Actuarial logic has taken a backseat to political correctness in the European Union (EU). Gender equality must be upheld at all costs, the European Court of Justice ruled in March 2011 when, despite stiff opposition from the insurance industry, it ruled that in the EU when assessing and pricing insurance risk the use of gender was in conflict with the European Charter.
The court’s ruling banning the use of gender by insurers comes into force on 21 December 2012 and is binding on all EU member states.
The court’s decision ended a process that began in 2004 when the European Commission published the Gender Directive which provides for equal treatment of men and women in the supply of goods and services.
The directive, however, has a clause which allows individual EU states to opt out of applying the directive in the case of insurance premiums. All EU states have chosen to use the opt clause for life insurance and pension annuities. Most states have chosen to use the opt out clause for general insurance.
The opt out clause was challenged by the Association Belge des Consommateurs Test-Achats, a Belgian consumer group, which took its case successfully to the European Court of Justice.
The European insurance industry believes that the impact of the court’s ruling will be unintended but extensive and, in general, negative for consumers.
Commenting, Michaela Koller, director general of European insurance and reinsurance industry body Comité Européen des Assurances, says: “The use of evidence-based statistics is indispensable in actuarial science, and the study proves that gender is one of the factors that has an obvious impact on the risks to be covered in such products as annuities, term-life and motor insurance.”
To put this view to the test, Germany’s insurance industry association Der Verband ist ein Zusammenschluß der wichtigsten Versicherern commissioned Oxera, an independent consultancy, to conduct a study into the impact of the ruling.
The broad findings of Oxera’s study are that, on average:
- women (aged 40) could see term-life insurance premiums rise by around 30% or more;
- men (aged 65) could see a reduction in pension income from annuities of around 5% or more. This is, effectively, a rise in premiums; and
- young women (aged 20) could see motor insurance premiums rise by 11% or more.
EU-wide Oxera estimates of the impact of gender-neutral pricing are similar to its findings in a study which it undertook earlier for the Association of British Insurers. Specifically, Oxera concluded that, on average, in the UK:
- for annuities, men approaching retirement could see an 8% reduction in annuity rates while annuity rates for women approaching retirement could rise by 6%;
- for life insurance, women could see a rise of as much as 20% in the cost of cover, while men could see a fall of 10%; and
- for motor insurance women under the age of 25 could see their premiums rise by an average of 25%.
In other EU countries, Oxera estimates that gender-equal pricing will have an even more significant impact.
In the life insurance sector, women in Spain and Poland will see life insurance premiums rise, on average, by about 40% while men in those countries will, on average, see a 13% decline in premiums. The most extreme impact of gender-equal pricing will be in the Czech Republic where Oxera estimates that women will, on average, pay about 60% more for life insurance and men about 17% less on average.
Oxera also emphasised that gender-equal pricing could encourage adverse selection. This occurs if a uniform premium deters the low-risk group from buying insurance, while attracting more of the high-risk group.
The European Court of Justice’s ruling on gender equality in the insurance market may not be the end. More sweeping change is looming in the form of the proposed EU Anti-Discrimination Directive on age and disability.
The direction in which political thinking is currently moving indicates a ban on the use of age or disability by insurers as a pricing determinant.
“A ban on the use of age or disability would undermine the insurance business model as it currently exists, to the detriment of consumers,” says Koller.
“Such a ban would have a massive impact on the affordability and availability of insurance.”