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The Actuary The magazine of the Institute & Faculty of Actuaries

Insurers bid farewell to the gender rating factor

Insurers will no longer be able to differentiate premiums by gender as a result of a judgment of the European Court of Justice (ECJ). The change will take effect from 21 December 2012. Gender is currently one of the rating factors used to price risks covered by many different types of insurance policies. In some products it is the second-most important factor after age. Current UK gender legislation (and the EU Gender Directive) allows the use of gender as a rating factor when based on actuarial and statistical data on gender-related risk differences but the ECJ has ruled that this does not comply with the EU Treaty.

An Association of British Insurers (ABI) research paper looked at the impact of this legislation on policyholders, insurers and the insurance market. One possibility is that insurers may change their marketing strategy to target the gender with the lower risk cost, thus paying more attention to the mix of business. Consumers in the most affected group may change their actions by opting for lower forms of cover. The suggested impact on policyholders is as follows, split by product:

Motor Insurance
Female drivers under the age of 25 are on average much safer drivers than men of the same age. In this age group, premiums for women will increase. Men may drive more powerful cars as their insurance premiums fall.

Currently, men receive a better single life pension income than women, due to their shorter average life expectancy. Women are expected to gain from the changes as their pension income increases whereas men find their pension income falls.

It is compulsory to take some defined contribution pension pots as an annuity, therefore this prevents men from dropping out of the market. In other areas such as personal pensions there may be greater reluctance by men to annuitise when offered the choice of income drawdown instead. However, the charges on income drawdown policies may militate against this option for those with smaller funds.

Life cover
Life cover rates for women are forecast to rise whereas rates for men would fall. This is because women have longer average life expectancy. Insurers have considered using proxies such as body mass index for pricing. Others have considered changing the product design to variable rates or shorterterm products.

Private medical insurance (PMI)
The majority of private medical insurers in the market do not currently price by gender. For those providers who do price by gender, the largest expected differences are in the 35 to 50 age group, where premiums are currently higher for women than for men. The opposite effect is observed in women above 60, where their premiums are cheaper than for men.

Removing gender from pricing models could lead to a fall in the model’s accuracy. However, PMI policies are annually reviewable and the possible changes to premium lower this risk.