can increasingly tailor premiums, as the AFM wrote in 2023 in its study Technology towards 2033: The Future of Insurance and Supervision. Every customer then receives a personalized premium from the insurer. This is possible due to the increasing use of data, combined with better data access and analysis. For example, personalized assessment of the expected loss cost can help the insurer come closer to the actual loss cost. Driving behavior insurance is an example of this.

Additionally, an insurer can personalize the profit margin. Thus, an insurer can charge a higher margin (profit loading) for certain (groups of) customers. These price differences are not explained by differences in risk profile. This is also known as margin personalization or margin differentiation. In this investigation, we use the term margin personalization, with the definition that insurers charge higher profit margins for loyal customers than for newer customers.

If profit margins are personalized, this often happens based on customer duration. Various investigations by European supervisors showed that in other European member states, margin personalization takes place based on customer duration. In the United Kingdom, Ireland, and Sweden, non-life insurers made existing customers pay (increasingly) higher premiums than new customers or customers renewing their policy for the first time, without an actuarial reason underlying this. This means that the estimated necessary costs for new and loyal customers were equal, but the premiums charged for loyal customers were still higher. Thus, the British supervisor (Financial Conduct Authority, FCA) showed that insurers built advanced models to predict whether customers would switch, in order to maximize the profit margin.

Personalizing profit margin based on customer duration can be contrary to the fair treatment of customers. Following the European investigations, the European supervisor for insurance and pensions (EIOPA) published a supervisory statement. In it, EIOPA states that it is primarily vulnerable consumers – such as people with limited digital skills – who are disadvantaged by such personalized pricing techniques. These groups are less able to regularly compare their insurance products. The use of these techniques can therefore lead to unfair outcomes and thus be contrary to the product development standards and the principles of the IDD. In several European countries, supervisors have therefore taken measures to prohibit margin personalization based on customer duration.

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ANALYSIS REPORT

The most recent AFM Consumer Monitor confirms that Dutch consumers who switch little are potentially vulnerable customers. The research shows that consumers with lower education and lower income groups switch less often than consumers with higher education and higher income groups. Furthermore, we see that older consumers switch less often than younger consumers. Any margin personalization thus affects these groups of consumers, who are potentially vulnerable, more often.

The AFM therefore shares the concern that margin personalization leads to adverse effects: precisely potentially vulnerable customers pay a higher premium, despite equal actuarial profiles. Therefore, the AFM – as a follow-up to its report Technology towards 2033 and the European investigations – conducted a market-wide investigation into margin personalization in the Dutch private non-life insurance sector.

1.2 Objective

The objective of this investigation is to determine whether insurers in the Dutch market for private non-life insurance (car, contents, and liability insurance) charge higher profit margins for loyal customers than for newer customers. With this investigation, the AFM gains a market-wide view of the extent to which margin personalization occurs in the non-life insurance market.

1.3 Legal framework

This investigation takes place on the basis of the standards for product development and the general duty of care of insurers, which also stem from the IDD. According to Article 32 of the Decision on Conduct Supervision Financial Undertakings Wft (BGfo), a financial undertaking must possess adequate procedures and measures that ensure that in the development of the financial product, the interests of the consumer are taken into account in a balanced manner and that the financial product is demonstrably the result of this weighing of interests. Part of this is that the products are cost-efficient for the customer. Article 25 IDD (Supervision of products and governance requirements) contains a comparable standard. On the basis of Article 4:24a Wft, which also implements Article 17, paragraph 1, IDD, financial service providers must further carefully take into account the justified interests of the consumer. The AFM points to the aforementioned supervisory statement of EIOPA in this regard.

1.4 Guide

In Chapter 2, we describe our research methodology; in Chapter 3, the results of the investigation (2023). Chapter 4 contains our conclusion and follow-up. In Appendix I, we describe what information insurers provided, what analyses we performed, the results for the three benchmark years (2021-2023), and what the limitations of this investigation are. In Appendix II, you will find our explanation of the AFM Consumer Monitor regarding the switching behavior of consumers with insurance.

