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The Actuary The magazine of the Institute & Faculty of Actuaries

Avoiding sex discrimination in insurance premiums

EU treaty referendum or not, the EU
continues to have a very large say in
the way we live our lives and run
our businesses. EU Council Directive
2004/113/EC (1) sets out requirements for equal
treatment between men and women in the
access to and the supply of goods and services,
particularly in the field of insurance.
The Directive prohibits, in principle, the use
of sex as a criterion in the calculation of premiums
and benefits for the purposes of insurance
and related financial services in all new
contracts concluded after 21 December 2007.
However, Member States may decide to permit
such practices where sex is a determining factor
in the assessment of risk based on relevant
and accurate actuarial and statistical data available
to the public.
The UK government is implementing the
directive by means of The Sex Discrimination
Act 1975 (Amendment) Regulations 2007
(SDA2007) (2), which will come into force on
21 December 2007. The government has made
use of the option under the directive to allow
insurers to set differential premium rates for
men and women as long as there is publicly
available data to support the differences in premiums
and that such differences in premiums
are proportionate to the differences in the
underlying data. The SDA2007 sets the requirements
for data being publicly available by reference
to guidance issued by the Treasury.
Insurers cannot get around the rules by setting
the same premiums but for different levels
of benefits.
In June the Treasury issued a draft of the Guidance
referred to in SDA2007 for consultation.
This was entitled ‘The publication of data
associated with the use of gender in the assessment
of insurance risks.’ (3) The deadline for
responses is 3 September 2007.
The Treasury accepts that there are many factors
that influence premiums, of which sex is
just one. They therefore point out that there is
unlikely to be a direct relationship between the
data required to be published under SDA2007
and the premiums charged. Nonetheless they
would expect there to be a close relationship.
The draft Guidance contains the following
general requirements regarding data used in setting
differential premium rates:
? it must be published in a form that is intelligible
to someone who is not an insurance
expert and must use plain English;
? it must be presented in the form of a table,
graph or chart accompanied by relevant explanations.
Technical terms must be explained;
? the publication of the data must include the
source and period to which it relates;
? insurers may publish their own data or can
combine with others. They can do this using
a third party, if they want, as long as they
comply with competition law;
? although it is not subject to external audit it
must be signed off by an officer of the insurer;
? the requirement to publish can be fulfilled
by providing a hard copy, free of charge, on
request, or by publication on the internet;
? for existing products the data must be published
by 30 June 2008. In the case of new
products, the data used must be published
no later than six months after the first contract
is written; and
? it must be reviewed at least every two years
or when significant changes are made.
The draft Guidance also includes minimum
requirements for the specific types of product
shown in table 1.
Justifiable discrimination?
As a profession we would not support any
unjustified discrimination but UK insurers have
many years’ worth of data showing that statistically
there is a genuine difference in the cost
of claims between males and females for a variety
of insurance products. It has consistently
been argued and generally accepted that setting
different premium rates for men and women is
a justifiable form of discrimination.
In a debate in the House of Lords on
6 June 2007 Lord Skelmersdale opposed the
idea of outlawing differential annuity rates
‘because life is unfair for women. Not only, as
the noble Baroness [Howe of Idlicote” said, do
they live longer, but they also give birth, as my
daughter-in-law is doing as we speak.’ (4)
The same noble Lord went on to justify differential
rates for annuities by reference to
motor insurance: ‘If a car insurer, for example,
can offer a preferential insurance rate to young
women because of their statistical likelihood to
be safer drivers than young men I must admit
that that statistic surprises me, but be that as it
may I do not see how we can avoid similar differentiation
for the elderly.’ (4)
Following this debate Baroness Howe dropped
her motion in favour of unisex annuity rates.
Implications for insurers
Most insurers should already have the necessary
data to justify setting different ‘his and her’ premium
rates either directly or via their reinsurers. Although they may not be too keen to publish
data, they will have to publish data themselves
or include their data within data
published by a third party. If they do not publish
their data in some form they will have to
use unisex rates. The presence of unisex and differentiated
premium rates could provide opportunities
for anti-selection by policyholders.
Where an insurer sees their data as part of their
intellectual property and hence part of their
competitive advantage, they will want to protect
this advantage. They will therefore have
to work within the Treasury’s requirements to
ensure that while publishing the data they do so
in a manner that gives away as little as possible.
If an insurer chooses to club together with
some of its peers to publish combined data,
especially if this is via a third party that respects
the confidentiality of the data-providers, the
effect of publication may be fairly limited. The
disadvantages of committing to publish as part
of a group might include the burden of having
to meet strict deadlines, inflexibility of format,
and losing control over who has the data, even
if it is summarised. Third parties that may be
able to provide this service would include the
ABI and CMI.
As regards private medical insurance, which
is primarily a family unit purchase where both
males and females are often included in the
same risk unit, the risk differentiation is implicit
rather than explicit and generally translates into
unisex rates. The newer market entrants may
find it difficult to continue to offer genderspecific
premium rates if the more established
insurers with unisex rates decline to publish
their gender-specific data. There may be questions
about whether such barriers to entry contravene
other EU directives.
With respect to annuity business not only do
premium rates depend on past and current
experience; expectations of future mortality
improvements are also very important. Currently
the draft Guidance does not require the
publication of mortality improvement factors
used by insurers.
What will happen in practice?
Apart from the additional costs of collating and
publishing the necessary data, it is not clear what
impact the directive will have on premiums.
Surprisingly for a class such as motor insurance,
not all EU countries differentiate premiums
by sex. The UK seems to have one of the
highest levels of differentiation. In the UK,
policyholders have more or less accepted that
men will, in general, pay more than women
drivers due to the average cost of claims being
higher for men than women. Similarly there is
little likelihood of having to set unisex annuity
and life insurance premiums.
The proposed minimum guidelines for each
class of business appear to be broad enough to
allow insurers to carry on as at present as long
as the data are published and kept up to date.
With only summarised data available, policyholders
and consumer and other lobbying
groups may not in the end be much the wiser
about how the data translates into their individual
premiums. Nonetheless insurers need to
be ready to respond to requests for data and to
questions about how it has been used, as the
Guidance points out that ‘Individual policyholders
wishing to discuss the relationship with
their own premiums and benefits should contact
their insurer’ (section 4.15). If a policyholder
on seeing the information decides that
he or she has been discriminated against and
decides to take action it is likely to cost insurers
more in legal fees than the differential in that
person’s premium rates. However, settling out
of court could have implications under the
treating customer fairly requirements and the
insurer might have to revise their premium
rates for other policyholders.
It will be interesting to see how consumer and
other political organisations react to the Treasury’s
draft Guidance and if there will be pressure
from these quarters to restrict insurers’
pricing flexibility or to require more detailed
The actuarial profession has set up a working
party, chaired by Camilla Bennett, to look into
this issue and respond to the draft Guidance.
The working party would be happy to receive
comments from members of the profession.
(1)EU Council Directive 2004/113/EC:
(2)The Sex Discrimination Act 1975
(Amendment) Regulations 2007:
(3)Treasury Guidance:
(4) Lords Hansard 6 June 2007 column 1213