The Consumers' Association wants a separate investigation to be carried out by the insurance industry into the EU directive proposals for gender equality. Is the CA right if it thinks insurance companies may have a bias?
Kirwan: No. There are two quite separate issues here. The first is the insurance implications of introducing gender equality. This is a matter for the insurance industry to work out and say what the consequences for premiums and availability of cover would be.
The second is whether it is the right thing to do, given the consequences. This is essentially a political decision, one where a lot of people have a vested interest – almost all of us have some type of insurance that would be affected.
So, of course, it should not just be up to the insurance industry but when the politicians do get around to making the decision one way or the other, let us hope they understand all the consequences.
Warner: It is good to see the industry united in its view that we should be allowed to continue to differentiate on gender. The good news is that the UK Government can make this happen provided, as now seems likely, it proceeds with its right to opt-out and also that we can objectively justify the differentiation. We certainly seem able to do the latter through high level, publicly available valid statistical data such as the GAD mortality tables. It certainly looks like a resolution to this potentially unfair piece of legislation is close at hand and it is very much welcomed. We need to provide the data mentioned earlier to satisfy the opt-out conditions and perhaps this information will allay the concerns that the Consumer's Association seems to have.
Shanks: We are strong believers in transparency in this area and we welcome any further open discussions. We believe it is important that all stakeholders understand fully the reasons behind underwriting positions. From a consumer perspective, in particular, it is important that any differentiation is evidenced based and rather than insurers having a bias, we believe that we have the evidence to support the current stance.
Should gender still affect pricing on insurance?
Kirwan: The principle here is whether or not it is right to treat people differently according to their gender where reliable information shows the different treatment is actuarially justified. If young women drivers have fewer accidents than young men, it seems perfectly reasonable for them to pay less for their car insurance. Equally, if we can show women live longer than men, women should pay less for their life insurance and more for their pension annuity.
There are other products where the whole basis of the cover is different for men and women, for example, critical-illness cover, where men and women claim for entirely different things. By far the most common cause of claim for women is breast cancer.
If men and women do have to pay the same premiums, both genders will on average have to pay more. This is because the premium an insurer char-ges for any particular type of insurance will depend on the proportion of men and women who take it out. So the insurance company will have to make an allowance in the premium for variations in these proportions so both genders will need to pay a little bit more overall.
Warner: Women live longer than men so should benefit from better term rates but slightly worse annuity rates. They may be more likely to suffer from illness during their lives so pay more for income protection cover but they are statistically less likely to have road accidents and so are entitled to cheaper car insurance.
Shanks: The whole premise of insurance is about individuals paying for the risk they bring to the overall pool. If this is out of kilter, we could end up penalising some individuals. It is then possible that these individuals will not buy insurance or may go to another market place were there is a gender differential.
Of course, all positions such as this must be evidenced based but the industry has the statistics to support it. There are clear substantiated differentials in mortality rates bet-ween men and women. They continue to have different life expectancy. Until these differentials disappear or other factors such as lifestyle have a greater and consistently measurable impact, gender should remain as a primary rating factor in pricing insurance.
The mortality gap between the sexes is narrowing, acc-ording to the Continuous Investigation Bureau. Are mortality levels based on lifestyle, that is, drinking and smoking, a more realistic indicator of risk?
Kirwan: In theory, these are potentially useful rating indicators. There is, of course, no reason why they would have to be used instead of (as opposed to as well as) gender. Most companies already do this for smoking and the difference in rates between smokers and non-smokers is usually much greater than the difference in premiums for men and women for products such as life cover and critical-illness cover.
One issue would be in validating the information for underwriting purposes in practice. For example, proving that someone smokes is much simpler than proving how much that person smokes. There are similar considerations for drinking. What we do not want to do is use information that is hard to validate and end up in more disputes with customers at the point of claim.
