The End of Insurance Solidarity? How Incumbents Can Respond to the Erosion of Insurance Cross-Subsidies

The silent engine behind many insurance lines isn’t margin, it’s cross-subsidy. For decades, insurers have priced products not solely on individual risk but on broader risk-pooling logic. A healthy 30-year-old buying income protection helps make cover affordable for a 58-year-old with a musculoskeletal history. A homeowner in a low-crime suburb quietly subsidises flood coverage in a higher-risk postcode. These trade-offs aren’t errors; they’re intentional, reflecting a balancing act between fairness, commercial viability, and regulatory oversight.

This principle is neither new nor unique to one market. In fact, cross-subsidisation has shaped some of Europe’s most enduring insurance frameworks:

• Agricultural insurance in France has long relied on state-backed reinsurance and pooled contributions from low-risk farmers to ensure affordable cover for regions facing systemic weather risk. This blending of public and private resources has kept premiums stable despite increasing climate volatility.

• Flood insurance in the UK, via Flood Re, operates on a similar logic: low-risk homeowners contribute through a levy embedded in every policy, allowing properties in high flood-risk areas to access affordable premiums that would otherwise be prohibitive.

  
  

Historically, this approach emerged from the recognition that certain risks, left purely to market forces, would be uninsurable for large segments of the population. Post-war welfare models in countries like Germany, the Netherlands, and the UK entrenched the idea that insurance could serve both economic and social functions, an ethos reinforced by EU-level regulation in the decades that followed.

But this balance is under pressure. New entrants are breaking the unwritten rules, using data and pricing flexibility to strip out low-risk, high-margin customers. As the subsidisers disappear, what happens to the segments that rely on them?

Why Cross-Subsidy Exists And Why It’s Vulnerable

Insurance pricing has never been purely actuarial. While models, loss history, and exposure data drive technical pricing, many products are built on an implicit social contract - that some segments will overpay so that others can access cover at all.

This dynamic, known as conscious cross-subsidisation, exists for several interconnected reasons.

First, moral and societal expectations play a crucial role: in lines like health, income protection, and disability, it is politically and ethically difficult to fully load premiums for customers with pre-existing conditions, hazardous jobs, or volatile income.

Second, regulatory guardrails restrict how much insurers can differentiate pricing. For example, the EU’s Test-Achats ruling prohibits gender-based pricing, and catastrophe-prone areas often benefit from state-backed reinsurance or price controls.

Third, channel economics influences pricing design. Traditional models such as tied agents or bancassurance require broad eligibility and consistency. Aggressive segmentation could disrupt these relationships and trigger churn.

Finally, political optics matter. In personal lines, visibly penalising vulnerable or rural customers with risk-based pricing can cause reputational damage and public backlash.

Cross-subsidies don’t always show up clearly on a balance sheet but they’re baked into many tariff structures. For example, in some income protection portfolios, it’s common to see premiums for high-risk professions underpriced relative to claims cost, offset by white-collar segments that rarely claim but pay a full risk load.

What makes this construct vulnerable today is that new market entrants are not bound by the same rules. Digital MGAs and neo-insurers can target narrow segments, use alternative data sets, bypass traditional channels, and underwrite only the profitable share of the market. When that happens, the economic foundation of solidarity starts to crack, putting both profitability and access at risk.

In practice, the erosion of cross-subsidies often begins with differential pricing and selective underwriting, where new entrants target low-risk segments and leave incumbents with a weakened pool. We explore this mechanism in more depth in our article on [differential pricing in insurance], including case examples from UK motor and Dutch health markets.

Why This Is More Than a Niche Phenomenon

While targeting overpriced, low-risk customer segments may appear niche at first glance, the reality is more significant. In many European motor portfolios, a material share of policies is misaligned with actual risk-based costs.

Using telematics as a proxy, insurers offering usage-based discounts have demonstrated that a substantial proportion of customers are paying above their risk-adjusted price. In some motor portfolios, pricing analysis using telematics data has revealed that a meaningful portion of customers pay significantly more or less than their risk would justify.

Market & Context	Outcome & Lessons
UK Motor – Telematics Adoption Early telematics players targeted the safest drivers (low mileage, high compliance). These segments had historically overpaid relative to risk, subsidising higher-risk drivers.	Profit erosion in non-telematics portfolios as low-risk customers migrated. Resulted in premium hikes for remaining books, accelerating churn and creating a profitability spiral. Lesson: selective adoption can destabilise the entire pool if not matched by defensive pricing or product design.
Dutch Health – Risk Equalisation Challenges The National system compensates insurers by attracting higher-risk customers. Some carriers still found ways to selectively appeal to healthier groups (e.g. students, sports clubs).	Triggered repeated formula adjustments and political scrutiny. Lesson: even strong regulatory safeguards can be undermined by targeted acquisition strategies, requiring ongoing system recalibration.

For attackers, particularly those using price comparison websites (PCWs), broker aggregation tools, or embedded distribution channels, this mispricing represents a sizable opportunity to cherry-pick profitable segments.

Moreover, new entrants no longer need to build large brand presence or distribution networks. They can operate efficiently using digital MGAs, streamlined underwriting rules, and low-cost infrastructure whilst tapping into existing transactional distribution networks provided by PWCs, broker aggregation tools or embedded insurance partners. This makes selective pricing at scale feasible.

