The House of Lords’ EU sub-committee on social policy and consumer affairs has announced details of an inquiry on EU proposals prohibiting the use of gender criteria in determining prices for products such as car insurance, pensions and annuities.
Individuals and organisations such as independent financial advisers are invited to submit written evidence to the inquiry on the proposals for an EU council directive implementing the principle of equal treatment between women and men in accessing goods and services.
Insurance is based on individual underwriting, allowing insurers to assess individual risk profiles fairly and objectively. A ban on the use of data about gender will remove fairness and lead to higher insurance prices for men and women.
The directive would lead to higher motor, accident and term insurance rates for women despite their lower accident rates and longer life expectancy.
Annuities and income protection insurance would become more expensive for men, despite lower life expectancy and fewer health claims.
Prudential regulations applying to insurers in the UK would not allow reserves to be set up on the basis that an average of high and low risks is taken. To ensure that policyholders are fully covered, insurers would have to reserve on a highest risk basis. This additional cost of capital would feed through to higher premiums.
The underwriting of life insurance and annuities is usually based on the core risks of gender, age and smoking habits, not just on gender. However, gender is the most significant. It is also the easiest to verify.
Standard mortality tables published by the Institute of Actuaries split mortality rates between women and men. Women’ life expectancy is greater than men’ Published data for the population aged 18 to 75 shows that mortality rates are on average considerably higher for males compared with females. Differences in mortality related to age, however, are greater than differences related to gender but more variable.
Mortality rates for smokers are on average around 50 per cent higher than for non-smokers but there is, again, significant variability in this difference by age.
Overall, gender is at least as important a rating factor as smoking habits.
Generally, women pay between 10 and 30 per cent less than men for term insurance, which has contributed to an expansion in the term insurance market. If gender-neutral rates were imposed on insurers, it is possible that women would have to pay 10 to 15 per cent more for the same cover as men.
It is essential that insurers are able to continue to underwrite using the best available data and to take account of changing claims experience as otherwise there will be a tendency to increase premium rates in line with the highest risks.
This is already evident in the UK where unisex annuity rates – used for protected rights fund under contracted-out pensions – are not in the middle of male and female rates. Rather, unisex annuity rates tend to be pitched at a level where men are worse off and women little better off compared with single-sex annuity rates.
An increase in motor insurance for women drivers as a result of the directive would have a big impact because drivers tend to study comparative premium rates closely every year on renewal. Premiums are based on data from claims history that shows that male drivers present a greater risk than women drivers and are responsible for a greater number and seriousness of road traffic accidents.
Women’ premiums are around 25 per cent less than men’ premiums but a future gender-free rating basis is unlikely to result in lower men’ premiums but an increase in women’ premiums.
For most consumers, the fact that term insurance rates might increase could go unnoticed but a reduction in annuity rates would be more obvious to people approaching or in retirement, especially as annuity rates have already reduced significantly in recent years.
The cost of motor insurance, however, is likely to be the most newsworthy story and the negative impact of gender-free underwriting of motor insurance on consumers may also assist the cause of life insurance and annuity rates.
The elimination of discrimination which has a negative impact on individuals needs to be pursued but this should be done in a way that does not bring about consumer detriment through the back door for those whom the directive should be aiming to protect.