UK: Corporate Insurance Group - Test Achats – The End To Gender Based Insurance Risk Pricing?

The insurance community is waiting with bated breath for the imminent judgment of the European Court of Justice (ECJ) on the test case brought by the Belgian consumer's association Test Achats as to the legality of gender based risk pricing in insurance contracts.

At present Article 5(2) of the Gender Directive 2004/113 as currently enacted in the United Kingdom in Part 5 of the Equality Act 2010 permits insurers to charge different premiums and to provide different levels of benefit to men and women for "insurance business" (as defined in the Financial Services and Markets Act 2000) provided that sex is a "determining factor" in the assessment of risk and where it is "based on relevant and accurate actuarial and statistical data."

In practical terms this means that different premiums, policy terms and benefits are applied for men and women in a range of insurance products including motor, life, health, accident and annuities based on statistical gender differences. For example, that women live longer than men or that men are more likely to have traffic accidents. This transposes itself into women paying more for annuities and less for motor insurance.

In September 2010 the Advocate General (AG) opined that the derogation contained in Article 5(2) of the Gender Directive was invalid because it contravened the fundamental principle of equal treatment between the sexes as enshrined in Article 6(2) of the Treaty on European Union, the underlying constitutional treaty.

The opinion, which is not binding but is usually, if not invariably, followed by the ECJ, further recommended that that any declaration of invalidity by the ECJ should not have retroactive effect because of the legal uncertainty this would create in existing insurance contacts. The AG further recommended a three year transitional period to avoid a sudden and disorderly market adjustment (and possibly the immediate withdrawal of some products) and to allow insurers time to adjust their products and pricing to comply with any revised legal framework.

The AG's reasoning was that it is inappropriate to link insurance risks to a person's sex and that gender is a characteristic which is inseparably linked to the insured person as an individual and over which he has no influence. Article 5(2) did not focus on biological differences between insured persons, but on statistical differentials associated with gender. Accordingly the derogation permitted by Article 5(2) did not take proper account of other factors that would influence risk and that gender statistics were impermissibly being used as a substitute for other distinguishing features in pricing risk.

For example, in relation to life insurance the AG noted that rather than pricing based on the broad brush gender based statistics, that risk pricing should be strongly influenced by economic and social conditions. This included habits such diet, consumption of stimulants and drugs, leisure activities, and sporting activities and that these behavioural factors on a person's health and life expectancy could no longer clearly be linked with sex and that the derogation in Article 5(2) did not therefore do proper justice to the complexity of the problem.

Whilst the AG's recognised the practical difficulties insurers would face, not least in verifying lifestyle factors or where those factors varied over time, the continued convenience of using sex as a pricing factor did not justify the discriminatory effect. It was further noted that the use of unisex rates would not give rise to a serious danger to the financial equilibrium of the insurance market or that the financial disadvantage of increased premiums (or reduced benefits) for a proportion of insured people, constituted a material reason making discrimination on the grounds of sex permissible.

The opinion raises as many questions as it answers and it leaves two important questions for the ECJ, namely whether or not the invalidity should have retroactive effect or apply only prospectively and whether (and if so for how long) any transitional period should be.

It further does not provide any guidance on how matters of indirect gender discrimination in pricing should be dealt with. For example in pricing motor risks the occupation of the insured will be a factor influencing the premium. Given the concentration of the genders in certain occupations, for example women being teachers or nurses and men being builders or in the armed forces, will it be lawful to take into account occupations where there is a concentration of one gender or the other in pricing risk?

Assuming however that the ECJ does follow the AG it is clear that insurers will need to change fundamentally how they price risk and is likely to lead to a levelling up of premiums or down of benefits to provide a unisex rate. It may even lead to the withdrawal by some insurers of certain product lines. It will however provide a clear opportunity to insurers who are able to develop methods of pricing risk that are more closely correlated with the personal factors of the insured and which are gender neutral to exploit gaps in the market and to exploit unisex price differentials.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Nick Elwell-Sutton
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