Memorandum submitted by Association of British Insurers


The ABI is the voice of the insurance and investment industry. Its members constitute over 90 per cent of the insurance market in the UK and 20 per cent across the EU. They control assets equivalent to a quarter of the UK's capital. They are the risk managers of the UK's economy and society. Through the ABI their voice is heard in Government and in public debate on insurance, savings, and investment matters.


1. Executive Summary


The insurance industry is committed to treating people fairly and providing cover at a fair price and on reasonable terms. Insurers are opposed to discrimination in society, and do not restrict the availability of insurance on the basis of gender, race or sexual orientation.


Our submission will focus on the use of age when calculating risk, which are appropriate in insurance because:


it helps ensure that the insured pays a fair price for the risk they pose;

it can act as a proxy for other risks, keeping the underwriting process simple and the cost of insurance low, and making the purchasing process less intrusive for consumers than other approaches; and

it encourages insurers to develop innovative products.


People's needs change as they age: notably, they may have fewer financial obligations and dependents, they may retire from work, and their health may worsen. Insurers develop products to meet these changing needs and currently offer a wide range of products designed to meet the needs of all age groups, including older people. Maintaining this ability to specialise and target particular markets is key to a thriving, healthy insurance market.


The insurance industry is concerned about the lack of knowledge about access to motor and travel insurance for older customers. While there are many insurers serving this market, some older customers do not always know how to find cover. The ABI is looking at how to help customers.


The ABI is concerned that legislation to restrict the use of age in pricing products would have negative unintended consequences for all consumers, including elderly consumers, by making products more expensive. Restrictions on the use of data sources would make it difficult for insurers to use all relevant information when pricing risk. An obligation to publish aggregated data would place a burden on industry without providing consumers with particularly useful information. Insurers and actuaries use information that changes over time and must therefore use judgment when underwriting the risk of future events, and not only rely on historical data.


Legislation on this issue is currently under consideration in both the UK and Europe, running the risk of gold plating and possible conflicts between European and domestic law that would need to be fixed during transposition. The timetable for primary and secondary legislation must be carefully considered.


2. The use of age in insurance


Age as a risk factor


Insurance policies are priced according to the level of risk posed - generally, the higher the known risk, the higher the premium.


The effect of age on risk differs between products; for example, older people are considered better risks by household insurers than younger people and thus they will often pay lower home contents premiums. In other areas where risk increases with age, e.g. travel insurance, premiums will be higher for older customers.


In some products, age is used as a proxy for other risks such as general health and mobility. Using age as the core risk factor simplifies the underwriting process: it can significantly lower the cost of the product; may enable a wider range of organisations to distribute the product; and can be less intrusive for customers than alternative approaches to calculating risk. These savings can then be passed onto consumers through lower prices.


In other products such as annuities and life assurance, age is the major determinant of life expectancy and is therefore an essential factor in pricing these contracts.


Age limits


Some insurers impose minimum and maximum age limits on particular products. Such age limits are justified for a number of reasons.


First, some products would not be viable without age limits; if the product could be purchased by customers of any age, the typical premium would increase so significantly that it would become unaffordable for many. Health cash plans are an example of this. These low-cost plans pay cash sums towards the cost of a wide-range of treatments and age limits on the purchase of the plan are needed to keep the cost of the product low for all customers. Policyholders are often on low incomes and the policies have the benefit of paying premiums that are kept the same throughout the life of a policy, helping to fund claims in later life. If customers were able to purchase health cash plans much later in life than the other customers, they would pay premiums for a much shorter period and, due to more costly and more frequent claims, push premiums up for everyone.


Secondly, some insurers do not collate actuarial data or rely on expertise to underwrite higher risks. The use of age limits allows insurers to enter the market, increasing competition, without the benefit of detailed actuarial data for all ages. Customers benefit from increased competition in the market, which ultimately drives down prices.


Thirdly, age limits allow insurers to specialise and offer innovative products that are tailored to the needs of particular age groups. For example, telematics-based insurance for young drivers charges more for night-time driving when the risk of an accident is particularly high for this age group. There are also a number of insurers who specifically cater for older customers.


The UK has a highly sophisticated insurance sector with a wide range of specialist products.


Age bands


Some insurance products set premiums that reflect the typical risk posed by individuals in a particular age band.


