Politicians and insurance experts have attacked a ruling from the European Court of Justice which prevents insurers treating men and women differently when assessing risk. The decision has huge implications for pensions, life cover and car insurance.

How has this happened?
European judges have put a ban on insurance companies from assessing risk based on gender, which in turn completely changes the pricing of, motor insurance annuities life and medical cover and turns it on its head.

Assessing risk based on gender has been standard practice for years for insurers to ascertain rates in these areas according to proven statistical differences between male and female.
Using these proven statistics it is said that women, in general live longer than men and have when it comes to female road users have fewer road accidents than men. The term ‘boy racer’ does tend to spring to mind! Fewer road accidents mean lower car insurance for women but lower annuity rates when converting their pensions into a retirement income stream.

The European Court of Justice in Luxembourg ruled that using behavioral differences between men and women when setting premiums breached EU rules on equality. ‘Taking the gender of the insured individual into account as a risk factor in insurance contracts constitutes discrimination,’ the court said.

Implications:
Research for the Association of British Insurers shows women under 25 could see their car insurance premiums leap by 25% on average. Men may pay slightly less than they do now,
In pensions women could benefit from a 6% rise in annuity rates though men could suffer an 8% fall, reducing their retirement income.
Similarly, life insurance for women could soar by 20% while men could see a fall of 10%.
However, there is great uncertainty as to what will actually happen. The ruling is not due to take effect from 21 December, 2012. There are fears that insurers will exploit the confusion to push up their margins. They will also face one-off costs changing their systems in light of the ruling.

‘Madness’
In their decision the judges followed advice from the court’s advocate-general that ‘higher-ranking’ equality provisions set out in the Charter of Fundamental Rights of the Lisbon Treaty must now apply. Discrimination in setting insurance rates until now had been permitted under EU rules, if gender was a ‘determining risk factor’ backed up by actuarial and statistical data.
The leader of Britain’s Conservative MEPs, Martin Callanan, blamed the last Labour government for the outcome. ‘By signing us up to the Charter of Fundamental Rights in the Lisbon Treaty they have opened the floodgates to nonsense court rulings like this one.’

Is the current system unfair?
The judges issued the ruling in response to a challenge by a Belgian consumer group, Test-Achats. It had argued that the current exemption for insurers contradicted the wider European principle of gender equality.
David Trenner of Intelligent Pensions said the verdict could lead to a more sophisticated underwriting of annuities. He pointed out that differentiation based on gender alone had always been a ‘very crude’ way of estimating life expectation.
‘My late grandmother and Queen Elizabeth the Queen Mother were both born in 1900. Both were females, but whereas the Queen Mother died in 2002, my grandmother died in 1972 a full 30 years earlier, he said. ‘This example highlights very strongly that gender alone does not determine life expectation!’
Martin Lewis, the creator of MoneySavingExpert.com, said there was ‘some logic’ to the ban in regard to car insurance. ‘Gender price differences there are based on behavior. Why should one man pay more because others behaved badly? Would we allow the same to happen based on racial differences?’
However, Lewis went on to say that in the main, the ruling was ‘ridiculous.’
Another blow to pensions
Pensions expert Dr Ros Altmann warned that annuities would become more expensive as four-fifths of annuities are bought by men. ‘Currently, men buy around eight out of every ten annuities sold in the UK and all of them risk receiving much lower pensions as a result of this decision,’ she said. ‘This means that future UK pensioners will be even poorer than they otherwise would be. ‘
Laith Khalaf, pensions analyst at Hargreaves Lansdown, said the firm expected a reduction of between 5-10% in male annuity rates. ‘It remains to be seen how much of an increase women get when they buy their pension,’ he noted.
A 65-year-old man with about £100,000 would currently receive an income of about £6,500 a year from an annuity, Khalaf said, reflecting a rate of 6.5%. The European court ruling would move that rate down to about 6.2%, he pointed out.
‘If you think about what that means in terms of your annual income, if you’ve got that £100,000, you are moving from £6,500 a year to £6,200 a year – that is a loss of £300, that is around 5% of your annual income that you are losing,’ he said.

