With the EU Gender Directive now UK law and more changes anticipated, Nick Starling explores the potential impact of anti-age discrimination legislation on health and protection insurance.
Anti-discrimination legislation is big business. Following the EU Gender Directive, which is now UK law, more legislation is on the horizon to prohibit discrimination on the basis of age, disability, sexual orientation, race, religion and belief. Of these, the first is likely to have the most significant impact on insurance.
The UK insurance industry does not support or practice unfair discrimination. However, on gender, it has successfully argued that there is sound data to support differing treatments. It will do the same with regard to age.
Two significant pieces of legislation are expected in this area. In the UK, the Equalities Bill will introduce requirements and restrictions on insurers’ use of age as an underwriting factor through secondary legislation. The Government intends to consult on detailed proposals
After the scope of potential legislation has been clearly defined, the Government is expected to run a full impact assessment to estimate how the legislation will affect the insurance industry. In parallel, though with no confirmed timeline, the European Commission has published a draft Equal Treatment Directive that aims to ensure consumers are not discriminated against in the provision of goods and services because of age, disability, sexual orientation, race, religion or belief.
The insurance industry is opposed to unjustifiable age discrimination – many insurers serve older people and some specialise in this market. Some older customers do not always know how to find appropriate cover and the industry needs to respond to that challenge. However, it believes that treating customers differently on the basis of age is justifiable in insurance because:
- It helps ensure that all customers pay a fair price for the risk they pose.
- It can act as a proxy for other risks, keeping the underwriting process simple. The cost of insurance low and making the purchasing process less intrusive for consumers than other approaches.
- It encourages insurers to develop innovative products.
The Association of British Insurers (ABI) is concerned legislation restricting insurers’ use of age in pricing products could have negative consequences for all consumers, including the elderly. The Government has indicated that any legislation will allow financial services providers to use age as a factor in risk-based pricing. However, this does not mean there are no issues to face.
The legislation has potentially serious impacts on insurers’ business. In particular, two practices under close scrutiny are the use of wide age bands and age limits. The wide age bands that some argue are unfair are those that lead to premium rises that customers find hard to reconcile such as when the customer advances in age by just one year. This practice ensures that straightforward cover can be offered at affordable prices to a wide range of customers, giving easy access to valuable products such as travel insurance. Here, it needs to be explained clearly to customers that they have had the benefit of being on much lower rates for the previous 20 or more years.
However, legislation that sought to ban age limits would be much more significant. Some products would simply not be viable without age limits; if the product could be purchased by customers of any age, typical premiums would increase so significantly that they would become unaffordable for many people.
Health cash plans are an example of this. These pay cash sums towards the cost of a wide range of treatments. Age limits on who can buy such plans are necessary to keep the cost of the product low. Policyholders are often on low incomes so they benefit from paying premiums that remain the same throughout the life of a policy, helping to fund claims in later life. If some customers were able to purchase health cash plans much later in life, they would pay premiums for a much shorter period and, due to more costly and more frequent claims, push premiums up for everyone.
Inner age limits do not affect the entire policy, but ring-fence parts. For example, with a critical illness policy that provides cover up to the age of 90 years there may be a waiver of premium limit up to the age of 60 years.
The Equality Bill will be a landmark piece of legislation with potentially significant implications for the insurance industry and its customers. The ABI has already begun to engage with the Government to minimise any unintended impacts on its members’ business, including implementation costs involved in such things as publication of data. It is working hard with the Government to ensure any legislative requirements are proportionate rather than burdensome on insurance business and, above all, are in the interests of all insurance customers.
Nick Starling is director of general insurance and health at the Association of British Insurers