Warner: Drinking alcohol and smoking tobacco are major influences on future mortality. But we have to depend on applicants being honest about their level of consumption. The benefits will be more accurate underwriting decisions, less cross-subsidy between the healthy and the less-so and a lower chance of the repudiation of claims on the grounds of non-disclosure at the underwriting/new business stage. The issue is validating the degree of consumption. We try to use objective means to assess risk. These include gender, medical history, height/ weight ratios and, if we need to send for a medical, items such as blood pressure.
Lifestyle issues become more relevant with some of our modern products such as critical-illness cover, where inc-reased screening and better diagnostic techniques already makes pricing an inexact science. Is the answer to reward those who do adopt a health-ier lifestyle by exercising regularly and taking part in agreed screening programmes? Perhaps but the issue of validation will persist.
Shanks: Male mortality continues to improve more qui-ckly than female mortality. However, there is still a pronounced gap between the sexes, with the mortality rates for females at all ages being less than that for a male the same age. Gender and age continue to be the main factors used in pricing not least bec-ause there is considerable credible data available enabling sensible rates to be calculated and used.
Socio-economic groupings are currently only really used with PHI and TPD type contracts, we may see the extension of this into other contract types. Research indicates there is a mortality differential of around 8 per cent between the highest and lowest socio-economic groupings for males. Lifestyle information is already taken into account in the underwriting selection process referring to cigarettes, alcohol and drugs but even when this information is stripped from the data, the base group of sexes still show marked differences. What is the problem with real-time pricing on prot-ection insurance applications and what is the compromise solution?
Kirwan: Imagine getting a quote for some painting and decorating at home and when you decide to go ahead a few days later, you are told it is going to cost more. The same could happen with real-time protection pricing. Imagine sending your client a quote in the post that turns out to be wrong by the time it arrives. What is the point in sending a quote that could be wrong? This just seems to be creating an extra barrier to taking out cover.
Warner: The main issue with real-time pricing from the intermediary's and end-customer's point of view is the price could change between the time the quote was originally prepared and when the business is actually submitted. An application form will more than likely have been submitted either in paper form or online and only at that stage will it come to light that the price has changed. Any rise in premium will alienate the IFA/customer relationship and the IFA will have additional work to do in potentially selecting another provider and then completing a further application. Customers need to be sure they have a reasonable amount of time in which to choose a provider and apply.
Shanks: The main concern is that the adviser cannot be certain the rate set on which he sells the policy to the client will be the rate set on which the policy is processed and completed. While this often means the price paid may be lower, it may be higher and it is the uncertainty which gives advisers concerns. For real-time pricing to work effectively, it requires an environment where business submission and receipt occurs on the same day and in the presence of the client. Such a scenario could only realistically happen with electronic transactions but our research indicates even with e-transactions this rarely occ-urs and therefore we do not consider real-time pricing is right for the market at the moment.
How can intermediaries address apathy in the market when the majority of 16-24-year-olds think mobile phone insurance is more important than income protection. Are they right?
Kirwan: Given the status that mobiles have these days and the media profile of phone theft, it is hardly surprising. People want phone insurance because they treasure their phone and know that it could get lost or stolen. What we need to do is get that same message across that people should treasure their health because it too can get lost or stolen.
Warner: If young people are seeing the need for insurance for their mobiles at least they are thinking about the financial loss of something important to them. Hopefully by the time they take on more responsibility or some form of debt, they will have developed some appreciation of the risks of long-term disability and be open to a discussion about their protection needs. As an industry we could do more to educate young people in terms of the range of financial products available and the cover they provide. It can't do any harm to start sowing the seeds early.
Shanks: Sales of income protection have always been low across all age groups and the major concern must be concentrated on the 25-50 age group because it is between these ages that people maximise their financial liabilities. Income protection is sold rather than bought and is dependent on the advice channel for distribution. Traditionally, intermediaries have sold critical-illness cover over income protection and providers and advisers should do more to ensure more people have income protection cover going forward – not just to this age group but to a wider cross section.
Laura Shanks, Head of marketing, Scottish Equitable Protect
Nick Kirwan, Director of protection,Scottish Widows
Gerry Warner, product development manager, Zurich