Memorandum by GE Life
1. COMPANY INFORMATION
1.1 GE Life is a fully owned subsidiary
of GE Insurance Holdings and belongs to the General Electric Company
(GE). GE is a diversified technology, manufacturing and services
company founded on over a century of achievement and innovation
employing over 330,000 people worldwide. GE's EMEA operations
represent a major part of its overall business activities and
growth strategy. In 2003, these businesses generated Euro 32 billion
in sales and employed 75,000 people. GE's commitment to Europe,
through increasing investment and employment, including the opening
of a branch of its Global Research Centre in Munich, reflects
its global strategy. GE is also a leading player in the financial
services industry with businesses active in consumer and commercial
finance activities as well as in the insurance sector, including
reinsurance and mortgage insurance.
1.2 In the UK GE Life offers a broad range
of products for both at- and post-retirement including a comprehensive
set of retirement Drawdown solutions, self-invested personal pensions
and transfer plans. GE Life further offers supplementary retirement
options allowing its customers to generate additional income for
retirement, including specialist annuities, equity release income
plans and structured investment products.
1.3 One of GE Life's principal focuses is the
conversion of accumulated wealth into income in retirement. We
have a leading position in the specialist annuity market and were
one of the first firms to introduce Drawdown in July 1995. As
such we have a long and successful track record in this segment
of the market—the segment of the pensions market that would
be most directly affected by the proposed Directive.
2. OVERVIEW
2.1 GE Life welcomes the opportunity offered
by the EU Sub-Committee on Social Policy and Consumer Affairs
of the House of Lords to comment on the proposal of the European
Commission for a Council Directive implementing the principle
of equal treatment between women and men in the access to and
supply of goods and services (COM 2003-657).
2.2 The proposed Directive lays down a framework
for combating gender discrimination in the supply of goods and
services. The European Commission, in setting the context for
the Directive, argues that: "Equal treatment between men
and women and non-discrimination on grounds of sex are fundamental
principles of Community law".
2.3 GE Life supports this general principle.
As a company we already maintain a strong commitment to promoting
the fair treatment of individuals. This commitment can be demonstrated
clearly through both our role as an equal opportunities employer,
and as a leading provider of insurance and financial services.
2.4 GE Life believes this to be wholly consistent
with our strong belief in the principle of risk-based premium
pricing. GE Life currently adopts this principle with regard to
a wide range of insurance-based retirement products. This is in
keeping with common UK industry practice. Of particular concern
to GE Life is the provision contained within Article 4 of the
Directive requiring Member States to prohibit the use of gender
as a factor in the calculation of premiums and benefits for the
purpose of insurance and related financial services.
2.5 GE Life wishes to emphasize that the
proposal as currently drafted will have a significant negative
impact on its operations and more specifically on its annuities
based life insurance products. GE Life would request that the
EU Sub-Committee give particular consideration to the following
factors in formulating their response towards the EU Commission's
proposals.
3. THE BUSINESS
CASE FOR
RISK-BASED
PRICING
Industry Practice
3.1 The basic principle of all private insurance
models is the need to undertake an accurate assessment of risk.
Insurers typically use a whole range of rating factors to determine
(in some instances on a case-by-case basis) the level of risk
when insuring each individual or organisation. From this perspective,
any premium calculation needs to be based on statistical, scientifically
justified and objective data in order to allow the insurance to
appropriately cover future liabilities.
3.2 The Financial Services Authority (FSA)
has taken a strong lead over recent years in encouraging firms
to develop a greater awareness of risk across a number of fronts.
This can be demonstrated by the ongoing changes to insurers' prudential
rules under the EU's solvency II review, and the FSA's approach
to Individual Capital Adequacy Standards (ICAS). Meanwhile, the
provisions governing firms' conduct of business, such as the FSA
"know-your-customer" requirements, stress the importance
of understanding consumer risk. With the development of a risk-based
approach in all areas of financial regulation it is now widely
accepted that the need to identify and manage risk is vital in
ensuring more effective and efficient markets.
3.3 The fact that UK insurers have already
developed sophisticated approaches to risk-based pricing is not
only consistent with this regulatory approach, but has a long
track record in generating widespread benefits to consumers. Varying
premiums in accordance with risk effectively rewards the consumer
for good behaviour and reduces possible moral hazard. Of course,
not all factors are variable (including gender) but they form
an important indicator of risk none-the-less.
The Gender Gap
3.4 It has been widely reported throughout
the popular press that women receive unfavourable treatment when
compared to men as a result of risk-based gender pricing (as is
generally the case with life insurance products). However, in
other cases the outcome has been reversed with men generally paying
higher premiums (as with motor insurance). GE Life argue that
this is natural given the different risk profile of men and women,
and it should not be held up as an example of gender discrimination.
