The impact of a ban on the use of gender in insurance on consumers. Launch of report 7 December 2011 Reinder van Dijk, Managing Consultant

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1 The impact of a ban on the use of gender in insurance on consumers Launch of report 7 December 2011 Reinder van Dijk, Managing Consultant

2 I. European study conducted by Oxera 2

3 1. Objectives of the study The economic and independent study of the potential impact of a ban on gender-based pricing for insurance products (life and nonlife) on European consumers was commissioned by the German insurance association to achieve a better understanding of the potential consequences by: assessing the potential impact of the ban on consumers providing quantitative estimates of the impact on insurance premiums and benefits considering wider social consequences 3

4 2. Background of the study The EU Gender Directive of December 13th 2004 (Council Directive 2004 / 113 / EC) provides for equal treatment between men and women in the access and supply of goods and services. The Directive contains an exemption allowing member states to permit the use of gender in the calculation of premiums and benefits. On March 1st 2011, however, the European Court of Justice (ECJ) ruled that this time-unlimited opt-out provision of the EU Gender Directive is invalid as of December 21st 2012 ( Test-Achats ruling ). 4

5 II. Men and women are different 5

6 Men and women are different Statistically, women live longer and cause fewer car accidents. Gender is therefore used in the pricing of insurance products that cover risks which differ by gender namely, mortality risk, morbidity risk, and accident risk. The study covers three of the main products where such differentiation applies in the European insurance sector: pension annuities which convert pension funds into a regular stream of payments from a given age over the remaining life of the policy-holder term life insurance which provides financial protection to beneficiaries in the event of death of the insured person, as the insurer pays a lump sum of money if the insured person dies during the policy term in return for a stipulated premium paid at regular intervals motor insurance which, for this report, refers to motor third-party liability (MTPL) insurance covering the third-party liability risk associated with the insured car being involved in a traffic accident 6

7 Why risk-based insurance pricing benefits consumers Like all companies, insurance companies set the prices for their products to reflect the costs of providing those products. The cost of providing insurance products is driven primarily by the amount of claims paid by insurance companies for those products. Consequently, the cost of supplying an insurance product to an individual is determined primarily by their likelihood of claiming and the likely amount of any claim made. Gender is one of the factors that has long been used by insurance companies around the world to estimate the likely claims made by individuals buying insurance products. Insurance premiums are based on the risk insured against, including the probability of a claim being made against the policy and the likely costs of that claim. Risk-based pricing means that insurance premiums are cost-reflective in each risk pool. Cost-reflective pricing is efficient from an economic point of view as they encourage each risk group to purchase their optimal insurance cover. 7

8 Example: Gender differentiation in motor insurance In most European countries, young women currently pay less for motor insurance cover as they have fewer car accidents on average than young men do. 8

9 Example: Gender differentiation in motor insurance Motor insurance premiums in Germany by gender and age Source: Oxera analysis of premiums data from a German price comparison website ( 9

10 Example: Gender differentiation in motor insurance Motor insurance claims in Germany by gender and age Source: GDV 10

11 Differences in life expectancy are forecast to persist On average, insurance actuaries expect the difference in male and female life expectancy in Europe to persist in the future. Thus, there will continue to be a difference in life expectancy for new customers of life products and hence with gender based pricing, premiums will better reflect the personal risk of each insured individual than in the case of a single unisex premium. 11

12 Differences in life expectancy are forecast to persist Life expectancy of 65 year olds by gender and age in France Source: Oxera analysis of TGH05 and TGF05 actuary mortality tables 12

13 Example: Impact on premiums for pension annuity products The net present value (NPV) of expected future benefits from life products, such as pension annuities, is currently very similar for women and men with genderbased pricing. But with unisex pricing, differences in life expectancy will mean that the NPV of a future expected pension income stream will be higher for women than for men. 13

14 Example: Impact on premiums for pension annuity products NPV of expected lifetime benefits ( ) for pension annuities in the Netherlands Source: Oxera analysis 14

15 Example: Impact on premiums for term life insurance With unisex pricing, there would be large differences between the expected lifetime benefits from term life insurance policies for men and women, as men have a higher mortality risk for any given ten year period than women. 15

16 Example: Impact on premiums for term life insurance Ratio of expected benefits relative to premiums for term life insurance in Germany Source: Oxera analysis 16

17 What happens without risk-based pricing If insurers do not differentiate between different groups of individuals who have different risk levels, then economic efficiency can be lost through adverse selection and moral hazard. adverse selection, which occurs if a uniform premium deters the low-risk group from buying insurance, while attracting more of the highrisk group. Setting premiums separately for the two groups leads to insurance adoption which is closer to an economically optimal level moral hazard, which arises when insurance results in customers changing their risk behaviour. For example, if a uniform motor insurance premium for young drivers makes insurance for fast cars more affordable for an individual, it may lead to a change in risk-taking behaviour while driving 17

18 What happens without risk-based pricing Source: Oxera 18

19 III. Impact on consumers 19

20 Winners and losers of unisex pricing of insurance products 1 redistribution effects 2 additional costs 3 wider social consequences 20

21 Winners and losers of unisex pricing of insurance products Redistribution effects suggest that unisex pricing could result in significant increases in premiums for men buying pension annuities, for all women buying life insurance and for young women buying motor insurance. Based on the data available for selected countries: men (aged 65) could see a reduction in pension income from pension annuities of around 5% or more on average (which is equivalent to an increase in insurance premiums) women (aged 40) could see life insurance premiums rise by around 30% or more on average young women (aged 20) could see motor insurance premiums rise by 11% or more on average 21

