On the 1st of March 2011 the European Court of Justice made a ruling that commencing on December 21st 2012 insurance companies will no longer be able to use gender as a risk factor in setting premiums. The ruling applies to all life, health, general and pension products. This decision to inhibit gender discrimination will undoubtedly have vast implications for actuarial work going forward. Prior to this ruling gender discrimination has been explicitly permitted under EU equal treatment rules, 'if sex is a determining risk factor... substantiated by relevant and accurate actuarial and statistical data'. Below I will examine some of the changes that this ruling may entail.
Long before the invention of computers and sophisticated statistical software it has been well accepted that on average women live longer than men. Even in early with profit policies that lacked the proper data to generate highly granulated groups it was standard practice to offer different terms of contract to males and females. The deterioration of this standard practice will inevitably have huge pricing implications.
For life insurance, as men and women will be grouped together, we can expect that women’s premiums will rise while males will fall. Keeping all other factors equal this will be because women will find themselves in a less select group as male mortality elevates the average mortality of the group with the opposite being true for males. Similarly for car insurance (which has received much media attention) women will be grouped with their less select male counterparts. This should raise female premiums and lower male premiums despite decades of statistical data have proven that men are more likely to claim in this industry. However, the ruling will benefit females when purchasing annuities or pensions as it will not be considered that females live longer than the average group age when mixed with males.
As the most common factor in underwriting will be prohibited we can expect that many alternative risk factors will evolve on the introduction of this new ruling. In particular it is expected that underwriting will become much more aggressive and insurance companies will attempt to determine gender in different forms (type of car, profession, previous illnesses, etc.) If this is the case it would appear that the new ruling is a dead weight lost to society as insurers continue to discriminate on sex but in less direct measures and through more expensive underwriting. It must be said that perhaps more aggressive underwriting could uncover more influential risk factors than sex that would increase claim likelihood. For example maybe a person’s salary has more influence on their mortality than gender does. This new law could revolutionise underwriting which arguably up to now has relied on outdated methods of risk classification.
There will also be huge changes in how insurance products are marketed as corresponding males and females must be charged the same premiums. For life insurance and general insurance, companies will want a higher female customer base to subsidise males with the opposite being true for pension and annuities. One measure of doing this is targeted advertising campaigns to the desired audience of the same gender. Companies may also engage in strategic customer retention methods that would attempt to retain customers of a certain sex whilst discouraging customers of an unfavourable sex. In addition companies may start to offer ‘special group rates’ to groups such as trade unions or social clubs in which they can achieve a customer base of an often similar gender. For example a life insurance company may offer a special group rate to a trade union in a profession traditionally populated by females to attain a woman customer base.
It will be interesting to see if a company is allowed to ask about gender on the policy form even though it is not allowed to use this information in its pricing process. If not a company may be unaware of the subgroups represented in its customer base and the ‘selection against the office’ problem inherent in this new ruling will be amplified. It is also interesting to note that life tables which traditionally discriminate between males and females may have to be updated to merge the two genders as in Europe there is no longer a use for such information.