3.5 With regard to annuity products the
tradition of gender-based risk pricing is well established. Mortality
tables and morbidity tables are widely used in life and health
insurance and help to deliver objective data. In the UK the Continuous
Mortality Investigation Bureau (CMIB) plays a leading role in
collating and analysing the most recent data for use by the insurance
industry.
3.6 The most recent figures revealed that
the gender gap in life expectancy has reduced in recent years.
In fact, this has been the established trend over recent decades.
However, the degree to which gender differences persist is an
important consideration for policymakers, and one which deserves
further examination.
3.7 On this crucial point it has been statistically,
scientifically and objectively proven using CMIB data, as well
as other independent sources, that life expectancy for women remains
significantly longer than for men. For a man aged 65 the life
expectancy is 81. This is three years less than the 84 years life
expectancy for a woman aged 65. While this does represent a fall
in the gender gap, from 4.5 years in 1990, the difference between
men and women is still significant.
3.8 Given women's longer life expectancy,
an annuity providing a fixed amount of income for life is worth
more to her than to a man and it is exactly on that ground that
women pay higher premiums. If men and women were to pay the same
premiums for an annuity based life insurance, this would constitute
a discrimination against men as not only they would benefit from
annuities for a shorter period of time than women who have paid
the same premium, and would result in men cross-subsidizing women's
pensions.
3.9 By differentiating the premium between
men and women, insurance companies take into account an objective
fact and do not in any way violate the non-discrimination principle
laid down in Article 13 of the EC Treaty (which is the legal basis
for the proposed Directive).
3.10 GE Life's position is that an appropriate
interpretation of this provision means that discrimination may
exist when:
— similar cases are treated differently
or;
— different cases are treated similarly.
In the case of life insurance, however, the
situation of men and women is objectively different and therefore
justifies a differentiated treatment.
4. THE "UNFORESEEN"
REGULATORY IMPACT
Proportionate Regulation
4.1 GE Life has considered the proposals
closely and firmly believes that certain elements have not been
sufficiently examined by the European Commission. Furthermore,
the failure to undertake an in-depth cost-benefit analysis could
lead to negative outcomes, which will be unforeseen by legislators.
4.2 Under the UK financial framework any
measures emanating from the FSA must, in accordance with Part
1 of the Financial Services and Markets Act (2000), give regard
to "the principle that a burden or restriction which is imposed
on a person, or on the carrying on of an activity, should be proportionate
to the benefits, which are expected to result from the imposition".
As part of this approach the FSA is required to undertake a cost-benefit
analysis justifying the need for regulatory action.
4.3 The European Commission is not subjected
to a similar requirement. The danger for unnecessary regulatory
impacts is therefore an ongoing threat. In the case of the proposed
Directive any additional costs will have severe impacts on the
consumer through the potential for a general increase in the level
of premiums or a reduction in annuities products that are made
available.
4.4 GE Life therefore calls on the UK Government
as a matter of urgency to work with the Commission to undertake
the studies that clearly demonstrate the cost neutrality of the
proposed measures.
4.5 Whilst GE Life welcomes the European
Commission's decision to adopt a long lead-in period for implementation
(with the implementation date set for 2008), the requirement for
gender neutrality appears at best misguided. The fact that the
Directive explicitly seeks to undermine the principle of risk-based
pricing will over the long-term prove to be socially inequitable.
As we have already outlined (Para 3.8) the proposals will result
in low-risk consumers paying higher premiums in order to subsidise
reduced premiums to high-risk individuals. Removing risk from
insurance pricing is also likely to increase the level of moral
hazard.
The position of UK pensions savings
4.6 The danger of negative regulatory impacts
is particularly pertinent given the size and nature of the UK
pensions industry. The UK is in a small minority of EU Member
States that have well developed private pensions savings. The
so-called third pillar of personal pensions is still largely in
its infancy in many EU countries as they are only just beginning
to grapple with the long-term sustainability of their existing
(largely publicly funded) pensions arrangements.
4.7 The impact of introducing gender-neutral
annuities is therefore marginal for most European countries, as
their citizens are far less likely to contribute into a personal
pension. Consequently, it will be the case that they are less
likely to be required to purchase annuity products in retirement.
Therefore the negative impacts will be felt disproportionately
in the UK. The concerns of the UK should therefore be a major
consideration for EU policymakers before proposing any legislative
changes, which are designed to specifically impact upon insurance-based
pensions saving.
4.8 If Member States decide that this provision
should be maintained in the Directive, GE Life would call for
a UK derogation from the prohibition of sex discrimination that
would allow gender to be used as a differentiating factor if such
use was based on objective and statistical data.
5. CONCLUDING
REMARKS
5.1 GE Life wishes to emphasise that we
fully support the goal of the proposed Directive, which consists
in eliminating the discrimination between men and women. Our comments
are solely directed at Article 4, and the provisions covering
insurance and other related financial services.
5.2 We wish to reiterate our gratitude for
being invited to participate in this consultation process and
we will be happy to answer any further questions you may have
or provide you with any additional information you may deem useful.
28 April 2004
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