Actuaries: European Court of Justice ruling will have wide ranging consequences

Ronnie Bowie, President of the Institute and Faculty of Actuaries said: “Insurance companies have some tough decisions ahead. They will need to provide convincing evidence to justify any future differences between men and women, between old and young and between the healthy and the unhealthy. Consumers also need to be wary but, as now, there will be better value for those who are prepared to shop around.”

Duncan Anderson, a leading motor insurance actuary, said: “Motor insurance premiums vary by type of person to reflect the different likelihood of accidents and claims.  The latest figures from the Confused.com/Towers Watson Car Insurance Price Index show that the average comprehensive premium for men in the UK is £728, compared to £655 for women, a difference of just over 10%. However, for 17-20 year olds, the premium differential is far greater: £2,976 on average for young men and £1,694 for young women, a difference of 75%. The difference reflects the significantly different claims experience between men and women at these ages. If insurers have to stop using gender as a factor in setting car insurance premiums, the effect of combining the claims experience of men with those of women, particularly in younger age groups, would be substantial premium increases for women. On the basis of averaging out the most recent premium index data, 17-20 year old women might anticipate rises of around 40% if insurers equalised rates, with the increases being much higher still if, in the short term, insurers just moved female rates to equal male rates.”

Differences between sexes are especially recognised in mortality, with women typically expected to live longer than men. Yet Dave Grimshaw, a life insurance actuary, argued that for some life insurance products, the changes might not be that great because both sexes are likely to live till retirement age. He explained: “A 30-year old male non-smoker might currently pay around £8 per month for £150,000 of term-life cover, i.e. coverage at a fixed rate of payments for a limited period of time, whereas a female non-smoker might pay between £6 and £7 per month. A gender-neutral premium of £7 to £7.50 per month is unlikely to have huge financial significance for most people. The change is unlikely to affect the popularity of this simple type of life insurance.”

Where the ruling is expected to have a significant impact, though, is on annuities. Annuities are financial products where, in exchange for a lump sum payment, the issuer agrees to make a series of future payments in return. Here the differences in life expectancy between men and women make a real difference. Dave Grimshaw said: “For many individuals, purchasing an annuity is a one-off decision to invest a sizeable sum of money with significant ramifications for their standard of living in retirement. Currently, a man and a woman aged 65 with £100,000 of pension savings to invest may find the man being quoted an annuity of around £500 a year more than the woman. This reflects the insurance company`s expectation to pay the pension for 21 years on average for a man but 24 years for a woman. The ruling could mean that insurers will have to tread a fine line between the risk of losing profit by pricing unisex rates too generously or losing business by pricing too conservatively.”

A full copy of the ruling can be found here

Ends

Enquiries: Tel. Michael Scanlan on +44 (0)20 7632 1453 / +44 (0)7798 804 871 or email michael.scanlan@actuaries.org.uk
 
Notes to Editors:

1. Actuaries provide commercial, financial and prudential advice on the management of a business’s assets and liabilities, especially where long term management and planning are critical to the success of any business venture. They also advise individuals, and advise on social and public interest issues.
2. The Profession is governed by the Institute and Faculty of Actuaries. A rigorous examination system is supported by a programme of continuing professional development and a professional code of conduct supports high standards reflecting the significant role of the Profession in society.
3. Members of the Institute and Faculty of Actuaries have a statutory role in the supervision of pension funds and life insurance companies. They also have a statutory role to provide actuarial opinions for managing agents at Lloyd’s.
4. The Profession is available to provide expert comment to the media on a range of actuarial- related issues, including enterprise risk management, finance and investment, general insurance, health and care, life assurance, mortality, and pensions.

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