Post Europe: Where does discrimination stop?

Young women drivers affected

Europe has made it clear that gender discrimination is no longer acceptable in insurance and this is going to have long lasting affects on the market. Catherine Barton reflects that this is not the only area where discrimination is seen and asks when it will stop.

The European Court of Justice ruled on 1 March 2011 that insurers will no longer be able to differentiate their prices based on a person's gender, as this has been judged to be a form of gender discrimination. The ruling is effective from 21 December 2012.

There are a whole host of ramifications for insurers associated with this decision, particularly in the highly price-competitive motor insurance market. It is going to be a confusing time ahead for insurers as they grapple with the law change to ensure that they treat customers fairly in line with the European Union's requirements, while adhering to Solvency II which comes into effect around the same time.

Proxy use
Currently motor pricing generally uses a series of attributes related to the vehicle and the driver, which act as proxies to describe both the driver behaviour and the underlying risk costs. Within this framework, gender is a heavily embedded factor in the numerous statistical models that are commonly used when an insurer calculates the final price and develops its business strategies.

Typically young male drivers are charged more than young female drivers as a result not only of them having an increased chance of causing an accident, but also when they do have an accident, it is often significantly larger and more serious than an accident caused by a young female driver.

"There are a whole host of ramifications for insurers associated with this decision, particularly in the highly price-competitive motor insurance market."

Finding common ground
So if a common price needs to be charged to men and women, a decision needs to be made about which price to charge. At its most basic level the insurer has two options: either charge the higher male price and potentially price itself out of the market for all ‘good' risks or charge the cheaper female price, leaving itself underpriced for many individuals, which may lead to profitability issues. There is also clearly a risk that this directive will lead to price rises for young female drivers, which relative to their inherent level of risk could be viewed as unfair discrimination in its own right.

Given the vast amount of public and third party data that is now available, it is altogether conceivable that insurers will find another factor or combination of factors that can replace gender in their pricing models. Developing better vehicle classifications might help - could colour become a factor in vehicle classifications?

People classification
Alternatively the wide range of factors that are already used in marketing models could be used to develop a ‘people classification' for pricing purposes. Possibly more sensitive questions such as number of years in employment or even asking what the household income is could be asked. Ultimately insurers are expected to investigate a range of new rating factors to price motor insurance.

This directive may also force the insurance industry - notorious for its lack of technological innovation - to re-examine the business case for technology such as telematics. This technology, which enables the way in which a policyholder drives to be captured, could be used as a gender-neutral way to understand the risk of the driver and potentially offer better risk-priced premiums. This would have the added benefit of rewarding drivers who actually do drive carefully. However, such an approach would mean any ensuing marketing campaigns would need to overcome the ‘big brother' stigma that is currently attached to them.

"Marketing campaigns would need to overcome the ‘big brother' stigma that is currently attached to them."


Worst case
The worst case scenario is that, come December 2012, insurers have not developed a way to replace gender from their pricing algorithm and as a result will increase significantly young female prices to levels that are unaffordable.

Notably, the smaller insurers that are currently under pressure to comply with impending Solvency II regulations may not have the time or resources to investigate other options to replace gender from their rating algorithms fully and may lose out to bigger players.

Further scrutiny
Interestingly, insurers' injury claims settlements currently also discriminate on gender: women are expected to live longer than men, which will lead to their cost of living claim settlements in injury cases being greater than those of men. It is likely that these settlements will come under further scrutiny and may no longer be allowed.

The outcome of the ECJ ruling will likely have far reaching consequences beyond gender. Discrimination based on robust statistical analysis is an accepted approach to pricing business for insurers: similar analyses based on postcode are common, which could be viewed as racial discrimination due to the range of demographics present in different postcodes.


"The worst case scenario is significant increases for young female prices to levels that are unaffordable."


Age discrimination
Likewise, could using the age of a driver in rating models be viewed as age discrimination? Removing age as a factor would have far greater ramifications than the gender ruling and would possibly lead to a revamp of ‘experience' based factors such as ‘no claims discount' systems or the need for driving experience to be validated. If gender can no longer be used as a rating factor, there are clearly other factors which may subsequently come under unfair discrimination scrutiny and the ruling is likely to be the catalyst for further change in the way rating models are used.

Clearly, with a December 2012 deadline looming, time isn't on insurers' side. Individual insurers' responses to the ruling are not yet known: matching female prices at the male rate? Exploring new rating factors? Using this change as an opportunity to seize market share by holding female rates while taking a hit on profitability? Insurers need to plan their strategy and tactics now to ensure that this proposed change in December 2012 does not result in significant losses during 2013 and 2014.

Catherine Barton is a partner at Ernst & Young

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