New gender rules could see insurance costs rocket
The European Court of Justice is expected to reach a decision tomorrow on whether the use of gender in setting insurance rates is unlawful.
This could have a profound effect on certain areas of the industry, such as motor insurance, annuities and life cover where gender is one of the key contributing factors when analysing risk.
Critics argue that gender plays a real part in assessing risk with some types of insurance and that this ruling could skew the cost of premiums unfairly.
"It's absolutely ridiculous," says Peter Chadborn, co–founder of independent financial adviser Plan Money. "If it's actually proven that with some types of insurance, gender makes a genuine difference to the level of risk, then why shouldn't the insurers be able to differentiate?"
If the court does rule that gender cannot be used to assess risk, it's not known whether insurers will have to make changes immediately, or if there will be a three–year interim period before the decision is enforced.
How will the changes affect you?
Life and health insurance
Peter Chadborn says the decision would have a profound effect on the pricing of protection as statistics show women typically live longer than men, while men are less likely to get sick and need large stretches of time off work.
He explains: "Life cover is generally pound for pound more expensive for males than for females so in this instance the cost of life cover for females will have to rise."
This uncertainty could cause insurers to pump up their premiums in preparation. While it's unlikely that current policyholders will see their prices go up, there is concern that new customers will face inflated costs in light of the impending decision.
"What we understand is that there could be a three-year lead period before things have to change but there is genuine concern that it could be immediate," says Chadborn. He is wary that the threat of a sudden ruling will jolt insurers into putting up prices sooner rather than later.
"I'm not saying everyone should suddenly take out policies but if you need to make a decision about some cover in the next few months you'd be wise to buy it now."
Chadborn has sent out an open letter to his clients warning them of the potential changes. He says that although the ruling could be immediate, if customers have already registered and applied for insurance then it's more likely that the insurer will honour their original quote.
It's commonly accepted that male drivers pay more than their female counterparts, especially younger and therefore 'riskier' male drivers. For example the average car insurance policy costs £2,750 for a man in the 17–22 age bracket, according to AA statistics compared to £1,682 for a woman in the same age range.
"Demographic factors such as gender and age may be beyond individuals' control but they have a serious impact on behaviour and the likelihood of being a motorist causing an accident," explains John O'Roarke, managing director of LV= car insurance.
Simon Douglas, director of AA insurance says that insurers will need more of a margin to cover the risk of losses if gender cannot be taken into account. "If insurers are not allowed to use such an important risk factor as gender, there is an increased risk that premiums won't cover claim costs and they will need to increase prices in aggregate to compensate for the additional risk."
He expects premiums to increase "substantially" for women while men could be rewarded with lower premiums.
Car insurer Sheila's Wheels, famed for appealing to the female market unsurprisingly doesn't welcome the possible ruling; however, spokesperson Adrian Webb says that the insurers may be less affected than expected.
"We hope the ruling doesn't go through but ironically if it does, because Sheila's Wheels insures so few men compared to women our customers' premiums won't go up so much." Because there are more women insured through the insurers, less adjustment will be needed, he added.
Women typically get lower annuity incomes than men. This is because they tend to live longer which means their pension needs to be stretched further. The result of the EC directive would mean that men would see their annuity payouts slashed to fall in line with a unisex policy.
"The proposed changes to UK annuity underwriting should be a concern to anyone currently using pensions to save for their retirement income," warns Gemma Goodman, head of operations at Alexander Forbes Annuity Bureau.
Goodman also is reluctant to believe that women will profit from the situation with higher annuity rates because most annuities are still purchased by men.
"Statistically, most annuities are purchase by men who provide a spouses benefit for their partner. By restricting the underwriting methods of insurance companies there is a very real risk that we are disadvantaging a great many people."
So what should those who are about to take out an annuity do?
Male retirees with pension pots could be tempted to act quickly to secure their annuity income before the European Court announces its ruling. While this makes sense if you are about to purchase your annuity and have thought through your options, there is a danger customers could make a rushed decision and purchase an annuity without fully considering the different options available to them.
Conversely, from a woman's point of view, it would seem to make sense to wait and see what happens with the court's ruling before purchasing an annuity.
Given that annuity rates continue to decline, Emma Banks, spokesperson for LV= says that regardless of your gender the most important thing to do is to put your funds in the right product. "Annuities are long term investments and purchase decisions should not be taken lightly. The ruling will have a serious impact on future annuity rates and we urge all those approaching retirement to seek professional advice before taking any pension income."
Generally thought of as being interchangeable with life assurance, but isn’t. Life insurance insures you for a specific period of time, at a premium fixed by your age, health and the amount the life is insured for. If you die while the policy is in force, the insurance company pays the claim. However, if you survive to the end of the term or cease paying the premiums, the policy is finished and has no remaining value whatsoever as it only has any value if you have a claim. For this reason, life insurance is much cheaper than life assurance (also called whole of life).
In exchange for any lump sum – usually your pension fund – an annuity is “bought” from an insurance company and provides an income for life. When you die, the income stops. Annuity rates fluctuate daily and depend on your sex (although from 21 December 2012 insurers will no longer be able to use gender as a factor when calculating annuities), age, health and a number of other factors, so you have to pick the right one and, once bought, its terms cannot be altered, so seek financial advice.