European gender ruling
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.
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.
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.