The width of the age band will differ between products. Where detailed underwriting procedures are involved, e.g. in motor insurance, age bands are more likely to be relatively narrow - one or two years in size. In other products the bands might be wider. Wider bands reduce the cost of underwriting; these savings are passed onto the customer in the form of lower premiums. Simplified underwriting also encourages more distributors, increasing the accessibility and availability of the product. This is particularly true in travel insurance.


The use of age in motor insurance


The likelihood of a motorist making a claim against their motor insurance policy, and the probable level of that claim, changes according to age. ABI research shows the average cost of a claim by a 60-64 year old driver is 1,170, while the average claim by someone aged over 80 is almost 50 per cent more expensive, at 1,716. The same research found that drivers aged over 70 are 72 per cent more likely to be killed or seriously injured than people aged between 60 and 69[1]. Accordingly, an older driver will pay more than a middle-aged driver. However, older drivers pay less than the youngest drivers whose claims tend to be higher still.


Chart 1: Drivers killed or seriously injured per 100 million miles and per 1,000 license holders (ABI claims data)


The use of age in travel insurance


In the UK there is a strong and competitive market for travel insurance that has resulted in a large majority of people (86%) travelling with insurance[2]. As a voluntary product, its primary function is to cover the potentially very high cost of a customer needing emergency medical treatment or repatriation following accident or illness while abroad.


Due to the nature of the product, fewer risk factors will be considered and age is typically used as a proxy for health. Ipsos MORI research for the ABI found that over-65s are three times more likely to make a travel insurance claim than those aged 35, and people over 85 years old are eight times more likely to make a claim. Medical expenses largely drive the cost of these claims, which make up a third of total claim costs. Compared with under-50s, claims made by people aged over 65 are nearly three and a half times more expensive.


Chart 2: Likelihood, cost and frequency of travel insurance claims by age (ABI Ipsos MORI)



3. Forthcoming legislation


QUESTION: Does the Equality Bill incorporate the provisions of the draft Directive?


There are two significant pieces of legislation expected on equalities. In the European Union, the Commission has published a draft Directive that aims to ensure that consumers are not discriminated in the provision of goods and services. The draft Directive is likely to be amended by the Council of Ministers. In the UK, the Single Equalities Bill is due to be published shortly, with secondary legislation on financial services to follow. We have significant concerns with the wording of the Directive, and we are lobbying the EU institutions to improve the text. So we would not agree that the Equality Bill should incorporate all the provisions in the draft Directive.


QUESTION: What are the implications for transposition of a new EU Directive for UK law?


The ABI is concerned that equalities legislation would create two sets of transition costs for industry within a short period of time if secondary legislation is passed in 2010 and transposition of the European Directive follows shortly afterwards. These closely aligned timetables could also result in legislation being under consideration simultaneously in Brussels and Westminster, raising the risk of gold plating and possible conflicts between the legislation.


4. European Directive & the Disability & Discrimination Act (DDA)


QUESTION: Is the draft EU directive welcomed?


Notwithstanding our concerns about the timing of the legislation, the ABI recognises the European Commission's efforts to ensure that consumers are not discriminated against in the provision of goods and services through the proposed European Directive. Any legislation should be light touch to maintain a thriving, healthy insurance market that enables firms to specialise and target particular markets. Otherwise it will stifle innovation and reduce consumer choice.


QUESTION: What is the draft EU Directive in goods, facilities and services proposing?


Included in this Directive is a special clause for financial services, which recognises the need to differentiate between consumers in the fields of age and disability factors in the assessment of risk when developing and pricing insurance policies. However, we have concerns about the wording of the clause, which we believe restricts unnecessarily the data sources we can use to assess risk.


QUESTION: How could the duties in Goods, Facilities and Services of the DDA be built on to deliver systemic change?


Comparisons can be drawn with some aspects of the DDA to show where improvements could be made in several areas of the draft Directive.


Data Sources


If consumers are to continue to benefit from access to fairly priced insurance it is necessary that insurers be allowed to differentiate using a range of sources. Actuarial and statistical pricing techniques work well in the mass market where there is plenty of data and statistical credibility. However, many companies will have eligibility criteria which exclude unusually high-risk customers - for example an 18-year-old wanting motor insurance for a sports car or an 85-year-old wanting travel insurance for a skiing trip. By definition, data for such risks will be sparse. Insurers also specialise within certain segments of the market and will not have data relating to the mass market, other insurers will not employ actuaries or use actuarial data in pricing their products but instead will use previous claims experiences to price their products.