This isn’t just about better pricing, it’s about redefining the rules of engagement. Once an attacker begins to strip out profitable risks, the incumbent’s ability to cross-subsidise more vulnerable segments across its portfolio is weakened. Over time, this undermines both economic performance and social protection. In that sense, this is not a niche play but a slow bleed with systemic implications.

Incumbent Response Strategies

1. Ignore, But Know Your Tripwires

In some market environments, the best move is no move, at least initially. If the attacker is small, has limited distribution access, and targets only a narrow segment, responding too quickly could inadvertently validate their strategy or escalate a price war.

However, ignoring is not the same as neglecting. Incumbents should define clear tripwires to detect whether tactical patience is still serving them.

Recommended tripwires include:

• Profitability impact: If the combined ratio deteriorates by more than 1 percentage point over two rolling quarters, and you can reasonably attribute it to portfolio mix shift, it may be time to act.

• Churn concentration: If more than 10% of the most profitable deciles are churning quarter-over-quarter, your book is being hollowed out.

• Distributor leakage: If 25% or more of your Tier 1 partners begin placing 10% or more of new business with a specific attacker, a meaningful shift is underway.

  
  

This approach works best in lines of business with low price sensitivity, fragmented distribution, or limited aggregator penetration such as household contents or pet insurance in certain markets. But even in these cases, active monitoring is critical. Once profitable segments start moving, recovery becomes exponentially harder.

2. Discredit—Quietly and Credibly

If the attacker is gaining ground, discrediting their offer without fuelling their visibility can be a powerful early response.

Key audiences include:

• Policyholders: Subtly highlight what’s at stake. In health, pet, or disability insurance, that might mean reminding customers that low premiums today often come with exclusions, price walks, or rejection in later life stages.

• Distributors: These are your power users. If brokers or agents are tempted by lower rates, share case studies of past failures (e.g. operational instability, poor claims handling). Stress the reputational and service risk they assume by recommending unknown carriers.

• Regulators and public policymakers: Emphasise the societal risk of segmentation. When cross-subsidies erode, entire groups (older pets, customers in flood zones, workers in physically demanding jobs) may become uninsurable.

  
  

Crucially, discrediting is most effective when combined with structural deterrents. In some markets, health insurers or regulators limit re-entry for customers who leave the solidarity-based system for instance, in countries with hybrid public-private health structures like Germany. While controversial, these measures highlight the long-term consequences of short-term optimisation and protect the community-rated pool.

Discrediting doesn’t mean launching a PR campaign. In many cases, it’s about influencing key decision-makers behind closed doors with data, credibility, and foresight.

3. Jump on the Bandwagon Tactically

If you expect price-based competition to intensify, a contained, tactical response may be your best defence.

This involves setting up a flanker brand or tariff generation specifically aimed at matching or undercutting the attacker but only in their channels. Typically, this includes price comparison websites, digital brokers, or API-based partners. You leave your core brand and agent networks untouched.

Benefits of this approach:

• Channel containment: You don’t trigger a price war across your full portfolio.

• Brand protection: Customers and long-term partners see continuity in your main offer.

• Operational learning: You gain real-world insight into the attacker’s pricing logic, underwriting strategy, and distribution leverage.

  
  

Today, setting up a flanker brand is more affordable than in the past. No full-stack insurer build is required, just an MGA with its own P&L, underwriting rules, ops stack and reinsurer support is sufficient. 

The key is restraint. Undercut only when the pricing is sustainable. Don’t chase loss-making business. The goal is not to match the attacker’s ambition but to limit their traction.

4. Go All In & Rebalance Your Portfolio

If price differentiation becomes the new normal in your market, partial measures may not be enough. At this point, incumbents may need to fundamentally restructure how they price across their book.

This means:

• Adding new variables to existing pricing models (e.g. driving behaviour, purchase history, payment behaviour).

• Differentiating faster between profitable and unprofitable deciles, even within the same risk pool.

• Adjusting price paths: You may choose to raise prices on loss-making segments faster than you lower them on profitable ones to protect margins during the transition.

  
  

This is the most complex and risk-exposed strategy. You are effectively shifting the equilibrium and accelerating churn in some segments while fighting to retain others. Success depends on your ability to:

• Model price elasticity accurately. 

• React to competitor repricing in near real time.

• Communicate pricing logic internally across distribution, product, and actuarial teams.

  
  

The risk? Misjudging the market’s reaction or triggering an arms race you can’t win.The reward? You exit the repricing phase with a leaner, more resilient portfolio and fewer segments draining your combined ratio.

Solidarity vs. Segmentation: A Strategic Trade-Off

At its core, this isn’t just a pricing debate, it's a question of corporate philosophy. Do you believe your role is to offer access and protection for the many, or to maximise value from the few?

Cross-subsidies aren’t accidental; they are often intentional design choices rooted in long-term thinking. But they’re also fragile. Once eroded, they’re hard to rebuild.

Some lines, like motor or device insurance, may justify pure segmentation. Others, like disability or health, may need a higher dose of solidarity whether through state intervention, risk equalisation pools, or simpler, flatter pricing.

Insurers need to decide: are you defending a market consensus or preparing to outmanoeuvre it?

Whichever route you take, ensure it’s done on your terms and not in reaction to someone else’s playbook.

For a deeper dive into differential pricing within insurance read our companion article “Differential Pricing in Insurance: Opportunity, Backlash, and the Future of Selective Underwriting”.