A real gender bender from the European Court of Justice
It sometimes amazes how much influence the United Kingdom has on local regulation and legislation, especially when one considers the anti-colonialist stance of southern African governments. The financial services space is a perfect example. Local regulators at the Financial Services Board (FSB) have been shadowing their UK counterpart’s every move for some time now… It’s a case of: “The UK implements and tests it, before we adopt, adapt and implement it locally.”
But just because something happens in the UK or Europe doesn’t mean it can be sensibly applied back home. The latest rumbling from the Euro-zone centres on a European Court of Justice (ECJ) ruling which may result in significant increases in insurance prices for both men and women. Towers Watson, a leading global professional services company that helps organisations improve performance through effective people, risk and financial management, says the court ruling requires insurers to bring pricing for men and women into line. The judgment will force insurers to abandon certain risk selection practices.
The impact of the gender ruling
On 1 March the ECJ upheld an opinion from the European Union’s (EU) Advocate General that the exception to the EU Gender Directive originally granted to insurers should no longer be legal. Companies writing policies in the Euro-zone will now have to implement unisex rates from 21 December 2012. And insurers, both long-term and short-term will be scurrying to recalculate premiums between now and then. I will stick with the UK slant on this story for now – but local insurers might begin thinking about what would happen if South Africa, with our definite gender equality slant, adopts similar policies.
In the short-term space the ruling would require major insurance price increases for younger and older female drivers. Insurers will no longer be able to reward the “better” driving habits of female insured. At the end of December 2010, the Confused.com/Towers Watson Car Insurance Price Index showed an average comprehensive premium of £2,976 per annum for 17-20 year old men, compared to £1,694 for young women. If insurers equalised rates for young drivers, 17-20 year old women might experience premium rises of around 40% (or higher if insurers initially weight towards the male rates).
“Given the 2012 timeframe, however, there are a number of strategies that insurers might productively explore to differentiate prices without reference to gender,” says Duncan Anderson, global leader for P&C pricing and product management at Towers Watson. The group believes insurers will need to consider a number of new strategies, such as:
· Expanding the range of data modelled to set short-term motor premiums,
· Gaining a better understanding of the interactions between risk factors across all classes of business, and
· Setting premium based on actual driving behaviours monitored through in-car devices.
The third option has been tried by a number of South African insurers – though they’re run foul of the Short-term Insurance Ombudsman when trying to refute claims based on information gathered in this way. Hollard has also launched an innovative “Pay as you drive” premium based on actual kilometres travelled.
Moving into the risk and retirement space
This ruling will have a massive impact on the life insurance business – specifically in the annuity space. “Men’s life expectancy is expected to increase a little faster than women’s in the next few decades; but it seems unlikely that social change will completely bridge the gap,” says Adam Stevenson, senior consultant at Towers Watson. Insurers will have to get creative to tackle the differences between male and female mortality rates. 65 year old women are currently expected to outlive 65 year old men in 185 out of 193 World Health Organisation countries! “Early indication from the market is that annuity providers will probably cut rates for single men, with single women’s rates likely to rise slightly,” he says.
Towers Watson raised a number of implications of the court ruling:
· Male annuity rates could decrease by upward of 5% after the announcement, with female rates increasing slightly.
· The unisex annuity rate would discourage men from purchasing annuities beyond the UK-legislated Minimum Income Requirement, currently £20,000 per annum
· Individuals with small defined contribution pension pots have no choice but to buy an annuity on retirement – and the ruling could make it less attractive for single men on modest incomes to save for retirement.
· The ruling could result in many retirees delaying the purchase of an annuity in the hope of securing a more attractive unisex rate.
Other considerations...
We shudder to think what impact this ruling would have on life, disability, critical illness and income protection benefits. The first three categories of risk cover tend to be cheaper for women and more expensive for males, with the opposite true of income protection products. Insurers would have to take steps to protect their profit margins from 5% dips in annuity premiums – and dips of between 10% and 20% on other risk products!
Editor’s thoughts: Back at home we’re still deeply obsessed with gender in pricing financial services products. We’ve even got short-term insurance companies catering for women only – because, they say, women are less careless than men! With all the talk around gender equality, do you think South Africa would follow the European Court of Justice in legislating against gender based insurance premiums? Add your comment below, or send it to [email protected]
