The difference between men and women
I never thought this would need to be explained, but the reaction to this ruling in the media revealed some very confused ideas. Men and women are different. Women tend to live longer and men tend to drive more dangerously. This pair of 18-year old twins rolled out by the BBC may not like it, but it is true. If you don't think it should affect insurance premiums then you have a friend in the European parliament. If you don't believe it then you need to take your head out of the sand.
Pooling of risk
So what is the case for sex-specific premiums?
Insurance as an industry came about because of the desire to remove uncertainty from people's lives. Mutual societies were founded where groups of people clubbed together to share their gains and losses. They paid a little over a period of time knowing they would share the costs of the misfortunes of the whole group. This transformed large, infrequent costs into a small, regular cost. This situation works best when all the participants are similar in their riskiness. For example I would not want to pool my death risk with an 80 year old daredevil.
Modern insurance deals with this by charging different premiums to different people. The problem with the gender ruling is that it places a strong restriction on this process. In other words insurers will knowingly have to charge the same premium to groups of people they expect to be subject to different claims experience. The problem with this is two-fold:
- Business mix risk, where cross subsidy within groups leads to the risk that the mix of risks within the group will change over time, making the premium charged steadily more unsuitable.
- Anti-selection risk, where riskier customers will tend to buy cover perceiving it to be good value, and safer customers will tend not to buy cover perceiving it to be poor value.
Anti-selection risk is not just a concern for insurance companies. Society as a whole will suffer if insurance becomes less valuable to large chunks of the population.
Of course gender is not the only factor used to work out insurance premiums, and this will be well known by anyone who has had to fill out an application form. Many of the questions you answer are used to a greater or lesser degree to price your policy. The aim is to charge the same premium only to people who are expected to be subject to the same claims experience.
The great thing about gender for insurers is that it is a strong predictor of claims experience for many types of insurance (my own field of life insurance being a prime example); people tend not to mind revealing their gender; and people tend not to lie about their gender. The not so great thing about gender is that it is a protected characteristic under European law, which is why it can no longer be used.
So what might insurers do about this? Perhaps they could ask proxy questions which betray your gender and use those factors instead. For example does your hair fall below your shoulders? Unsurprisingly this is prohibited too. But it raises the question what questions an insurer can ask, since many questions will alter the probability that the respondent is a man or a woman. This is dealt with in the ruling as follows:
"indirect discrimination: where an apparently neutral provision, criterion or practice would put persons of one sex at a particular disadvantage compared with persons of the other sex, unless that provision, criterion or practice is objectively justified by a legitimate aim and the means of achieving that aim are appropriate and necessary;"
My interpretation is: you can only use a factor that is not gender neutral if that factor is a justifiable rating factor in its own right, and its use is appropriate and necessary for pricing a policy.
For example men tend to be smokers more than women. Therefore pricing on smoker status is not gender neutral. Smokers do not live as long as non-smokers, and this is well established and the effect is large. Also not pricing on smoker status would lead to problems of the type listed in bullet points of the previous section. Therefore this is a justifiable rating factor, and can be used to price insurance.
The problem here is the fuzzy language. What makes one factor justified, appropriate and necessary and not another? You may have heard the statistic that women have more car accidents than men but that men's accidents tend to more expensive. Does this make the no-claims bonus unlawful?
I think there is a societal aspect to this too. We see higher insurance premiums as somehow punishing the recipient, so we like it that boy racers pay more for car insurance and smokers pay more for life insurance. What we don't like is women paying more for critical illness cover and the elderly being priced out of the travel insurance market. From this point of view it is right that gender should not be used as a rating factor. Actuaries are influenced in this way too. Most if not all would disapprove of skin colour being used as a rating factor, but I would be very surprised if people of different races exhibited identical mortality characteristics.
From previous paragraphs I hope you can see that the people behind insurance pricing do not see their premiums as rewarding or punishing certain behaviour or traits. Also I hope you can see that there are benefits to having an insurance industry that is properly able to distinguish between people and the risks they present.
As with all things in life a balance needs to be struck, and the only question is where we draw the line. Personally I would like it back where it was before this ruling. I certainly don't want to see it moved any further.