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ANALYSIS REPORT

9 The underlying figures are included in Appendix II.

2.1 Research design and scope

In this investigation, the central question is whether insurers charge a higher profit margin for loyal customers who stay with the same insurer longer with their insurance, than for customers who renew their policy for the first time. We investigate this by setting the profit margin that insurers charge for their insurance against the customer duration (the number of years a policy has been running, or is in management, with an insurer). A premium increase as customer duration increases is not an indication of margin personalization; the customer's risk profile or the costs of the policy can also change. When the profit margin increases in the years after the first renewal of the policy, there is margin personalization.

We investigate margin personalization for private car insurance, contents insurance, and liability insurance. Within the private market for non-life insurance, car insurance is the largest in terms of premium volume. Additionally, car owners are required to take out at least a WA (third-party liability) insurance. The WA car insurance, WA+ car insurance, and the Allrisk car insurance are included as three separate product categories. Contents and liability insurance are included because private individuals take out these insurances, outside the mandatory health insurance, most often.

The investigation was conducted among 18 insurers active in the Dutch private non-life insurance market, with a total of 31 brands. When we speak of 'insurers' in this investigation, we actually mean brands. We asked insurers to answer our request per individual label/brand that was administered for the relevant product groups on the benchmark years (2021-2023).

In total (2021-2023), 27 WA car insurers, 27 WA+ car insurers, 27 Allrisk car insurers, 28 contents insurers, and 26 liability insurers were in scope. Although this is a market-wide investigation, not all offered car, contents, and liability insurances were in scope. Not all Dutch insurers were contacted, and in a few specific cases, insurers did not have the technical premiums of individual policies. Furthermore, not all participating insurers could provide the technical premiums of the insurances in the agency channel. The distribution channel of the insurances did not form part of the request.

This investigation is based on the premium data of 47.7 million policies. The data was requested for the years 2021, 2022, and 2023. This is to prevent any outliers in one year from having a disproportionate effect on the outcomes. Of the total number of policies, 15.5 million policies come from 2021, 15.8 million policies from 2022, and 16.4 million policies from 2023. The exact number of policies per product group (per year) is stated in the relevant figures in Appendix I, with additional information on the total premium volume per product group.

We calculate the profit margin of an insurance policy on an annual basis by dividing the premium the customer pays (actual premium) by the costs an insurer expects to incur for this insurance policy (technical premium). In this investigation, we use this ratio, combined with customer duration, to analyze whether there is margin personalization.

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ANALYSIS REPORT

The actual premium (WP) is defined as the premium the customer pays on an annual basis, including possible discounts and excluding insurance tax. The choice was made not to include insurance tax in the calculation of the actual premium, as this part of the premium is intended for the government and the insurer only passes it on. Including it would also give a distorted image of the relationship between the actual and technical premium.

The technical premium (TP) is the amount the insurer expects to need to cover the costs of an individual policy on an annual basis. The technical premium usually includes a provision for expected loss costs, costs for closing and managing the policy, payments to intermediaries, and other provisions and costs. Every insurer makes its own estimate of this amount. This is done based on its own policy, the insurance portfolio, and business operations.

The ratio between the actual premium and the technical premium is referred to in this investigation as the relative profit margin of the insurance. Insurers calculate their intended profit margin as a factor and not as an absolute amount. To align with this, we present the difference between the actual premium and the technical premium as a ratio. This ratio is the result of dividing the actual premium by the technical premium (WP/TP). This is the WPTP ratio. If the WPTP ratio is greater than 1, it means that the insurance is expected to be profitable, since the actual premium is higher than the technical premium. If the WPTP ratio is less than 1, the insurance is expected to be loss-making, because the technical premium is higher than the actual premium.

