The Advent of Gender Neutral Insurance Premiums

The date is December 21, 2012 (or, for our Mayan readers, and the apocalypse has not materialized (Hooray for Earth!). December 21 will, however, be remembered for another transformative event, at least in so far as the European insurance industry is concerned.

Today, the CJEU’s controversial ruling in Test Achats will enter into force, signifying that insurers can no longer take sex into account when calculating insurance premiums. Gender neutral or “unisex” pricing must now be implemented across the industry.

On March 1, 2011, the Grand Chamber ruled that a provision which enabled States to maintain sex-specific insurance premiums, notwithstanding the rule on unisex insurance and benefits laid down in Directive 2004/113, was incompatible with the principle of sex equality, enshrined in Articles 21 and 23 of the Charter. The Court took the unusual step of delaying the entry into force of the judgment until the expiry of an “appropriate transitional period”, allowing insurance companies time to adjust to the ruling.

The ruling will affect three insurance products where sex is considered a “determining risk-rating factor”, namely motor insurance, life insurance and private health insurance. Young female drivers are considered less risky than their male counterparts and so pay less for car insurance; the effect is reversed for life and health insurance – women tend to live longer and utilise more medical services than men, resulting in higher premiums.

The Guardian reported this week that women’s car insurance will rise by 25%; meanwhile one company is set to increase women’s life insurance by 23%, with men’s life insurance to reduce by 3%. Now, Im no actuary, but that does not seem to add up to me. The Commission issued a press release suggesting that insurance prices should balance out over time and expressing its hope that “price reductions resulting from unisex pricing should be passed on to consumers with the same level of fairness as price increases”.  One can always be optimistic…

For those unconvinced about the merits of sex equality in insurance, Advocate General Kokott’s Opinion makes for an enlightening read. At present, the use of sex as a determining factor in insurance is based on

a sweeping assumption that the different life expectancies of male and female insured persons, the difference in their propensity to take risks when driving and the difference in their inclination to utilise medical services – which merely come to light statistically – are essentially due to their sex. [para.61]

However, calculating risk is a complex phenomenon in which many factors – ranging from social and economic conditions to individual habits – play an important role.

In view of social change and the accompanying loss of meaning of traditional role models, the effects of behavioural factors on a person’s health and life expectancy can no longer clearly be linked with his sex … both women and men nowadays engage in demanding and sometimes extremely stressful professional activities, members of both sexes consume a not inconsiderable amount of stimulants and even the kind and extent of sporting activities practised by people cannot from the outset be linked to one or other of the sexes. [para.63]

In reality, sex is simply used for reasons of convenience, as a “substitute criterion” for other – admittedly more complicated, but also more accurate – distinguishing features.

(If you remain unconverted, see a post on contradictory scientific data on female/male drivers by Freakonomics. Elsewhere, insurance companies have been experimenting with new techniques to reward risk-averse behaviour – see, for example, the “driver black box”).

Background – Judgment of  1 March 2011

The Test Achats case concerned Directive 2004/113, which extended the principle of sex equality to the access to and supply of goods and services. Article 5 of the Directive prohibits sex discrimination in the field of insurance, such that insurance premiums and benefits must not be affected on grounds of the individual’s sex. However, Article 5(2) proceeds to allow Member States to carve out an exception under national law where sex is a “determining factor in the assessment of risk based on relevant and accurate actuarial data.” States are required to report any such derogation to the Commission, along with the relevant data. However, aside from an obligation to “review” the derogation within five years, it contained no “sunset clause” or other temporal limitation.  

Test Achats, a consumer association, instituted proceedings which wound their way up to the Belgian Constitutional Court, which in turn referred a preliminary question to the CJEU.

Unlike the Advocate General, the Court did not centre its analysis on the question of “comparability”, that is, whether men and women are in comparable situations for the purposes of insurance, although they affirmed – without any independent investigation or analysis – that they were indeed suitable comparators.

Instead, the Court took a narrower approach, focusing on the obligation of the EU legislature to act in a manner consistent with its own stated objectives. It recognized that the EU legislature is free to implement the principle of equality gradually, and which may include transitional periods and limited derogations.

However, once the legislature has decided to act in the field of equality, “it must contribute, in a coherent manner, to the achievement of the intended objective”. Having decided to extend the Directive to the insurance industry and to affirm the principle of unisex pricing, it would not be consistent with that objective to permit an indefinite derogation from equal treatment. Therefore, a provision enabling States to derogate from the rule of unisex premiums without stipulating any temporal limitation was contrary to the objective of equal treatment between men and women and Articles 21 and 23 of the Charter.