The European Court of Justice’s (ECJ) ban on the use of gender to calculate premiums could spread to other factors currently used in pricing, insurance industry experts fear.
Age and disability are two areas under consideration in a draft equality directive set to go before the European Council in June. Both factors are “very key” to pricing in the UK market, according to Phil Brown, underwriting and claims director at insurer Zurich.
“We would be very concerned if there was any contagion risk for this legislation,” he said.
The court’s ruling on gender, published on 1 March, followed a case brought by a Belgian consumer association, which sought to remove from gender equality legislation an exemption which enabled insurers to take gender into account in pricing. The court ruled that the exemption “works against the achievement of the objective of equal treatment between men and women”. It will be invalid from 21st December 2012.
Research commissioned by the Association of British Insurers (ABI), carried out in autumn 2010 showed that women could see a rise of as much as 20% in the cost of life insurance if the derogation was removed, while men could see a fall of 10%.
While insurers have expressed relief that a transition period is in place, questions remain about the impact of the ruling on in-force policies.
Alan Joynes, senior risk governance manager at reinsurer Swiss Re, expects this to be clarified in the coming months and suggested that different governments within the EU could implement it differently.
“National contract law may also have to be considered,” he said, warning that the costs for insurers and consumers of a retrospective application of the ruling would “almost certainly” outweigh any benefits.
The sense of frustration among some parts of the protection industry have led some commentators to urge the Association of British Insurers (ABI) and the Treasury to appeal against the ruling.
However, Swiss Re’s Joynes said the ruling was not open to appeal or opt out, with the UK government bound to incorporate the decision of the court into national law.
While there appears to be “little demand” to legislate on age, according to Joynes, Roger Edwards, proposition director for protection providers Bright Grey and Scottish Provident, believes that it cannot be ruled out. Law firm Norton Rose
has urged insurers to put pressure on the European council to prevent the removal of a derogation on using age and disability in pricing.
“There are some concerns related to proportionality and in particular the use of age limits for some forms of insurance, and we would hope these can be discussed and solutions found by the industry rather than leaving the door open for what would be extremely damaging legislation,” said Joynes.
Steve Groves, chief executive of long-term care provider Partnership, said it was important not to “confuse ‘not discriminating’ with ‘believing everyone is identical’.”
“Healthy older people are more likely to die in any year than healthy middle aged ones and therefore it is not discriminatory to charge a higher premium to insure against this risk,” he said. “In fact it can easily be argued it is discriminatory not to as the lower risk people would be paying the same and getting a lower benefit in return.”
Disability is also a key area of concern, with Joynes warning that price “would spiral out of control” if insurers were unable to assess health when measuring risk.
Private medical insurance (PMI) is expected to be less affected by the ruling than protection, given the fact that gender is less often used in pricing. Bupa confirmed to Health Insurance that gender is not used to calculate premiums. However, a spokesman for Exeter Family Friendly said the ruling would affect one of its PMI plans and AXA PPP healthcare confirmed that it does take gender into consideration when setting premiums for some individual policies, although the weighting is “relatively small” and is not applied to the “vast majority” of policies. These will be reviewed during the transition period, said a spokesman.
Partnership’s Steve Groves said the impact of the ruling on long-term care would be “more muted”, given the fact that the majority of lives are female.
“However, we suspect some males considering the product in the final quarter of 2012 will wish to ensure they have completed applications before the new rules come in,” he added.
The firm would be spending “significant” amounts of time analysing its data to find rating factors other than gender to remove uncertainty in the end underwriting ratings which the removal of gender will create, he said. It is not yet certain whether these will be implemented before December 2012.
The brunt of the court’s ruling will be felt by the protection industry, where gender is routinely used to assess risk and price premiums. It remains to be seen when providers will introduce unisex premiums, or how these will compare in terms of price. Laura McMaster, partner at consultancy firm Lane Clark & Peacock, said that by preventing gender from being used to set premiums, the ECJ was forcing insurers to cross-subsidise the cost of claims between men and women.
“If an insurer does not get the level of cross-subsidy between their policyholders right then it could seriously threaten their profitability,” she said. “This is not just about getting the maths right. If the mix of policyholders changes then the level of cross-subsidy will need to change, and this mix will be largely out of the insurer’s control if they are not allowed to price based on gender. The likely result is that insurers will be left with no alternative but to increase average premiums to compensate for this new uncertainty.”
“Insurers are required to act in a prudent manner, to ensure they are able to meet all their liabilities in the future, so the one thing which is certain is that the outcome will not be aggregate pricing at half way points between male and female rates,” said Swiss Re’s Joynes.
He believes the ruling may encourage insurers to come up with alternative ways to differentiate premiums but warned that indirect discrimination – based on gender – would be precluded by the ruling. Phil Brown of Zurich does not believe that proxies for gender will be permitted.
While a flurry of repricing might be on the horizon, either before the December 2012 deadline or at it, Roger Edwards of Bright Grey and Scottish Provident believes the priority is to get consumers protected now. “There are enough people who have not got insurance that we should not put ourselves in a position where we use it as an excuse to not talk about protection,” he said. “If the price changes in 21 months’ time and someone can get a better deal elsewhere that’s not that much different to what they can get now – rate repricing happening all the time. Let’s get them the protection they need rather than worrying about whether the premium might go up and down.”