In a controversial development, the European Court of Justice has upheld a directive that will ban insurers from taking a person’s gender into account when pricing insurance.
From 21 December 2012, insurance companies in Europe and the United Kingdom will no longer be able to use gender-based insurance tables to calculate premiums. They must instead develop ‘unisex’ premium rates tables. This ruling applies to life insurance, general insurance and annuity products that currently take into account separate male and female mortality and morbidity rates.
The peak industry representative body in the UK, the Association of British Insurers (ABI), has expressed its disappointment in this ruling which, it says, will foster further underinsurance in the region.
External research commissioned by the ABI revealed a range of outcomes that may follow as a result of banning gender in insurance:
Redistribution Impact
The removal of gender as a rating factor and resulting prices at unisex rates imply that the lower-risk gender experiences increases in premiums (or reductions in benefits) in order to cross-subsidise the higher-risk gender.
Under unisex pricing for life insurance, females would be worse off, while in the case of pension annuities, males would be worse off because men typically have fewer years in retirement.
Impact on Individual Insurers and Supply
Unisex pricing is effectively less accurate pricing, which in turn can:
- Increase the weighting assigned to the other rating factors used in the pricing models such as age and occupation, in particular if any of these are correlated with gender
- Lead to a search for new rating factors or rating methods to proxy some of the gender-related risks, such as occupation or Body Mass Index
- Include a risk margin, either directly by charging higher premiums or indirectly by making changes to capital reserves
- Impose product restrictions to limit the risk coverage (or potentially stop providing insurance cover in the market segment altogether), reducing the level and quality of insurance available for consumers
- Target the marketing and distribution process to control the gender mix in the insurance portfolio and/or attempt to bias the portfolio mix in favour of the lower-risk gender
Market-wide Impacts
A ban on the use of gender will have a different impact on different insurers, depending on their size, gender mix and distribution channels.
This could affect the competitive process in the market, requiring some insurers to adapt their business models or even close their books or exit the market.
The introduction of unisex rates may change the demand of consumers: females may purchase less insurance cover because of the increase in the price compared with before, and/or males may purchase more life cover. The average risk in the market could therefore rise, and overall insurance coverage levels could fall.
“This gender ban is disappointing news for UK consumers and … ignores the fact that taking a person’s gender into account, where relevant to the risk, enables men and women alike to get a more accurate price for their insurance,” said Maggie Craig, ABI’s Acting Director General.
“It will be crucial to ensure this news does not put people off having vital insurance that protects them against accident or illness, or provides an income in retirement. Insurance remains good value for people and not all customers will be equally affected as the use of gender can vary significantly between products and different companies,” added Ms Craig.
Within the UK, the ABI reports that for life insurance, women could see a rise of as much as twenty per cent in the cost of cover, while men could see a fall of ten per cent. For annuities, men approaching retirement could see an eight per cent reduction in annuity rates while rates for women approaching retirement could rise by six per cent.