22 Example: Impact on premiums of pension annuities Men lose out Statistically, women have greater life expectancy than men. In the context of pension annuities, longevity is the risk that matters. In other words, women represent the higher-risk group. Thus, the firstorder redistribution impact of banning the use of gender in annuity pricing is that men would receive a lower annuity payment for a given pension pot. Currently, men pay less for a monthly pension as their life expectancy is shorter. With a single unisex premium rate, men could need to pay around 6% more for the same monthly pension. 22

23 Example: Impact on premiums of pension annuities Redistribution of pension annuity cost with unisex pricing Source: Oxera analysis, for a pensioner aged 65 23

24 Example: Impact on premiums of term life insurance Women lose out Statistically, men have a higher probability of death than women, for any given age. Thus, for the purposes of term life insurance pricing, men are the higher-risk group. The first-order impact on life insurance of a unisex pricing requirement would be that women pay more and men pay less, depending on the gender mix in the portfolio. Currently, women pay less for term life insurance cover as their mortality rate is lower. With a single unisex premium rate, women could pay around 30% more for term life insurance. 24

25 Example: Impact on premiums of term life insurance Redistribution of life insurance premiums with unisex pricing Source: Oxera analysis, for a 40 year old customer 25

26 Example: Impact on premiums for motor insurance 1 young women currently pay less for motor insurance cover as they have fewer car accidents on average than young men do 2 with a single unisex price, young women could pay around 10% more for motor insurance 26

27 Example: Impact on premiums for motor insurance Redistribution of motor insurance premiums with unisex pricing Source: Oxera analysis, for young people aged 20 27

28 Additional costs Additional costs could arise from insurers having to apply a gender mix risk premium due to the risk of attracting the higher-risk gender group. A ban on the use of gender could also cause additional sales / marketing costs. Any additional costs incurred by insurers are likely to be passed on to consumers. In countries that have introduced unisex pricing for motor insurance products, premiums for young drivers appear to be high compared to the risk profile for young drivers, relative to older drivers. On this basis, young drivers seem to be paying more on average than in other countries. 28

29 Consequences: Unisex premiums are likely to be higher than gender-based premiums Example: Empirical experiences for Motor insurance Differences in motor insurance premiums for drivers aged 20 relative to drivers aged 40 in selected countries Source: Oxera analysis, for selected EU countries 29

30 Consequences: Unisex pricing could discourage uptake of private provision for old age Examples: Term Life Insurance and Pension Annuities The problem of adverse selection is potentially great for life insurance and pension annuities. Unisex pricing could have a major impact on incentives for consumers to invest in providing for themselves and their families. As a consequence, policies to ensure that people save for old age could unintentionally be put at risk by unisex pricing, threatening to increase old age poverty in the future. 30

31 Consequences: Unisex pricing could discourage uptake of private provision for old age Women, who are taking an increasing role in providing financial support for their families, could be discouraged from taking out life insurance based on the relatively large increases in premiums that could result from unisex pricing. Women could find term life insurance to be poor value for money and hence not purchase it. Men, who would be disadvantaged by unisex pricing of pension annuities, may face a reduction in benefits of around 5%. The impact of this reduction could be of importance given that men can choose to buy other financial products that do not provide guaranteed lifetime income. 31

32 IV. Conclusions 32

33 Conclusions 1 Private insurance functions properly only, if relevant risk parameters can be taken into account. Gender is a relevant risk parameter for a many insurance products. 2 A ban on the use of gender for the pricing of insurance products could increase premiums and reduce benefits for many consumers, in particular women: men could see a reduction in pension income from pension annuities of around 5% or more on average women could see life insurance premiums rise by around 30% or more on average young women could see motor insurance premiums rise by 11% or more on average 33

34 Conclusions 3 4 Unisex premiums are likely to be higher than gender-based premiums, as can be concluded from the examples presented. Unisex pricing could discourage consumers from investing in old age provision. 5 Not only gender but also age and disability are risk factors. In the light of the current discussions on the proposed EU Anti-discrimination Directive, the relevance of these factors could in principle be analysed using a similar economic framework as that used by Oxera to analyse gender. 34

35 Oxera our skills and values Oxera combines the most rigorous economic thinking and quantitative methods with a practical business approach to advise clients on matters in competition, finance and regulation. What sets Oxera apart is: our reputation for credibility and integrity with policy-makers, regulators and legal authorities, which is of critical value to our clients and has been created through our long-standing emphasis on quality and independence our experience and unique ability to combine the fields of competition, financial, regulatory and quantitative economics, which, together with indepth sector knowledge, provide the ingredients for our respected economic advice 35

36 Contact Contact: Reinder Van Dijk + 44 (0) Although every effort has been made to ensure the accuracy of the material and the integrity of the analysis presented herein, the Company accepts no liability for any actions taken on the basis of its contents. Oxera Consulting Ltd is not licensed in the conduct of investment business as defined in the Financial Services and Markets Act Anyone considering a specific investment should consult their own broker or other investment adviser. The Company accepts no liability for any specific investment decision, which must be at the investor s own risk. Oxera, All rights reserved. Except for the quotation of short passages for the purposes of criticism or review, no part may be used or reproduced without permission.

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