European court of justice rules against basing car insure premiums and annuities on gender
Main story: ECJ gender ruling hits insure costs
The European court of justice (ECJ) has ruled that "gender discrimination" is illegal when it comes to how much people pay for insure, and the income they receive from their pensions when they retire. Here we answer questions about the ruling.
What has happened?
The ECJ in Luxembourg has ruled that using gender as a factor in pricing insure "works against the achievement of the objective of equal treatment between men and women" and "constitutes discrimination".
As a result, from 21 December 2012 insure companies will no longer be allowed to take someone's sex into account when calculating annuity rates and insure premiums.
Why has this ruling come out now?
The court was asked to rule on an opinion reached by the advocate general, Juliane Kokott, that it is legally inappropriate for insurers to link risk to a policy holder's sex.
Proposals for gender equality in insure have been debated for years. In 2004, the UK's Financial Services Authority spoke out about the "threat" of a ban, warning it would "override reality". Insurers have also long opposed the idea, highlighting the significant differences in the riskiness of men and women.
An EU directive on equal treatment in the supply of goods and services was implemented in 2004, which outlawed all discrimination based on sex. But when it came to insure, member states were allowed to opt out of the prohibition, provided certain requirements were met. However, the issue has continued to prove controversial. Last year the Belgian consumer body Test-Achats, and two private individuals, challenged the Belgian implementation of this opt-out in the the country's constitutional court.
What does it mean for me?
Banning insurers from taking gender into account when setting premiums will have huge ramifications for financial services firms. It particularly affects motor insure and annuity rates, which dictate how much pension income millions of people will receive when they retire. It also affects life insure and private medical insure.
Is this ruling better for men or women?
It depends on the product being bought. Millions of older men approaching retirement could be left thousands of pounds worse off over their remaining lifetime as a result of the verdict. Currently, men get a better income from their annuities because their expected longevity is lower, so their pension savings can produce more income over a shorter period.
But when gender is no longer taken into account, both sexes should receive the same annuity rates, which would be bad news for men. Pension experts have predicted that men would see their annuity rates drop by between 5% and 10%, which would put them at or near current female rates. Based on current data, that would suggest a 65-year-old man with a £100,000 pension pot could be worse off by around £340 a year, or more than £8,000 overall if he were to reach the age of 90.
What about older women? Surely this is good news for them?
This should in theory mean a better deal for women. Because they can expect to live four years longer than men, their annuities are typically lower. Research carried out for the Association of British Insurers (ABI) last year suggested annuity rates for women approaching retirement could rise by 6% as a result of the verdict.
However, some experts reckon that in all the chaos of system changes, and with companies likely to be more cautious until things settle down, annuity rates for women may only improve slightly. Annuity providers are likely to move to "individualised underwriting". Don't forget that most annuities are bought by men, which means many wives who depend on their husbands' retirement incomes stand to lose out.
What's the advice from experts?
Hargreaves Lansdown, the investment and pensions firm, said shopping around for annuities would become more important, as failing to do so would lead to investors receiving poor "standard" rates. It warned that annuity rates would be "volatile" for the next few months as insurers review their annuity procedures and change their pricing in response to how they fare.
"It is now imperative that every investor shops around with their pension fund at retirement. If they don't, they risk ending up with a homogenised standard-issue annuity which is almost certain to be a poor deal for them," said Tom McPhail, the firm's head of pensions research.
However, he added that in most cases investors would be best advised to wait until they need their annuity income, rather than buying an annuity before December 2012 in an attempt to beat the ruling.
What about car insure?
Young people are particularly affected by the verdict. The ruling will push up premiums for women under 25 by an average of almost 25%, while male drivers in the same age group will benefit from a typical 10% reduction in their insure costs, according to the ABI's research.
But a minority women in their late teens or early 20s could be hit with rises of between 50% and 60%, while some young men could see the cost of their cover fall by as much as 25%.
The AA's insure arm said in the short term young women would see their premiums rise "significantly", while those for young men were likely to fall "a little". However, it predicted that insurers would quickly start to adjust their pricing to put greater emphasis on the individual risk presented by motorists, and that premiums would therefore start to settle down.
"This is an extremely competitive market," said Simon Douglas, director of AA Insurance. "We are likely to find the initial increase will start to be eroded as insurers begin to develop a more sophisticated response to the loss of gender for rating purposes. But following the court's judgment I fear many insurers will find the young driver market too risky and pull out altogether. That would reduce competition, leading to higher prices."
Will there be any other knock-on effects?
It could lead to higher levels of insure fraud and uninsured driving as motorists struggle to meet the growing cost of keeping a car on the road, warned insure website Gocompare.com. Meanwhile, the ABI said young female drivers who pass their test at 17 or 18 might feel they have little choice but to delay buying a car until they are in their 20s. However, cheaper premiums for young men may mean some opt for more powerful cars, which might have negative consequences for road safety.
It has been suggested some insurers may try to get round the rules by re-classifying the cars typically bought by young men into a higher insure category, which would in turn push their premiums up. The ABI research paper mentioned an unnamed insurer which said women accounted for 70% of its Mini drivers, but only 30% of its BMW drivers. Alternatively, car insurers may start paying more attention to people's occupations.
What about other types of insure?
Gender is one of the most important factors used in the pricing of term life insure, which provides a fixed cash lump sum if the insure holder dies during the term of the policy. Unisex pricing will mean that women pay more – perhaps up to 20% more, according to the ABI. Men might expect to see a fall of 10% in the cost of their cover.
Most leading private medical insure (PMI) providers don't use gender in their pricing models, but a few do. One PMI provider that does told the ABI that premiums for men aged 35-50 might increase by up to 15%, while for women in this age group they might fall by up to 12%, if it had to move to unisex rates. For men over 60, premiums would fall by 7% and for women over 60 they would rise by up to 8%.
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