Striking a balance

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Banning the use of gender-based information when pricing insurance could lead to higher premiums and restricted access for customers. Roger Edwards reports

Industry specialists often point out that women represent an untapped market for protection products and are the key to getting the message across to the largely under-insured UK population.

Swiss Re's estimate that we face a life assurance protection gap of £2 trillion pounds and an income protection (IP) gap of £130bn highlights the importance of persuading people to get the cover they need. And if targeting women with convincing marketing messages helps to close the protection gap, then this is an opportunity all protection companies should grasp.

Most women are aware they are likely to pay a different price for insurance than men. Women have a longer life expectancy - 80 years instead of 75 - and therefore pay less for life cover. However, women tend to pay more for IP and private medical insurance (PMI) due to the risks associated with pregnancy and female-specific illnesses.

Women under 40 may pay more for critical illness (CI) cover than men because they have a greater risk of getting cancer. However, over the age of 40, the cost of CI becomes more expensive for men due to the increased risk of heart disease. Even outside the protection market women pay different rates. Motor insurance, for example, is cheaper because, despite what men think, women are safer drivers.

The ability to price insurance products according to risk is a fundamental principle of insurance. It works best, and is fair, if the price that people have to pay is calculated using the best available information about the risks they face. This brings real advantages for customers in the form of value-for-money products and a competitive industry.

Only a minority of women would consider insurers' using these pricing techniques as a way of discriminating against them. Many recognise there are other factors taken into consideration as well, such as age, health and whether or not they smoke.

EU proposals

However, Anna Diamantopoulou, European commissioner for employment and social affairs, claims that these pricing techniques discriminate against women and is seeking to make these practices illegal. This could have a devastating effect on the insurance industry if it goes ahead.

Having tabled the motion, Diamantopoulou argues that women paying higher premiums for some insurance products is unjust and says it goes against the wider commit-ment of the European Union (EU) to ensure equality between men and women. However, she seems to ignore the fact there are some products that are cheaper for women for exactly the same reasons.

Diamantopoulou also argues that the proposals put forward suggesting women should pay the same prices as men would have no adverse effects on the overall level of insurance prices, or on insurance company profitability.

The proposals have now been finalised and are set to be put before the European parliament and Council of Ministers. If adopted, this would ban the use of gender-based information in insurance. The Association of British Insurers (ABI) is lobbying the EU about the serious effects such legislation could have on the industry, but it seems Diamantopoulou is still sceptical about the arguments that she has heard countering her proposals.

If this legislation becomes law, it means insurers would not be able to charge different rates for women and men. The implications for both are more serious than a perceived inequality of price. Such a move could mean higher prices for everyone, a further barrier to purchase and more people have inadequate cover.

An example of how this might affect the pricing of life cover - a product where women currently pay less than men - can easily be seen. Assuming the current premium for a woman is £20 and £25 for a man, the average premium would be £22.50 - and this is what European legislation would suggest is a fairer premium.

While this may be perceived to be an equal situation, according to Diamantopoulou, in terms of the risk the insurance company is taking, the woman is now over-paying and the man is under-paying. In other words, removing the ability to charge the correct price for the risk means that in this example, women end up subsidising men's life assurance cover. What would be the likely outcome of this scenario?

On the one hand, you could argue that women immediately become a more attractive customer because they are paying more than they need to for cover, making them more profitable. In fact, this legislation would be tantamount to giving insurers legal permission to over charge women for life assurance.

By protecting women from alleged discrimination, Diamantopoulou could possibly open women up to a real form of exploitation. This is because it might become more worthwhile for insurers to try to attract more overpaying female customers - perhaps with targeted marketing campaigns, including incentives to purchase.

On the other hand, men would not be paying enough to cover the risk, which could lead to adverse selection. This is because once men realised they were getting more cover for less money, they would be likely to increase their spend on life assurance since they would, in effect, be subsidised by women.

Hike in prices

Insurers would then have more male clients, a higher likelihood of paying out, but less than the required premium to cover the risk. The only way to protect the bottom line - apart from refusing to cover men - would be to compensate for this heightened risk by increasing prices. Therefore, the price charged in this example could be more for both men and women.

A higher price for everyone means a set of products which are already quite difficult to sell would become even more unattractive. This could increase the amount of financial exclusion in the UK, as the poorer members of society, including many women, would find it more difficult to afford insurance.

So by focussing on the perception that women are being discriminated against by insurance companies, Diamantopoulou could create a scenario where the whole of society - including the women she is trying to protect - are more disadvantaged as a result.

The notion that insurance companies are discriminating against women is nonsense. In fact, the UK's 1975 Sex Discrimination Act made specific provision for risk pricing of insurance products as long as the information used to support the pricing was objective and relevant.

Risk pricing is fair. Insurance exists to let people manage their risks and prices should fairly reflect the different levels of risk that different customers face. This is not discrimination - it is how insurance companies reflect the realities of the risks they cover. Let us hope the combined weight of opinion from the ABI and UK industry, as well as lobbying by the Government, will mean this piece of legislation will not see light of day.

But if it does happen, where could things go from there? Perhaps other people who do not understand how insurance works will suggest other elements of risk pricing are unfair and represent discrimination. How long before someone suggests using health as a means of determining price is discrimination?

Using height and weight could be deemed to be discriminating against people who are overweight. The ultimate end game in such a politically correct scenario would be a world where everyone regardless of age, gender or health pays exactly the same for insurance. But this is not a viable proposition.

Women represent an untapped market for protection, and providers should be doing more to give IFAs the marketing material to increase sales to women. This sort of targeting will take us a few steps closer to reducing the huge protection gap that threatens the financial security of the nation.

What we do not need is the fair way in which we price our products being changed using the false premise that it is discriminatory, because then the insurer's task, far from becoming easier, will become even more difficult.

Roger Edwards is products director at Bright Grey

COVER notes

• Pricing insurance products according to the risk is fundamental to the principal of insurance.

• The ABI is currently lobbying the EU about the proposals to ban the use of gender-based information in insurance.

• If the proposals go ahead, it could lead to increased costs and additional inadequate cover.

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