Age ain't nothing but a number ...

The insurance industry has had a raw deal from new rules of late. The European Court of Justice’s gender ruling, for example, will prevent insurers from using gender to price business from the end of this year.

Therefore, the industry should be pleased that the UK government has decided not to take away another of its underwriting powers: the ability to price based on the age of the insured.

Home secretary Theresa May has confirmed that the age discrimination laws contained in the Equality Act will not apply to insurers, a decision that has prompted complaints from Age UK and the National Pensioners Convention.

Reflecting the risk

It is understandable why certain groups would want to restrict insurers’ ability to base their prices on criteria such as age. The average member of the public would find it abhorrent, for example, if a seller of a particular commodity charged one age group more than another. And rightly so. Charging people of a particular age more for insurance looks like discrimination.

But with insurance, this is different. The product insurers are selling is not a commodity, and the nature of the product means the pricing has to reflect the risk the insurer is assuming. Therefore, if one group of the population is a greater source of risk, it is common sense that this group should attract a higher premium.

The detractors of this decision also miss a point. While insurers can sometimes charge older people more for certain types of insurance – one notable example being travel – they may get lower car insurance premiums than younger drivers because they are a perceived to be less of a risk. If anyone has a right to complain about discriminatory premiums, it is arguably young drivers.

In short, age-based premiums, just like gender-based ones, can benefit certain groups for certain products just as it can disadvantage them. Women have, in general, enjoyed cheaper motor premiums because of their safer driving record.

Getting the balance right

Using criteria such as age and gender is arguably a crude underwriting method. But it is important to remember that they are two items on a long list of other considerations insurers use when pricing business.

Arguably underwriting should be more tailored to the individual policyholder. However, this would mean more policyholder data, creating additional cost (and thus higher premiums), and also longer forms to fill in – both of which are a turn-off for customers.

Perhaps consumers should be more realistic about what to expect from insurers but, then again, maybe insurers should do a better job of explaining how the business works.

If people understood more about how their premium was calculated, they may not be as willing to cry foul when such a decision goes insurers’ way.