If they cannot refer to this information, insurers may have a diminished view of the risk and the cost of providing cover to that consumer would increase. In an extreme situation, some insurers may not be able to provide policies and consumers may face a reduction in the range and scope of insurance products available to them.


The DDA requires all decisions to be based on relevant information or data available at the time and used to form the basis of an underwriting manual. There is no definition of 'reasonable', and insurers must adopt a commonsense approach until precedents have been set through test cases. The interpretation of relevant information or data takes into account the range of sources used by insurers. This includes actuarial or statistical data; medical research information; and medical reports about an individual. It would be sensible to adopt a similar approach for any legislation relating to age.


It should also be recognised that for long-term 'forward looking' contracts, such as annuities and life assurance, providers need to make actuarial assumptions about future changes to life expectancy. Therefore it is essential that providers are not restricted to making pricing decisions on the basis only of historical data.


Member States' Discretionary Power


By using the terms 'Member States may permit...'[3], the insurance clause gives Member States discretionary power on whether to permit proportionate differences in treatment, as an exception to a general rule of equal treatment. The inclusion of this option means that there could be problems with future European Court of Justice (ECJ) jurisprudence. The ECJ tend to take a restrictive interpretation of cases based on an exception to a general rule. For example if a case came up in the UK, the ECJ would think that the ability for insurers to use age as a factor needs to be read in the context of a general rule of equal treatment. We do not think this should be expressed as an exception in the insurance clause.


Publication requirements


The British insurance industry has had experience with requirements to publish data following the implementation of the EU Gender Directive 2007.[4] We believe there is no consumer benefit from the publication of this data. It is not possible to draw any useful conclusions about an individual's premium from the information published.


Furthermore, insurance companies take account of many factors other than age and disability when calculating premiums. These factors will vary between each type of policy, but may include expenses and commission; underwriting practices; medical records; lifestyle; location and social group; age; postcode; usage; no-claims discount and type of vehicle. Therefore, if insurance companies are required to publish data based on the data they relied on in the assessment of risk (for example age data) this will not provide any constructive information to a consumer. Again this is due to the variety of data insurers rely on when pricing their products.


If a Directive went to the extent of requiring insurers to publish the actual data they used to assess risk, serious competition problems would ensue. The data that insurers use to assess risk, often based on confidential claims experience, is a prime tool of competition between insurers. Competition between insurers would be undermined if a publication requirement were to be interpreted as requiring insurers to publish all their proprietary data on the subject. Furthermore, policyholders would not receive fair and equal treatment if insurers could not use all the data available to them.


QUESTION: How can it be made easier for disabled people, carers and pensioners to bring and pursue cases in GFS?


Under the DDA insurers must be able to provide evidence to show that an underwriting decision was justified at the time it was made when asked to do so. A challenge can be made at any time, either before or after the start of the policy. This approach enables insurers to demonstrate that their underwriting philosophy and documented claims process is in line with the law if it becomes necessary.


The ABI would prefer the DDA approach in favour of publication requirements since it would ensure that consumers receive relevant information if they challenge an underwriting decision.


Age or disability as 'key factors' in the assessment of risk


The use of 'key factors' in the assessment of risk in the insurance clause needs to be clarified. Insurers use a variety of factors that reflect the frequency and cost of insurance claims. These factors are then used to determine the price and cover of insurance policies. This approach ensures that all customers are treated equitably according to their actual risk, rather than cross subsidising between customers.


The use of the word 'key' lends itself to mean that insurers must prioritise the factors they use and would restrict insurers' ability to assess risk fairly. It might be more preferable to use the words in the Gender Directive and refer to the use of age or disability as a determining factor.


5. Conclusion


Insurers are at their most competitive when the premiums they charge are appropriate to cover the risk posed, but no higher than necessary. This encourages firms to price risks accurately, while keeping the cost of underwriting the risk as low as possible. Insurers respond to this challenge in different ways depending on the relative simplicity or complexity of the product, or the demographic of the product.


This market-based approach is effective at meeting consumer needs and treating them fairly. Any restrictions on insurers' use of age to determine premiums or other age-related practices would risk pushing the cost of insurance up for all consumers and reducing customer choice.





November 2008

[1] Staying Active - Staying Insured: A report from the ABI. March 2007.

[2] Travel Insurance Market Report. Defaqto. February 2007.


[4] This prohibits gender-based differences in insurance, but offers Member States the option to allow gender-based differences provided insurers publish the data they use to assess the risk.