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Gender agenda

The European Court of Justice ban on using gender in underwriting could have far-reaching effects on annuities and other products By Gregor Watt

European Court of Justice: ‘Ban could penalise poorer or less well informed pensioners’
European Court of Justice: ‘Ban could penalise poorer or less well informed pensioners’

Last week’s decision by the European Court of Justice to ban the use of gender as an underwriting criteria for insurance raised many questions about the future pricing of annuities.

Following an appeal to the ECJ from a Belgian consumer rights group which had challenged the use of gender in the pricing of annuities as incompatible with the EU directive, the ECJ has effectively ended the exemption that insurance companies enjoyed and ntroduced a final deadline of December 21, 2012 for insurers to eliminate gender as a factor in the pricing. Despite the decision having been widely expected, it has not been well received by the industry and consumers.

ABI acting director general Maggie Craig says: “This gender ban is disappointing news for UK consumers and something the UK insurance industry has fought against for the last decade. The judgment 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.

“Insurers will study this judgment carefully to manage negative effects for customers.” There are a number of areas this will effect, including
car insurance and life, critical-illness and income protection insurance.

The ABI says it expects car insurance premiums for women under 25 to increase by as much as 25 per cent.

Similarly, it expects the cost of life insurance to increase by up to 20 per cent for women while life cover for men could fall by 10 cent.

Annuity rates are similarly expected to change. Although the ABI suggests a smaller percentage change (it expects female annuity rates to increase by up to 6 per cent and male rates to fall by up to 8 per cent) because of the significant sums involved in the pension market, the differences in final retirement income could be substantial.

Alexander Forbes Annuity Bureau head of operations Gemma Goodman says the actual reduction in male annuity rates is likely to be 4-5 per cent.

Annuity Direct managing director Bob Bullivant says a fall in income of this magnitude will see men lose an average of £300 a year and that this could see as many as 360,000 people get a lower income in retirement.

A J Bell marketing director Billy Mackay says the decision introduces unfairness to the system.

Mackay says: “It could be argued that this ruling introduces discrimination. It’s bad for women and men. Women drivers will pay higher insurance than they ought to and men’s pension annuities will go down. Twenty years ago, a typical man retiring at 65 could get an annuity rate
of nearly 15 per cent. Today, it’s nearer 6.7 per cent. With this ruling, it could drop further towards something like 6 per cent for both sexes.

But latest figures from the Office of National Statistics show that women retiring at 65 today can expect to live another 20.2 years – nearly three years longer than a man. How is that fair?

’If an insurer does not know if the person buying the annuity is male or female, they will inevitably increase the risk margin “just in case” they are selling to a woman, so men face potentially worse annuity rates’

“Essentially, it means a man with a pension pot of £100,000 can expect to be almost £700 a year worse off under this ruling and nearly £12,000
worse off over their predicted lifetime.”

Mackay says the decision may not just affect annuities but could also affect the amount of income that can be taken from drawdown.

“This could also have a knock-on effect in the long run on the rates at which men can take income from drawdown as well because they are intended to reflect annuity rates.”

Barnett Waddingham partner Dave Grimshaw says the decision could unintentionally penalise poorer or less well informed pensioners if wealther pensions are put off by the drop in annuity rates. He says: “If males are deterred from purchasing an annuity as a result of this ruling,then insurers may need to price nearer the current – lower – female rates than one might otherwise expect. Indeed, as it is probably the better informed and better advised men who will opt out of purchasing an annuity, the ruling may have an unintended impact on equality, with men who are less financially astute remaining in the insured pools while their more affluent peers opt out.”

Although women’s annuity rates are to increase at the same time as male annuity rates are made worse, Saga director general Dr Ros Altmann says the disproportionate number of annuities that are bought by men will see many more people lose out than gain from the equalisation of rates.

Altmann says: “Currently, men buy around eight out of every 10 annuities sold in the UK and all of them risk receiving much lower pensions as a result of this decision.

This means that future UK pensioners will be even poorer than they otherwise would be. If an insurance company does not know whether the person buying the annuity is male or female, it is inevitable that they will increase the risk margin ’just in case’ they are selling to a woman, so men will all face potentially worse annuity rates and, therefore, will receive much lower pensions for the rest of their life. Women’s annuity rates
are unlikely to improve by much, especially as the majority of annuity purchasers are men.”

Insurance companies now have 21 months in which to implement the changes. This opportunity to phase in the repricing has been welcomed
as an opportunity for both annuity providers and customers to get to grips with the change.

Unfortunately, by the time annuity rates have been adjusted to take account of the change in legislation, another potentially more serious drag
on annuity rates will be looming.

And, to the ECJ’s approval, this will affect both men and women equally.

Goodman says: “Within the next two years, annuity rates are likely to decrease further when the EU directive, Solvency II, comes into force. The result of which means that life companies will be obliged to value their annuity liabilities using government gilt rates.

Inherently, the returns will be lower than the returns from corporate bonds, which are currently used. These lower returns will result in lower annuity rates being offered universally.”

Crude awakening

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I think that it is likely we will see a more sophisticated approach to underwriting annuities. Simple differentiation based on gender alone has always been a very crude way of estimating life expectation.

My late grandmother and Queen Elizabeth the Queen Mother were both born in 1900. Both were females but whereas the Queen Mother died in 2002, my grandmother died in 1972, a full 30 years earlier. This example highlights very strongly that gender alone does not determine life expectation.

Annuity providers were not just sitting there waiting for the announcement. In advance of the ECJ decision, one cut its rate guarantees so that no quote was guaranteed past February 28. Another announced that it was equalising its male and female rates ahead of the ruling, something it is very easy
to do when your rates are not competitive. Others had planned to close for new business for an indeterminate period until they knew what the market was doing.

Before the announcement, the doom-mongers were saying that male annuity rates would be equalised down to match female annuity rates. There were “buy now while stocks last” signals coming from some providers looking to cash in on the uncertainty.

Now we have some clarity and it is clear that clients who were not planning to buy an annuity this year do not need to take any
action. Rates could still move up with interest rates before the impact of equalisation is felt. If it is clear that rates are moving ahead of the December 2012 deadline, we will take appropriate action. Otherwise we expect it to be business as usual for some months to come.

There seems to be a general expectation that rates will be equalised down, with men getting annuity rates similar to those currently offered to women but I do not believe that this will be the case. The annuity industry has been given 21 months to consider how to underwrite people buying annuities more effectively and hopefully this will result in a better outcome for all of them.

David Trenner is technical director at Intelligent Pensions

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