Memorandum by Investment and Life Assurance
Group (ILAG)
1. INTRODUCTION
1.1 ILAG is a professional representative
body concerned with the future of the investment, life assurance
and pensions industry. It is led by practitioners, and aims to
identify and develop industry best practice.
1.2 The Group currently has a growing membership
of around 50 practitioner companies and associate members, as
well as individual members, including consulting actuaries, pension
lawyers and accountants affiliated to the Group.
1.3 ILAG's Technical Committees are populated
with experts from specific fields within the industry. This submission
has drawn on the considerable experience within these committees.
1.4 Our response focuses on the implications
for Life and Health business. ILAG is happy to provide oral evidence
to the Committee.
1.5 Whilst we support the broad aims of
the Directive, which are to eliminate unfair discrimination between
genders, the proposed Directive would be counter-productive in
some areas. Gender is only one of many factors that insurers take
into account in pricing risk.
1.6 If the Directive were enacted without
amendment, the impact on the insurance industry and consumers
would be severe. The chairman of FSA, Callum McCarthy concurred
with this view in a recent speech, pointing out that this would
entail greater risk for insurers, resulting in the need to hold
more capital (which may not be available).
1.7 We are able to produce evidence, which
shows the impact of the above. Consequently, if the Directive
is enacted without amendment it would be a matter of social policy,
rather than a reflection of the underlying reality.
1.8 Along with many other factors, gender
clearly leads to differences in risk for a range of insurance
products. Charging someone a different premium because they represent
a different risk is not discrimination—it is not suggested
that smokers are discriminated against because they are charged
more for life cover. Population statistics aggregate such factors,
and are appropriate where everyone is covered, and for homogenous
benefits, such as the State National Insurance.
1.9 If insurers are allowed to use some,
but not all such factors it will lead to greater uncertainty in
underwriting the risk. Wherever there is uncertainty, margins
will be added to premium rates. Consumers could pay more for insurance
than necessary since a prudent underwriter would need to hold
sufficient reserves to cover its risks. Insurers would have no
certainty that the mix of the pool of risk between genders would
remain constant, and would need to incorporate a margin to cover
the consequent pricing risk.
1.10 The current system is based on equity
between participants in the insurance pool, so that price is proportionate
to the value and probability of claim. Any change will be open
to anti-selection and market bias. As the result is likely to
be higher prices, some consumers may find the cover unaffordable,
and choose to fall back on the State provision.
2. MARKET SECTORS
Life Insurance
2.1 Women can generally expect to live longer
than men and, as a result, can expect to pay around 20 per cent
less than men for life cover. Unisex rates would mean that women
would pay 12.5 per cent more than they currently do. Given that
the average annual premium for term assurance cover in the UK
is £350, women would pay £44 extra for the same amount
of cover.
Health Insurance
2.2 Conversely, women pay more for health
products such as income protection and critical illness, the rationale
for pricing is long established and was tested and upheld by the
Courts in the case of Pinder v Friends Provident. Statistics
show that the incidences of long-term incapacity are higher for
women.
Annuities
2.3 Life expectancy at the core ages of
60, 65 and 70 is different for men and women and, if rates were
equalised, male annuitants would receive lower income. Since the
majority of self provision pensions are paid to men, equalisation
of annuity rates would have an adverse effect on the average household
income of pensioners in the UK, with a potential increase in the
burden on the State.
2.4 The present system already provides
equity and fairness between males and females. The total benefits
paid are broadly equivalent, although they are distributed over
a different number of years to reflect current mortality data.
2.5 A risk premium would have to be built
in to counter the risk that more women join the annuity pool as
a percentage of the total.
2.6 Consequently the market would become
less efficient since the more specifically that a risk can be
identified, the more accurately the pricing of that risk can be
achieved.
3. CONCLUSION
3.1 Women generally pay less for life insurance,
and more for health cover.
3.2 Life and health insurance is not compulsory,
and there is a real danger that those who feel disadvantaged by
these proposed changes, may decide not to insure at all. If so,
this could further distort the risk pool by attracting only those
whose risk was, in reality, under priced.
3.3 We do not think Life and Annuity providers
should be required to remove age as a statistical factor in determining
life and health premiums and annuity rates as this will clearly
have undesirable effects on consumers, insurers and the Welfare
State.
3.5 Moreover, EU insurers would be vulnerable
to competition from gender based pricing offered by insurers operating
from non-EU States.
3.6 The effects of the Directive go beyond
the insurance sector, and we do not believe that a proper impact
assessment and consultation has been carried out prior to publication.
A thorough assessment is essential before any conclusions are
drawn.
We would be happy to discuss any aspect of our
evidence in more detail.
April 2004
| 