Warning over income drawdown
Billy Mackay, marketing director of pension provider A J Bell, warned that the ruling could also have a knock-on effect in the long run on the rates at which men can draw down income from their pension pots as well, because these are intended to reflect annuity rates.
‘GAD [Government Actuaries Department] rates have only just been reviewed,’ he said, referring to the official limits for income drawdown. ‘Another review to reflect this ruling is a distinct possibility.’
Meanwhile, Gemma Goodman, head of operations at Alexander Forbes Annuity Bureau, said the anticipated drop in male annuity rates was small compared to the bigger problem of people failing to shop around for the best annuities. By simply buying their annuity off the company they had saved with ’66% of people miss out on potentially a 35% increase in income’, Goodman said.

Life Settlements
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Teak
Teak is a popular building material due to its unique hardness and durability and managers claim its investment in sustainably managed Brazilian team plantations offers low volatility and consistent returns.

Polish Property
Investing in unusual properties in unusual places is a favourite for UCIS especially the Polish, Croatian and Romanian property markets.

Violins
The invests in rare violins and Violas with the aim of generating non-correlated returns with a target of 15% per year. It invests in Stradivarius instruments which can often cost millions.

Film Schemes
The movie business is uncertain but that does not deter investors looking for a revenue stream unrelated to the stockmarket. When a film does well the backers reap big rewards but there are almost no guarantees.

Esoteric Finance
The sidelines of the corporate finance world have proved a popular target for UCIS funds. One of the most successful funds provides financing for small companies in the UK, Europe and Canada and has delivered annualised returns of 17.91% since its launch in 2004.

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Art has always been popular for high net worth investors and institutions. Some funds have attracted $100 million of assets under management.

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Green energy is a great investment story given the twin drivers of climate change and the energy generation crunch facing the UK over the next 20 years.

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Following a review Barclays is planning to stop offering financial advice through its retail branches by closing Barclays Financial Planning as it was deemed no longer commercially viable.
Barclays said it expected to offer retail investment advice online, and that it expected financial advice in bank branches to decline.
‘Barclays has been conducting a detailed review of its financial planning advice over recent months. This review has concluded that, given the changes to the retail investment marketplace, it is unlikely that this business would be able to deliver a return that would justify the investment required,’ said a spokeswoman.
Barclays said it will shift its focus to online execution only service Investor Zone and that existing plans and investments currently held by customers will continue to be serviced.
The bank was recently fined £7.7 million by the Financial Services Authority for mis-selling two Aviva funds.

The Financial Services Authority (FSA) has recently confirmed that the new deposit compensation limit for the United Kingdom will increase from £50,000 to £85,000 per person, per authorised firm, from 31 December 2010. This is the Sterling equivalent of the €100,000 deposit compensation limit which comes into force in all European Economic Area (EEA) member states at the end of the year.

Further changes coming into effect on 31 December 2010 are:
• Fast payout rules, with a target of a seven day payout for the majority of claimants and the remainder within the required 20 days.
• Gross payout, which protects customers by ring fencing their deposits if they have savings and loans with the same firm. Currently, any outstanding loan or debt would be deducted from any compensation.

This new pan European requirement replaces the existing UK arrangement which has been in place since 2009, and which allowed for separate compensation cover for customers with deposits in two merging building societies.

Consumers need to understand the type of firm they are doing business with, and how this can affect which scheme would pay the compensation should anything go wrong.

The UK’s Financial Services Compensation Scheme (FSCS) covers deposits with UK banks and ‘subsidiaries’ of foreign banks which operate in the UK. However, deposits in ‘branches’ of EEA banks operating in the UK will not be covered by the FSCS, but rather by the scheme of the country where the branch has its headquarters.