The price of gender equality

Equal is not always fair

One of the LMI Sydney team, Revell Weightman, head of LMI Forensic Accounting, alerted me to an article posted in the UK by the Sable Group about changes to the pricing of life and some classes of general insurance in the United Kingdom and Europe due to the insurance industry losing its ability to opt out of the 2004 European Union Gender Directive.

As most of us know, the insurance market in London is one of the oldest and most stable in the world. Through hundreds of years the actuarial data that they have collected has allowed underwriters to price risk quite accurately. With one or two exceptions such as AIG in the United Kingdom completely under pricing the cost of sold credit protection in the form of credit default swaps on collateralized debt obligations. AIG lost US$13 billion in the first half of 2008 and its shares fell 95% in value as a result.

This major glitch and a few smaller ones over the years aside, in the main the London Market has got it right and using this massive amount of statistical data insurance has been priced accordingly. Simple examples are, and I stress these are generalisations based on broad statistics of the entire UK market. Please do not send me an influx of emails advising of examples of the alternative.

  • Women as a general rule have few motor vehicle accidents than do men. They therefore enjoy cheaper car insurance with some insurers.
  • Men are less likely to be ill and so income protection and health insurance is less expensive and they are typically offered a higher interest on their annuities
  • Women on the other hand tend to live longer and so their life insurance premiums can be lower.

Most in society are either unaware of this or accept that premium is the cost of transferring risk away from yourself or your family to an insurer and is based on the likelihood and severity of the event happening.

Come 2013, European insurers will not be able to factor gender issues into the pricing mix. Sable report that the insurance industry in the United Kingdom alone is building up a capital reserve of £1 billon to provide protection against getting the new pricing wrong. At the same time there will be many promotions to get in while the pricing is still cheaper under the existing pricing regimes.

The question is will this approach come to our part of the world and is so when and what effect will it have on us all?

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