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The Actuary The magazine of the Institute & Faculty of Actuaries

ECJ ruling to have far-reaching impact

The European Court of Justice’s ruling on 1 March 2011 that men and women will pay the same car insurance premiums in the future will have wide-ranging consequences on the actuarial profession, as gender is a long-established factor in pricing insurance and other financial products.

Ronnie Bowie, president of the Institute and Faculty of Actuaries, said: “Insurance companies have some tough decisions ahead. They will need to provide convincing evidence to justify any future differences between men and women, between old and young and between the healthy and the unhealthy. Consumers also need to be wary but, as now, there will be better value for those who are prepared to shop around.”

Duncan Anderson, a leading motor insurance actuary, said: “Motor insurance premiums vary by type of person to reflect the different likelihood of accidents and claims. The latest figures from the Confused.com/Towers Watson Car Insurance Price Index show that the average comprehensive premium for men in the UK is £728, compared to £655 for women, a difference of just over 10%. However, for 17-20 year olds, the premium differential is far greater: £2,976 on average for young men and £1,694 for young women, a difference of 75%., The difference reflects the significantly different claims experience between men and women at these ages. If insurers have to immediately stop using gender as a factor in setting car insurance premiums, the effect of combining the claims experience of men with those of women, particularly in younger age groups, would be substantial premium increases for women. On the basis of averaging out the most recent premium index data, 17-20 year old women might anticipate rises of around 40% if insurers equalised rates, with the increases being much higher still if, in the short term, insurers just moved female rates to equal male rates.”

The ruling will set a precedent and likely extend to other areas, such as life insurance. For example, with women typically expected to live longer than men, differences between sexes are especially recognised in mortality. Yet Dave Grimshaw, a senior life insurance actuary, argued the changes might not be that great because both sexes are likely to live till retirement age. He explained: “A 30-year old male non-smoker might currently pay around £8 per month for £150,000 of term-life cover, for example, coverage at a fixed rate of payments for a limited period of time, whereas a female non-smoker might pay between £6 and £7 per month. A gender-neutral premium of £7 to £7.50 per month is unlikely to have huge financial significance for most people. The change is unlikely to affect the popularity of this simple type of life insurance.”

However, where the ruling is expected to have a significant impact is on annuities. Here, the differences in life expectancy between men and women make a real difference. Dave Grimshaw said: “For many individuals, purchasing an annuity is a one-off decision to invest a sizeable sum of money with significant ramifications for their standard of living in retirement. Currently, a man and a woman aged 65 with £100,000 of pension savings to invest may find the man being quoted an annuity of around £500 a year more than the woman. This reflects the insurance company’s expectation to pay the pension for 21 years on average for a man but 24 years for a woman. The ruling could mean that insurers will have to tread a fine line between the risk of losing profit by pricing unisex rates too generously or losing business by pricing too conservatively.”