First published in ITIJ 104, September 2009
Following the feature in our last issue written by Age Concern, the Association of British Insurers (ABI) and the British Insurance Brokers’ Association (BIBA) have asked to respond to the charges made by the age lobby regarding the provision of insurance for older travellers. Kate Carr of the ABI and Graeme Trudgill from BIBA have their say
The UK insurance market is the largest in Europe and the second largest in the world. Almost every household in the UK holds at least one general insurance policy. Despite this, insurance is not well understood by many people.
The Equality Bill, published by the Government in May, seeks to simplify and strengthen the existing anti-discrimination regime. Insurers support many parts of the Bill, but we have significant concerns about the potential impact of the likely restrictions that it will impose on insurers’ use of age. If we are to maintain a strong and competitive insurance market that works well for customers, insurers must preserve their ability to specialise and innovate. The Bill puts this in jeopardy.
insurers must preserve their ability to specialise and innovate
On the face of it, the age lobby’s position doesn’t seem unreasonable: they agree that insurers should continue to be allowed to use age to price risk, but they want insurers to objectively justify the prices they charge, and to offer cover to all customers regardless of age. This, they argue, will improve the way the insurance market works for older people by lowering prices and increasing availability. Unfortunately, the reverse is true.
Travel insurance is widely available
The pressure to restrict the way insurers use age stems from a mistaken belief that travel insurance is not available for older customers. Research commissioned by Age Concern and Help the Aged in 2007 found that 20 per cent of older people are unable to find travel insurance. This was based on a survey of 229 people aged 65 and over who were asked to attempt to obtain two quotations. If neither insurer was able to provide a quote, the assumption was made that travel insurance was not available for that person. What is more likely to be true is that travel insurance was available, but they weren’t looking in the right place. This is backed up by the Government’s own research, which found that insurance is widely available for older people, with more than 97 per cent able to find travel cover. Indeed, there are currently 60 single trip travel policies available to people up to the age of 85 (a third of which have no upper age limits at all).
The issue, then, is not that insurance isn’t available for customers of all ages, but rather that some people don’t know where to look to find it. We understand how frustrating a fruitless search can be, and are keen to make sure older customers can find the cover that is available far more easily. To this end, the ABI is developing a signpost for older people. The signpost will provide customers with information on insurers that provide motor and travel cover for people of their age. This will bring benefits both in terms of helping customers obtain a quote, and reducing the amount of unproductive searches that arise when customers are unable to find a quote. Crucially, the signpost will mean that no one will be unable to find insurance because of their age. And signposts are popular with customers. Research commissioned by the ABI shows that around two-thirds of customers would use a signpost to find motor and travel cover. As well as helping older people find cover more easily, the signpost will also reduce barriers to entry for new providers seeking to serve this part of the market, increasing customer choice. The crucial point here, then, is that there is no market failure: travel insurance is already widely available, and the industry is developing a solution that will help customers find cover more easily. Legislation is seeking to address a problem that does not exist.
The price an insurer charges for cover depends on a number of factors, including their assessment of the level of risk posed by the insured and their appetite for that risk. The higher the risk posed by an individual, the higher the premium, and age is an important factor in assessing risk. Older travellers represent a higher risk than younger ones: they make more claims (over-65s are three times more likely to make a travel insurance claim than 35 year-olds; this rises to eight times for those over 85) and more expensive claims (over-65s are nearly three and a half times more expensive than the under-50s). It is therefore unsurprising that the average premium for older travellers is higher than for younger customers.
The issue, then, is not that insurance isn't available for customers of all ages, but rather that some people don't know where to look to find it
However, while older travellers do pay more for insurance because of the higher risk they pose – the average premium across all customers is £31, compared to £131 for customers over the age of 65 – many insurers do not charge older travellers a premium that is fully risk-reflective; instead, they incorporate an element of cross-subsidy into their pricing structure. This helps keep the cost of insurance affordable for older people. If these cross-subsidies were to be removed – as they would be if prices were required to be objectively justified – insurance would become more expensive for older people.
In a competitive market, insurers may also choose to offer premiums below the level of risk for a defined period in order to gain market share. Again, these premiums wouldn’t be objectively justifiable, but the lower prices would benefit customers. Indeed, the concept of objective justification throws up a number of problems, not just higher prices. In theory, the principle of requiring insurers to prove that the prices they charge are proportionate is a reasonable one. However, in practice, objective justification is far from straightforward.
One issue is around how to prove objective justification. The proposal from the age lobby is that insurers should publish aggregated industry data on the link between risks associated with age and premiums. This is problematic because, while age is a key factor in helping insurers assess risk, it is not the only factor by any means. In travel insurance, other risk factors include the holiday destination, the length of travel and medical history. Because of the different risk factors involved in the calculation of premiums, the published average premium charged across the industry for a customer of a particular age may bear no resemblance to the premium of an individual of that age.
Another issue is how insurers can be expected to objectively justify an underwriting decision for a risk they have no experience of. Insurers’ risk appetites differ; this means that not all insurers offer cover to all customers. Where an insurer has little or no experience of a particular risk, they will likely not hold any data on it. As such, they will not be able to objectively justify their decision not to provide cover.
Different customers have different insurance needs. These different needs are reflected in the range of products and product features available. Not every product is available to every customer, but there are very good reasons for this. The age lobby is pushing for the Equality legislation to require insurers to quote for customers of all ages in the mistaken belief that this would lead to a higher number of older people being able to access travel insurance.
Removing age limits would not increase access. One of the reasons that some insurers are unwilling to provide travel cover to older people is because medical risks increase with age. Since these are highly correlated, firms could choose to limit their risk exposures by placing limits on the medical risks rather than placing limits on age. Around 80 to 90 per cent of older customers fail initial medical screening questions, indicating that those currently unable to find insurance because of their age would now be unable to find cover because of their health. As well as not helping older customers, this would also have a knock-on affect on other customers, as the quality of cover would be reduced for everyone. Introducing a signpost that directs customers to cover that already exists would be more beneficial.
