Gender Ruling 21 December 2012

Vikesh Gohil contributed to the writing of this blog

To Australian’s “G-day” is a greeting, to us it means something entirely different. As we edge towards G-day, on 21st December, we have a look at what impact the exclusion of gender as a risk factor has on the non-life insurance market.

How did we arrive at this point?

On the 1st March 2011 the European Court of Justice (“ECJ”) concluded that gender should be equalised and there should be no distinction between men and women. The aim of this ruling is to move to equality so that neither men nor women are charged more for the exact same product. The unintended consequence of this is that insurers can no longer use gender when deciding on the premium to charge for insurance policies. Even though it has been statistically shown that gender can influence the likely cost of providing some insurance products, the ECJ ruling seems to have ignored this.

Currently young women experience a much lower car insurance premium than men of the same age. Between the ages of 30-40 the premiums converge and are less dependent on gender, with prices being about the same. Naturally the thought would be that young women will see an increase in their rate and young men will see a decrease, but the increase in the rate for women is not directly offset by a decrease in the rate for men. There are costs involved for the insurers in changing their systems, which needs to be taken into account in the new rating structure. However, there is some evidence to suggest insurers are taking advantage of the situation to bring in extra profit by charging more for the switch than is necessary.

The more reliable data insurers have, the more accurately and easily they can underwrite the risk. So perhaps the exclusion of gender is a step in the journey towards other ways of measuring risk, such as telematics which can measure individual driver behaviour and price accordingly, rather than grouping them into rating factors such as gender. By creating an accurate risk profile for an individual using telematics, insurers can charge a more accurate premium associated with their risks. Although this market does seem to be expanding, less than 1% of car insurance policies use telematics and that will not drastically change before 21 December 2012, especially as not everyone will be keen on having a black box fitted in their car monitoring their every movement!

What’s happened since the ECJ ruling?

Over the last year we collected data from Money Supermarket on a monthly basis for a 25 year old living in London driving a VW Golf. Note there is a gap in the data between August and October 2012 where no quotes were obtained.

The premiums are showing signs that they are slowly narrowing between the genders, with the difference between men’s and women’s premium now being under £400, from over £1,000 just a year ago. This can be clearly seen in the graph below by the black lines:

It has been suggested that insurers may be trying to capitalise on the naivety of individuals that don’t understand the effects of the gender ruling. So they may accept the renewals offered even if they are overpriced.

The cheapest rate we could find in December for women was £1,639 and for men £1,873. The cheapest equalised rate was £1,789, which is £150 more for women and £84 cheaper for men. Whilst this is something of a straw-pole it does show there are signs of equalisation in advance of “G-day”.

Other responses we have noticed are some insurers directly contacting their female policy holders so they can renew their policy now and take advantage of a lower premium for a little longer. Some have gone further and are offering them the opportunity to purchase a policy with a start date of up to 90 days in the future.

What next?

G-day is looming and we shouldn’t forget the impact on other insurance products such as life insurance, critical illness cover and annuities. Arguably, these may affect individuals more than motor insurance as gender can have a much greater impact on the premiums. Whether there will be a surge of young women purchasing car insurance before the 21st December or men purchasing annuities (as they will be better value for them before the change!) is yet to be seen but one thing is for sure – G-day is round the corner and insurers will have to remove gender from their pricing systems whether they like the ruling or not!