Posted on Nov 19, 2012 by Sergio Ulloa
(G+)
From the 21st of December 2012 European insurers will no longer be able to use gender as criteria when assessing risk factors to price premium plans. The European Court of Justice ruled a decision in March 2011 determining that insurance policies reliant on gender factors were incompatible with the prohibition of discrimination under the European Union. The final Article prohibits:
"...any results whereby differences arise in individuals' premiums and benefits due to the use of gender as a factor in the calculation of premiums and benefits
."
Initial plans for the Gender Directive began in 2004, with the goal to enforce equality for men and women when accessing goods and services. The Directive would dismiss the use of actuarial factors related to sex when insurance companies determined the provision of insurance to clients. Individual plans could no longer be calculated using gender as a factor. Despite the campaign, the court ruled that insurance companies could continue to identify sex as a determining factor when defining differences between premiums and benefits.
Seven years on and the Court of Justice of the European Union has declared the above ruling invalid after the 21
st of December due to inconsistency with Article 23 under the
EU Charter of Fundamental Rights:
"Equality between men and women must be ensured in all areas, including employment, work and pay."
The Gender Directive applies only to private insurance and pensions that are voluntary and separate to the employment relationship. It also only applies to new contracts entered into after the 21
st of December, with all further renewals (or automatic extensions) from that date to be re-quoted. Anybody that has already begun drawing from their pension will not be affected by the new law.
The European Commission has issued
guidelines for insurance industry members, with specific examples of what is considered a "new contract" to assist with the application of the new Directive. Michel Barnier, the EU Commissioner for the Internal Market and Services, maintained a positive outlook by addressing the concerns among insurers as to the impact and consequences of the judgement:
"I believe that these guidelines will be helpful for the [insurance] industry and assist them in adapting their contracts and premiums to be able to ensure timely and full compliance with the judgement. This will be beneficial for both the industry and policyholders."
While there is the prohibition of procedures that differentiate between men and women based on sex, the ruling is clear that certain practices may continue in using gender as a factor. The permitted gender-related insurance practices include:
- Collection and storage of gender status for internal risk assessment. For example, the calculation of technical provisions and monitoring of a portfolio mix from an aggregate pricing perspective.
- Reinsurance pricing (excluding different pricing at an individual level).
- Use of marketing and advertising to influence their portfolio through targeted advertising at either men or women (access to a specific product may however not be refused or restricted due to a person's gender).
- Life and health insurance underwriting with regards to health status or family history, the assessment of which requires insurers to take gender status into account due to physiological differences between men and women.
There needs to be consideration for how the new rulings affect the insurance industry as it moves forward. Early judgement of the impact this will have on the industry has been essential for insurance companies as they begin to prepare for the end of the year.
Facing this shift in the industry, Globalsurance looks at some of the directions this decision could take insurance companies, with forecasts of both positive opportunities and the challenges that will undoubtedly arise.
Traditionally, men and women are offered gender specific rates because of the difference in cost for each insured factor. For example, the cost of a pregnancy can be calculated and then reflected in an insurance plan. Similarly, the risk assessment for an adult male within a certain age bracket can be justified due to a statistically higher chance of developing prostate cancer (than a younger man). Without transparency in future plans however, a man is unlikely to buy into an insurance policy he suspects covers costs of pregnancy.
Since the 1
st of August, the
'Patient Protection and Affordability Act', ruled that women with private insurance or those under employment insurance schemes in the United States must be provided the option of birth control services as well as some preventative care at zero cost. Should European insurers follow suit and choose to include similar coverage of preventative care for female policy-holders, costs will rise in plans for both men and women yet without (direct) benefit for the former. A product that has removed maternity costs will therefore appeal to all men, and to those women who have made a choice not to have children for the period of their insurance plan.
Currently the offer of annuity rates to men have been slightly better (about 5¶8 percent better than females in the UK) due to the measurement of a generally shorter life expectancy. Without permission to differentiate genders in this calculation however, it is likely that annuity rates for men will fall closer to the existing female rates. Specialist pensions law firm, Sackers, believes that the average payout for men will decrease by up to 10 per cent.
With the polarising banner of gender soon absent, there needs to be a focus on assessing fields that determine a more personalised risk assessment tuned to effectively manage those risks. The new legislation presents an opportunity for the insurance industry to focus on the individual, gathering specific information that allows the policy to cater effectively for the client. Without these factors being analysed closely, the risk assessments carried out may fail to represent the actual probability of risk against the predicted loss.
Theoretically, annuity for Women should balance out with cheaper costs and improved payouts; but few companies have released information to diminish fears of adverse affects for their female clients. There are also worries that, at least in the short term, women will not benefit from the new Directive until long after the industry settles on tested, functional and affordable quotations.
As in 2004, one of the first implications assessed was the danger of facilitating corporate decisions to align top end prices, rather than drop rates to a lower average across the board. Officially, the new ruling does not mean that women will always pay the same Motor insurance premiums as men, as specific factors of individuals will still vary. It is clear though, how the Directive may unintentionally encourage companies in the industry to raise the average rates of premiums - as a necessary precaution to offset risks in a new and untested environment - instead of balancing rates
between the previous average prices for male and female drivers.
Limiting transparency in a product or service always presents a danger in any business when customer relations are concerned, especially considering current the trend where clients are striving to understand more about the mechanics of the policies they can choose. There are concerns that preventing the insurance industry from considering key actuarial criteria could cause real problems, essentially disabling their ability to successfully form insurance rates that appropriately reflect risks.
Comparisons between the current use of gender as a factor throughout the EU to determine risk, and the future practices of the insurance industry show promise of a dramatic change. Just a few insurance areas below are highlighted to show the significance of the new Directive for the majority of EU members.
The current national use of gender as a rating factor:
| [Figures from the Official Journal of the European Union] |
Member States that permit gender to determine risk according to national law |
Percent of Members in the EU |
| Life insurance |
24/27 info. on 3 nations not available |
89% |
| Annuity products |
22/27 info. on 4 nations n.a |
81% |
| Private health insurance |
20/27 info. on 4 nations n.a |
81% |
| Accident insurance |
20/27 info. on 3 nations n.a |
74% |
| Motor insurance |
16/27 info. on 3 nations n.a |
59% |
At least 89 percent of European insurance companies currently rely on gender statistics to determine life insurance rates; it is clear there will be considerable modifications to risk assessment strategies when designing premium plans.
With that said, the EU Commission has put its faith in the insurance industry to overcome difficulties, hailing it as "competitive and innovative," while being in a position to offer "attractive unisex products without an unjustified impact on the overall price." The question then is whether the industry will be able to project price reductions as equally as it justifies price increases.
So it is down to insurance companies to remain competitive and keep policyholders informed as they push to avoid market inefficiencies. Time and effort will need to be assigned carefully to ensure existing and potential clients are clear on the new law, preventing both loss of confidence and loss of business while maintaining a smooth transition into compliance with the Gender Directive. Given that the Directive was approved back in March, insurance companies will have spent the past nine months dedicated to designing new products tailored to fit the new regulatory requirements.
Insurance companies will aim at dynamic ways to ensure their products and services continue to suit customers looking for new contracts, with the likely introduction of policies based around family plans and stripped down products. Globalsurance has indeed learned of at least one international healthcare insurance company that will be issuing their new premium plans and rates on the 20th of December, equipped to face the new initiative.
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