First published in ITIJ 123, April 2011
You can hardly fail to have noticed all of the headlines over the last few weeks concerning the Euro-judges banning cheap insurance premiums for women and the difficult consequences for pensions and other forms of insurance. But what has actually happened and how will it affect the cost of travelling? Simon Sheaf and Nigel Cooke explain
At the start of March, the European Court of Justice (ECJ) issued a judgement preventing European insurers from continuing to charge different premium rates based on an applicant’s gender. The ban takes effect from 21 December 2012. Many types of personal insurances will be affected by the judgement because gender is currently a key element of their rate structures. Insurers would argue (with much justification) that this is because the risks are very different for men and women. Among the biggest statistical differences are in motor insurance for young drivers, life expectancy (used for term insurance and annuities) and in some forms of health insurance. While the influence is weaker in other types of insurance, there will still be some impact and, as a result, changes could occur in such products as travel insurance and car hire insurance in order to deal with the ruling.
Why did it happen?
The principle of the equality of individuals is enshrined in European law. Race, gender, disabilities and age are four areas where that principle demands that positive action is taken by all EU states to remove discriminatory behaviour. As you might expect, therefore, it is illegal to charge someone more or less for a product or service simply because of their race or their gender, and explicit EU Directives have been issued over the years to stamp this out. Each State then has to adopt the Directives into their own laws.
Because of the statistical evidence showing that some claims rates differ so much between men and women, insurance has had an exemption option since the Gender Directive came out in 2007. Any EU State that chose to make use of this exemption was given a period of five years in which to evidence that using gender as a rating factor was fair. Insurers who failed to demonstrate this would have to relinquish the exemption on 21 December 2012.
"this is going to be a period of change and insurers will need to carefully consider the most appropriate balance between increasing premiums and reducing the level of cover."
In 2009, a Belgian consumer group together with two individuals challenged the exemption and this challenge made its way to the ECJ last September. This action was not challenging the statistics on claims; it was challenging the principle – because, in effect, they felt that equality of price should mean exactly that.
On that basis, the ECJ found that it really had no option but to uphold the challenge under the principles of Article 6 of the Treaty on European Union. However, it is also a principle of the Union that changes of any law should not be so quick as to risk damage to any stable markets and so the ability to differentiate insurance prices based on gender remains legal until 21 December 2012, five years after the original Directive. Ironically, because of this last point, the Belgian challenge failed as it related to prices charged before 2009!
What will happen to insurance premiums now?
Nothing for now. Insurers need to consider what they do and they have more options available to them than just charging an average price. In fact, they cannot easily jump the gun because if, for example, an insurer started charging an average premium rate to young drivers next month it would get all of the young male drivers and none of the young female drivers (who would stay with the insurers charging them a lower rate). This would leave them with a much riskier book of business than their competitors and one for which the premium they received would be inadequate.
In fact, if you see offers promoting a unisex rate you should be suspicious. Either gender difference was never significant or the rate or cover is not likely to be that good.
However, in the run up to December 2012, UK insurers will have to change their pricing processes to ignore gender. Insurers who are charging differential premiums based on gender will have a major exercise to undertake that will take time to get right.
What will happen later?
Insurers will have three choices:
- They can change their premium rates. Put simply, this will mean rises for one gender and falls for the other. The problem is that if only the premiums change, insurers will have to be conservative and assume that they get more of the high-risk applicants than low-risk applicants. In reality, that will mean that any price improvements for one gender will be less than the price rises for the other.
- They can use new rating factors or increase the impact of existing ones. For example, in motor insurance (including the insurance sold when a car is hired) the type of car you are driving may now have a bigger impact on your premium than it did before. One can imagine that the colour and trims on your car may also start to play a bigger role. In life insurance, there may be fewer ‘standard rate’ policyholders, things like your weight and your occupation may then start to produce a wider range of premiums. The challenge for insurers will be to find any underlying risk identifiers that sit behind the gender differences and to move towards using these as rating factors by December 2012.
- They can change the policy benefits. This may result in products focused on female health risks for example that men will not want to buy and vice versa. Equally greater use may be made of exemptions from cover where the insurer believes that such risks are heavily affected by the policyholder’s gender, which it cannot now price for.
It is likely that insurers will do all of these to some degree or another. The exact mix will depend on which types of insurance an insurer writes, how it sells the cover and what everyone else is doing. For some types of insurance, such as life insurance and motor insurance, the size of the market and extent of competition means that it is unlikely that substantial price increases will occur when there are other options available to the insurers, even if they are not perfect. However, this is going to be a period of change and insurers will need to carefully consider the most appropriate balance between increasing premiums and reducing the level of cover. Events like this represent an opportunity to innovate and find a new way to be competitive and the reality is that any insurer who simply puts their rates up towards that of the most expensive gender is going to find that they rapidly lose their customers to the new options being put into the market.
A further concern for insurers is that the timing of this could not be worse. The end of 2012 already sees big changes both to capital rules due to the EU’s Solvency II initiative and to the taxation of insurance that will change pricing anyway.
What else could happen?
There are two additional areas where there is likely to be further debate, if not legal challenge. Firstly, there is a risk that as a consequence of the judgement, differential pricing that has occurred since the Treaty was implemented in 2004 may still be challenged as a fundamental infringement of the rights enshrined in the European Union Treaty, despite the fact that the Directive permitted the differential and still permits it. Logically, this would not appear to be a big risk given the ECJ comments and the fact that such a challenge would have major repercussions beyond insurance regulations.
Of potentially greater concern for insurance pricing, however, is that the principles of equality in European law extend well beyond gender. The UK’s Equality Act (2010) is derived from the EU Directives and it prohibits discrimination against anyone with a ‘protected characteristic’. There are nine protected characteristics, which are: age, disability, gender reassignment, marriage and civil partnership, pregnancy and maternity, race, religion or belief, gender and sexual orientation. Were these all to follow the same path as gender the impact would be dramatic. The most worrying item on the list is age, which at present has a very similar exemption to that which will be lost to gender pricing from the end of 2012. While the arguments are compelling for the use of age as a rating factor in certain insurance products (most notably, the same ones as affected by gender) and the wording used for its exemption is slightly stronger than it was for gender, we are still expecting a heightened debate on this following this ECJ ruling. Were the exemption for rating on age also to be lost, this would have a substantially more dramatic impact on pricing for the affected products than the removal of the exemption for gender. The thought of pricing for a life insurance product, for example, without allowing for age seems to defy logic.
What is the likely impact on travel insurance?
Returning to what is definitely happening rather than what might happen, many of the traditional benefits in a travel insurance policy have never been affected by gender, but ancillary insurances of the person (such as death and healthcare) are. As these will be a small part of the premium and not a key driver of the decision to purchase the cover, the chances are that the rates will equalise somewhere around the middle. Certainly, premiums for policies covering two adults of different genders are unlikely to change at all.
"the timing of this could not be worse. The end of 2012 already sees big changes both to capital rules due to the EU’s Solvency II initiative and to the taxation of insurance that will change pricing anyway."
However, insurers may impose greater restrictions on holiday pastimes, or charge more explicit additional premiums to add back that cover. There will probably also be a change to car hire insurance offers. At present, many deals will not hire to drivers under the age of 23 anyway and it may be that other exclusions will appear in order to keep insurance costs reasonable.
Once these changes take effect, it will be even more essential than usual for insurers to be vigilant since periods during which the market goes through a significant change are always riskier and more difficult for insurers to navigate their way through. As ever, the best defence is to be on your guard.