To determine whether there is margin personalization, we investigate whether the profit margin (WPTP ratio) increases between the groups with a customer duration of 1-2 years and 9+ years. By comparing the WPTP ratio, we can determine whether customers who keep their insurance longer with this insurer pay more, without actuarial reasons for this.

Finally, the participating insurers also provided qualitative information. With this, the AFM gained insight, among other things, into how the participating insurers determine their technical and actual premiums, whether and to what extent they apply discounts (such as welcome discounts and package discounts), and whether they have specific policies to bind consumers to them.

2.2 Definitions and analyses

To determine whether there is margin personalization, we compare the WPTP ratio between groups with a customer duration of 1-2 years (the first moment of renewal) and 9+ years. A comparison between the group 0-1 years and 9+ years would show a disproportionately strong effect of any welcome discount and other costs made in the first year the insurance runs, such as acquisition costs.

Additionally, we show the average WPTP ratios of all customer groups. We do this to show the development.

In Chapter 3, we describe the results of the following analyses:

For how many insurers there is margin personalization for at least one of the investigated insurance products, based on at least a 5% increase in the profit margin between groups with a customer duration of 1-2 years and 9+ years;
Per type of insurance, the differences in profit margin between the groups with a customer duration of 1-2 years and 9+ years;
Per type of insurance, the average actual and technical premiums per customer duration group for the total market, with corresponding WPTP ratios.

To maintain a margin of error, we have chosen for a threshold of at least a 5% increase in the WPTP ratio between 1-2 and 9+ years to investigate whether there is margin personalization. However, this does not change the fact that in practice, any increase in the WPTP ratio after the customer group 1-2 years means margin personalization.

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ANALYSIS REPORT

3. Results

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ANALYSIS REPORT

In 2023, nearly half of the insurers showed margin personalization for at least one product group: this means that the profit margin on loyal customers (9+ years) is at least 5% higher than on newer customers (1-2 years). When this is the case, it often involves an increase in the profit margin of more than 10%. For the three types of car insurance, between 19% and 30% of insurers show margin personalization. For contents insurance, margin personalization was found in 23% of insurers. For liability insurance, there is virtually no margin personalization. In the market average, margin personalization is hardly visible. This is because there are also insurers where for the group with a customer duration of 9+ years, a lower profit margin is actually charged than for the group with a customer duration of 1-2 years.

For WA car insurance, 19% of insurers show higher profit margins for loyal customers; for WA+ car insurance, this is 22%; and for Allrisk car insurance, this is 30% of insurers. For WA and WA+ car insurance, in the majority of cases, there is an increase of more than 10% in the profit margin between the group with a customer duration of 1-2 years and the group with a customer duration of 9+ years. For Allrisk car insurance, the difference in profit margin is almost always between 5% and 10%.

For contents insurance, 23% of insurers show higher profit margins for loyal customers. In the largest part of these cases, it involves an increase in the profit margin of more than 10% between the groups with a customer duration of 1-2 years and 9+ years.

For liability insurance, there is virtually no higher profit margin for loyal customers. There is only one insurer where the profit margin increases by more than 5% between the groups with a customer duration of 1-2 years and 9+ years.

The most likely explanation for the found margin personalization is increasing premiums for loyal customers. Another explanation is that loyal customers have less favorable policy conditions than newer customers, while they pay a comparable premium. They then have less coverage on their insurance (and thus a lower technical premium), but pay a comparable (actual) premium as a newer customer with more favorable coverage. In both cases, loyal customers are disadvantaged.

For a part of the insurers, the profit margin for loyal customers is actually lower than that of customers renewing for the first time; there can be various explanations for this. Loyalty discounts are a possible explanation. However, from the qualitative responses, it appears that such discounts are rarely part of insurers' policies. Only a single insurer applies loyalty discounts or gives ad hoc one-time discounts when loyal customers indicate they want to switch. Another explanation is that loyal customers relatively often receive a package discount. This would be the case if loyal customers more often have multiple insurances with one insurer...

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