Life after the gender ruling

Few legal judgments have had such profound ramifications for the industry as last week’s ruling by the European Court of Justice that insurance companies can no longer use gender as a factor when pricing insurance contracts.

Whatever the rights and wrongs of the European court’s verdict, it is one that the insuance world is going to have to learn to live with – the ECJ’s judgments cannot be appealed. So what, then, are the consequences of this landmark ruling?

1. Time on our side

The industry had been bracing itself for immediate implementation of the ECJ’s ruling. Many feared the court would follow the lead of advocate-general Juliane Kokott that discriminatory pricing be banned with immediate effect, or even retrospectively.

There is therefore relief that the court has given the industry until late December 2012 to bring the ruling into force. “We’re disappointed, but we’ve been preparing ourselves for this decision,” managing director of intermediary and partnership sales for AXA personal lines, Mike Keating, says. “There’s some relief that it’s not retrospective and that we have until December 2012, so we have the time to make the necessary changes.”

2. Bigger costs in store

But even with this stay of execution, the industry faces substantial costs as a result of the major changes it will have to make to IT systems and underwriting processes, such as repricing contracts and reprinting documents.

The ABI’s research into the potential impact of the ruling says: “These are mainly one-off costs, but can be significant and, in a competitive market, would be passed on to consumers in the form of higher prices.”

3. Re-assessing risk

With gender out of the equation, insurers must now look at other factors for determining risk. Grant Thornton general insurance actuarial practice leader Simon Sheaf says: “People need to be looking at re-examining rating factors or looking at possible alternative rating factors.

“There are some obvious ones, like the make and model of car. They might want to look at other data to do with lifestyle or occupation that many insurers are not capturing.” He gives playing rugby as an example of one lifestyle benchmark that could act as a proxy for gender, because it is a mainly male sport.

The ABI’s own research on the implications of the gender ban explores how insurers might use proxies for gender. But it warns that insurers should be careful about using proxies like shoe size or height. While such factors may be a good way of identifying female drivers, they would probably fall foul of the UK’s own equality legislation on the grounds of being indirect discrimination, particularly given that the size of somebody’s shoe is unlikely to be linked to their likelihood of having an accident.

It adds that even existing and more robust criteria, like occupation, might be open to similar challenge if those employed in a mostly female occupation, such as nursing, were found to be paying substantially lower premiums than the mostly male blue-collar workers.

4. Getting the data right

Better information will be the key to success in the post-ECJ ruling world, many believe. Towers Watson global leader for property and casualty pricing and product management Duncan Anderson argues that the range and quality of available information is improving all the time.

“In recent years, a much broader range of third-party and public data has become available which, if applied in pricing models, can improve pricing performance,” Anderson says. “For car insurers, enhancing the approach to vehicle classification, for example, is likely to contribute to a better picture of probable claims in the absence of gender as a factor.”

KPMG’s head of general insurance, Mark Winlow, says: “Those that already capture diverse information as part of a quotation, or have alternative customer data from loyalty cards or memberships, are likely to quickly maximise the benefit.”

Sheaf warns that the smaller insurers without access to this kind of high-quality data could fall by the wayside. He says: “Smaller insurers don’t have the level of resources that some of the bigger players have to devote to this, and this could put some at a disadvantage.”

Another problem is that the ruling replaces a relatively simple to harvest benchmark – gender – with one based on information that is less easy to collect. According to the insurance companies interviewed by ABI’s researchers Oxera, it can take years before sufficient statistical evidence can be gathered in order to price risks accordingly.

Another concern flagged up by the ABI is that insurers may have to become more intrusive to identify the information they need. Most people do not resent revealing their gender, but are likely to be more reluctant to surrender other information.

5. Technology

The ECJ ruling has sparked renewed interest in ‘telematics’ or driver-tracking technology. Such systems use information provided by a ‘black box’ located in the car, giving insurers details on how and when their customers drive.

The technology’s advocates argue that telematics negates the need for much of the customer-based information currently captured when policies are being issued. Instead of an annual renewal, payments would be based on ‘pay as you drive’ (PAYD) monthly statements determined by that month’s driving habits.

For more responsible younger female drivers in particular, there will be an increasingly clear financial incentive in taking advantage of PAYD technology, many suggest.

PricewaterhouseCoopers actuarial practice director Mohammed Khan says: “Insurers are now likely to move towards looking at how drivers actually use their cars when calculating premiums. This could lead to a steep uptake in pay-as-you-drive schemes, which charge you for the distance you drive, when you drive and potentially how you drive.

