In my last article I discussed underwriting post G-Day, when the admittedly boring conclusion was that little will change. This time I want to talk about premium rates, which face a far greater impact due to the new gender laws.
First, the obligatory reminder: we are dealing with the twin changes caused by moving to unisex rates and the change in life office taxation. For more info, see my previous articles.
Unisex rates are required under the EU Gender Directive. For life cover, if the proportion of males to females was equal then the new rates would be mid-way between the current male and female rates. However, we generally sell more to males so the new rates will be closer to the current male rates, though cautious actuaries might add a bit for the risk of getting their gender mix assumption wrong.
Currently for Aegon the males are on average about 25 per cent more expensive than females, and constitute about 60 per cent of business. (60% is higher than the market average, which is due to my underwriting team being so efficient at underwriting large cases and business protection, both of which are male orientated.)
Crunching the numbers gives an average reduction in male rates of 8 per cent and an average increase for females of 15 per cent, to which will be added the effect of the tax change.
These are averages and most insurers will allow for different gender mixes, for example by age, term and sum assured.
In this way Aegon can still be competitive at younger business for smaller cases. Aegon will also be differentiating rates for business and personal protection business to reflect the different gender splits.
For critical illness business the differential between male and female rates is smaller. The result is that the average reductions for males and increases for females, are both smaller. Income protection rates are the “wrong way round” and female rates will fall whilst male rates will rise.
Life Office Tax Change
Whilst I can follow the unisex changes, the tax changes defeat me. My clever pricing actuaries tell me that the old “I – E” regime reduced tax on protection business using investment business returns. So removing “I – E” has increased rates. And it is replaced by tax on profits, which further increases rates.
The effect of such increases is exaggerated as higher rates lead to higher commissions, which leads to even higher rates. Of course higher commissions is good news for advisers, but as we will see in the next article it is only putting advisers back to where they were a few years ago.
The commonly quoted figure is a 10 per cent increase for tax, from an Institute and Faculty of Actuaries paper. Having crunched the numbers, my colleagues tell me that the actual increases will be slightly higher overall, and significantly higher for smaller premium business. Expect to see increases of up to 33 per cent in the extreme for tax.
The tax change only affects life, and life and critical illness business. It does not affect IP business.
But what is really going to happen next year?
The first point is that we should expect rate volatility at the start of the year. Historically intermediary rates have been closely grouped as insurers compete on the edge of profitability. Single rate changes of even around 5 per cent for males are large in comparison and differences are bound to appear between insurers. There will be a lot of jockeying around before rates once again converge. The industry view on how long this might last varies from between one and three months.
Before that can happen two issues might confuse the picture. First, in January we might expect far fewer female lives, as these sales at least should have been brought forward to December. The gender mix will therefore be skewed in January to males, which means higher unisex rates. By how much, who knows?
Second, the effect of tax and gender mix may vary between insurers which will affect the appropriate rate change, even without traditional actuarial caution.
My three wishes
If I had three wishes they would be:
That rates settle quickly to stop that being a distraction from the real need of protecting customers against some of the worse things that can happen in life.
That rates settle at a level that is good value for customers, whilst providing sufficient profits to attract insurer and distributor investment into growing the business.
Someone takes a better picture of me!
Mark Preston is head of underwriting at Aegon UK