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Regulation changes offer once in a decade opportunity for protection

Although the natural response to legislative change is to focus on the downside, there can be another side and such change can prove the very making of a business.

The imminent change to the way that insurers are allowed to price life insurance policies, due to come into effect before the end of the year, is a good example and this should provide an opportunities for IFAs.

Life insurance for women should soon become significantly more expensive and there will probably never be a better time to interest those still without it.

According to a survey conducted by Opinium last year, a staggering 59 per cent of women still have no cover.

New legislation resulting from a judgement of the European Court of Justice in 2011 will prevent insurance companies from charging different premiums to men and women based on gender risk differences. It will not affect existing insurance policies but will come onto effect for new ones on 21 December 2012.

Someone’s gender can currently have quite an impact on the premium they pay for a range of insurance products because insurers know that male and female policyholders can have different accident, mortality and morbidity risks.

Underwriters therefore use data on proven statistical gender differences to apply different premiums, policy terms and benefits for men and women.

But, after being challenged by Belgian consumer group Test-Achats, this practice was deemed to be incompatible with European law.

The judgement sent shock waves through the insurance industry as it runs contrary to long-established basic principles of insurance but we must all come to terms with the fact that a ban on a rating factor as fundamental as gender will increase costs.

Unisex pricing will mean that the gender posing the lowest risk for a particular type of insurance will have to be subject to an increase in premiums to cross-subsidise the higher-risk gender.

This will impact on different types of insurance in different ways but, when it comes to life insurance, it is women who are going to have to pay higher premiums because they currently pay less than men on average as a result of being less likely to die early.

Indeed, life insurance for women could become up to 15 per cent – or, according to some actuarial opinion, even 20 per cent – more expensive as a result of the change.

The premium rise could in fact end up being much steeper still because the gender ruling is coming into effect at around the same time as completely separate legislation that is expected to put further upward pressure on life insurance premiums generally.

Regulation changes and protection

Gender pricing

From 21 December, insurance companies will no longer be able to use gender as an underwriting factor.

The ABI predicts that female rates for life insurance and critical illness will increase by up to 20 per cent, while female premiums for income protection are predicted to fall by up to 30 per cent.

For men, the cost of life insurance and CI could come down by 10 per cent while IP is predicted to increase by 25 per cent.

I minus E

From 1 January 2013,insurance companies will no longer be able to deduct the cost of running their insurance books from their investment returns before tax for new business. This will increase their tax bills and is likely to push up costs.

Figures from the Actuarial Profession suggest premiums for critical illness or combined life and CI policies will increase by 10 per cent.

Currently, insurance companies offset the costs of their life insurance business from profits made on their investments, a situation known as income minus expenses or I minus E. But, with from 1 January, 2013, protection business will be removed from I minus E and brought into line with tax regimes in other industries. This is likely to push up life insurance costs for insurers and some commentators are talking in terms of premium rises of up to 10 per cent.

There is nothing quite like the prospect of obtaining a bargain to attract the attention of the average consumer and that is effectively what any woman who completes a policy before 21 December this year is likely to be getting.

Simply having a good reason to have a conversation about life cover can help to dispel the widely held myths that it costs too much or that insurers do not pay out on claims. Ironically, despite all the impressive advances in technology and policy wordings that have been evident within the protection market, these misconceptions have changed little in the past 20 years.

Cost perceptions, in particular, have clearly become wildly out of date as increasing life expectancies and greater insurer efficiencies have resulted in life insurance premiums taking a steady downward path over the last decade to their lowest ever levels.

It is now therefore possible for a 30-year-old female non-smoker to get £200,000-worth of cover for 25 years for well under £9 a month. The cost could still be under £12 a month if they are aged 35 and even under £18 a month if they have turned 40.

These are still very modest amounts in the scale of things and many consumers think nothing about spending more on insuring their pets and mobile phones but leave their partners and children without life cover because they mistakenly assume that it will be too expensive.

I cannot remember a window of opportunity of similar magnitude for selling life-related policies on the back of legislative change since the 1980s when we experienced both the removal of life assurance premium relief and tax changes to the treatment of maximum investment plans. Both episodes were characterised by manic last-minute rushes, with plenty of applicants missing deadlines.

In the case of the MIP changes, I can clearly recall van-loads of proposal forms arriving at the eleventh hour. While there may be those who are licking their lips at the prospect of hauling in such a spectacular last-minute catch this December, they may feel somewhat less elated nearer the time if they also find themselves having to deal with last-minute RDR compliance issues. The time to start is now.

Roger Edwards is managing director of Bright Grey & Scottish Provident

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