“This could potentially benefit women drivers who generally drive fewer miles than men and will lose out from the ruling.”

KPMG’s Chapman says: “If there comes a point that to be a young male driver you either have to pay £4,000-£5,000 because there are very few players on the market or pay £50 to put a box in the car, you’re more likely to say I’ll take the telematics.”

6. Clever marketing

The female-only motor insurers like Sheila’s Wheels have been unexpectedly bullish about the ECJ’s ruling. They say that the game is not up and that, while they will have to offer their products to men, their overtly female friendly marketing strategies will act as sufficient disincentive for men to sign up.

The ABI’s report suggests that more mainstream insurers will be keen to tailor their marketing strategies to attract a greater proportion of the relatively, low-risk female driver market, such as by only advertising in women’s magazines. Affinity deals could be another mechanism.

7. Solvency II

December 2012 will be a big month for the insurance industry, and an especially busy one for actuaries, as both the ECJ ruling and the Solvency II directive come into force. Where insurers are unable to accurately predict their risk profile, Solvency II will require them to set aside substantial additional capital.

Grant Thornton’s Sheaf says: “The new Solvency II capital regime creates higher capital requirements where risk factors have been ignored. Under Solvency II, the more uncertainty you have, the more capital you are required to hold.”

If insurers are unable to use the information at their disposal to pin down the level of risk on their books through better data mining, Solvency II means they could be exposed to substantial additional costs.

8. An exit from the young driver market?

The ECJ ruling looks like good news for young male drivers, who can expect to see a fall in the level of their premiums. However, with some in the insurance industry talking about insurance companies pulling out of the youth market altogether, this fall could provide short-term relief.

At the moment, insurers can shield themselves against some of the cost risks inherent in covering young male drivers by setting prices for this group accordingly. But if insurers are prohibited from using gender in the underwriting decision, they may remove the young driver offer across the board. A less extreme response would be for insurers to impose certain other restrictions on the policy, such as requiring a higher excess for all young drivers.

ABI research says: “Instead of setting higher prices to deal with the pricing risks, insurers may respond to the removal of a relevant risk-rating factor by opting not to cover the risk at all or adjusting the design of the product such that the pricing risks for the insurer are more limited.”

9. Age could be the next battleground

Now that the ECJ has accepted that insurers cannot discriminate on the grounds of gender, many are concerned that a ban on premium differentiation based on age will soon follow.

The grounds for such a challenge are shaky, for now. The case taken by the Belgian charity to the court, which sparked last week’s ruling, was grounded in an EU directive on gender discrimination. As Beachcroft partner Mathew Rutter says, no directive provides a hook for an age discrimination-related challenge.

Allianz Retail technical director Tom Moss says: “I can’t see age being next at the moment. It has already been stated that age is not in the same category as gender. Before the case went to the ECJ, the EU advocate-general recommended that this line of thinking should not extend to age.

“Age is one of the most significant factors in motor premiums, based purely on evidence. There is a clear statistical correlation between age and claims experience; as a general rule, younger drivers will have more claims that older drivers.”

But this situation looks set to change this summer when the EU’s new directive on age and disability comes into force. The existing draft directive contains a derogation, or get-out clause, allowing insurers to differentiate pricing levels on age. Following the ECJ’s ruling, that position could be under threat.

PwC’s Khan says: “The concern now for insurers is whether age will be next on the ECJ’s agenda. Any ruling against discriminating an insurance premium based on age would have a far greater impact on consumers and the insurance industry than [last week’s] ruling.”

KPMG’s Winlow agrees: “This is a more significant factor than gender, as age is used much more widely to differentiate risks. For example, a young male driver can easily be charged 1,000%-2,000% more than the same man when he reaches 50. In anticipation of further restrictions, insurers are already looking to alternative methods to understand their customers and risk better.”

10. On the positive side …

But there could be a silver lining in last week’s ruling. Motor insurers have had serious trouble turning a profit in recent years. Some, like rating agency Fitch and Admiral chairman Henry Engelhardt, claim that the ECJ’s decision will provide an opportunity for insurers to smuggle in increased premiums.

Fitch’s note says: “For the motor insurance industry as a whole, the ruling could be seen as good news, as it will provide insurers with the opportunity to raise prices in a difficult market.” IT