Further, as mentioned above, many insurers do not have the benefit of detailed actuarial data for all ages. They will therefore only be able to offer competitive quotes to particular types of risk. Obliging insurers to quote for every risk, regardless of the quality of their data, could mean that they – and ultimately their customers – incur significant costs. Potentially, this could make travel insurance unprofitable for some firms, leading them to withdraw from the market.
The forthcoming Equality legislation forces us to consider what really constitutes ‘a fair deal’ for older people. Is fairness about being charged a fully risk reflective price for a generic product, even though the price may be significantly higher than it is currently; or is it about maintaining affordable insurance products that are tailored to meet their specific needs? If the latter, legislation will hinder, not help.
A broker’s view
The British Insurance Brokers’ Association (BIBA) is the UK’s leading general insurance intermediary organisation, representing the interests of insurance brokers, intermediaries and their customers, with partner members from leading insurance companies too. This puts us in a unique position: as intermediaries, we are the agent of the policyholder but also the agent working for the insurer. So, on that note we can look at this from a fair perspective to all sides. Our brokers are also the ones on the front line, selling travel insurance from a huge range of insurers to clients of all ages and medical conditions.
BIBA was part of the HM Treasury Financial Service Experts’ Working Group on age discrimination, and has a great deal of respect for Help The Aged and Age Concern and the excellent work they do. Our own members suffer the same frustrations that they do when clients are turned away without advice or insurance protection and we are also disappointed when premiums more than double on someone’s birthday.
So what is our position on this? BIBA opposes unfair age discrimination; supports proportionate risk-based pricing; and welcomes signposting.
And, is the system broken? It is quite clear to us that there is no market failure. What we see is the commoditisation of travel insurance. For example, a 71-year-old could try three distribution channels when looking to buy a policy – a supermarket brand, a comparison site or even their bank – and find that none of them would quote. Is this a market failure? We do not think so. What we see is a supermarket trying to use its brand to make money, but insurance is not their core business and so they may be able to put a square peg in a round hole, but they cannot help the round pegs. This is why the services of an insurance professional – an insurance broker/ intermediary – for advice is invaluable.
As well as helping older people find cover easily, the signpost will also reduce barriers to entry for new providers seeking to serve this part of the market
Banks usually sell their own branded product, but with just one product they are unlikely to cover all requirements and are often unable to help when it comes to the older traveller; whereas insurance brokers often use a panel of insurers. Travel insurance is a complex product, but as insurance is a broker’s core business, they help thousands of people arrange cover every day, especially the older person. Our members are able to offer access and availability to fairly priced insurance to consumers of all ages. We do not believe there is a market failure for older or younger people seeking insurance.
Is the Equality Bill needed?
The distribution system needs help and it needs to be brought into the 21st Century so that people are not turned away without advice and inadequate protection. BIBA sees the Equality Bill as the solution. The Government has proposed three options regarding the insurance industry’s involvement. These are:
- Strict implementation of the ban
- Allowance of proportionate risk-based pricing and to require insurance providers to signpost customers to a provider if they cannot cover the risk themselves.
- A wide specific exception allowing all current practices to continue.
We think the best solution for clients and the insurance sector is option two. Risk-based pricing underpins the way insurance works and quite clearly if travellers older than 85 are eight times more likely to claim than a 35-year-old – plus their claims are usually more severe as they are likely to be more fragile – then the premium cannot be expected to remain the same.
There is also the case, of course, that it is not just age that is the differentiator. We all get older and as we age we will have more medical conditions that greatly increase the risk to an insurer, which can muddy the waters of this debate. Often, it is the medical conditions that are the real factor when deciding acceptability and premiums. Therefore, providing the premiums are proportional, risk-based pricing should be allowed to continue.
We believe the biggest and most essential benefit to come out of the Equality Bill will be the availability of signposting, which we describe as: ‘A way of helping customers who were turned down at the point-of-sale (telephone, Internet, face-to-face) by a financial services provider on the basis of their age or other factor; customers would be ‘signposted’ by the declining company to an independent source of information about providers that do offer the relevant product.’ BIBA already operates a hugely successful signposting system at a local telephone call rate and it is available online too.
We are concerned that many people buy their insurance from the Internet or by telephone, and it is often here where insurers refuse cover. The result is that the customer feels let down and left without insurance protection. However, cover is available from insurance brokers, but without signposting the customer may not know cover is available and could be exposed to financial risk. There is an argument, however, that an overarching signposting service will cost millions to put in place; but this is just not the case. We have implemented this at competitive commercial rates and honestly believe this can and should be part of the Government’s solution. We are also very pleased to see that in a recent Government Equalities Office’s consultation paper, Equality Bill: making it work, ending age discrimination in services and public functions, the Government has stated that option two is their preferred choice.
We do not believe there is a market failure for older or younger people seeking insurance
Option two means no significant extra cost, use of an existing, successful, low-cost signposting system and most importantly of all, an easy, fairer, helpful solution for travellers at no additional cost. So common sense should prevail.
BIBA’s own vision of legislation is one that ensures fairness and signposting to help people, but does not force insurers to cover areas they have never dealt in and do not understand – particularly when there is no market failure. It is worth remembering that BIBA members can arrange cover for the vast majority of risks irrespective of age, gender and disability.
The expanding older generations allow amazing opportunities for the insurance industry and insurance brokers are leading the way in recognising this. Affordable insurance cover is available and if the Government was to support a signposting solution then BIBA could help direct customers towards a seamless equitable solution.