Open Europe has responded to this morning’s ruling by the EU’s European Court of Justice, which will ban the use of gender in determining different risks for insurance products. The ruling will take effect on 21 December 2012, meaning from that date insurers can no longer offer different products and prices to men and women based on their sex. In a briefing note published earlier in the week, Open Europe estimated that, on average, a 17 year old female driver will now have to pay an extra £4,300 in insurance premiums by the time she is 26 as a consequence of the ruling.

Open Europe Research Director Stephen Booth said:

“This ruling has pushed anti-discrimination legislation beyond the realms of all common sense. Unaccountable EU judges have ruled to overturn long-held national rules and increased costs for consumers in the process. To do so in the name of equality just adds insult to injury.”

“This goes to show that EU judges are able to rewrite national laws but with no democratic controls in place to ensure that their rulings make sense and are proportionate. Clearly, it’s time to put some checks on these judges, and the UK government needs to take a far stronger position in pushing for reforms. Otherwise, it’s only a matter of time before we see another EU ruling which has a negative impact on individual citizens or the UK economy as a whole.”

Please click here to read Open Europe’s briefing note: http://www.openeurope.org.uk/research/ECJgenderdirective.pdf

Open Europe has calculated that, as a result of the ruling, UK insurance providers will need to raise an extra £936m in capital to cover themselves against the new uncertainties created in the market. The industry has warned that these costs will be passed on to consumers. So rather than equalising men and women’s existing insurance costs, the ruling will in fact increase total costs for consumers taken as a whole. The ruling will affect several different insurance and pension products, including motor insurance, private medical insurance, life insurance and annuities.

Taking motor insurance as an example, Open Europe estimates that, on average, a 17 year old female driver will have to pay an extra £4,300 in insurance premiums by the time she is 26 as a consequence of the ruling. On the other hand, male drivers would save an estimated £3,250 over the same period of time. In a worst case scenario, women drivers’ cumulative insurance costs between the ages of 17 and 26 could increase by as much as £9,300.

BACKGROUND

On 30 September 2010 Dr Juliane Kokott, an Advocate-General at the European Court of Justice (ECJ) delivered the opinion that sex discrimination in underwriting insurance policies is incompatible with EU law.[1]

The EU’s 2004 Gender Directive[2] and current UK equality legislation[3] allows insurers to charge different rates for insurance premiums based on sex if it can be proven, using actuarial and statistical data, that gender is a determining factor in assessing risk.

However, in reference to Article 6 of the Lisbon Treaty, Dr Kokott notes that EU law “shall respect fundamental rights, as guaranteed by the European Convention for the Protection of Human Rights and Fundamental Freedoms” and the EU’s own catalogue of justiciable rights, the Charter of Fundamental Rights, which was given full legal effect for the first time by the Lisbon Treaty. The Charter stipulates that “Equality between women and men must be ensured in all areas, including employment, work and pay.”[4]

The references to both the European Convention on Human Rights, which the EU is due to join under the Lisbon Treaty, and the EU’s Charter of Fundamental Rights illustrates the complex web of European human rights law that is now in the hands of European judges at both the Council of Europe’s European Court of Human Rights in Strasbourg and the EU’s European Court of Justice in Luxembourg.

Today the ECJ ruled that “Taking the gender of the insured individual into account as a risk factor in insurance contracts constitutes discrimination.”[5]

COSTS

Insurance industry’s capital requirements

In 2004, when the EU’s Gender Directive (2004/113/EC) was originally being negotiated, the Financial Services Authority estimated that insurance companies would require extra capital to cover potential losses caused by the uncertainty of new market conditions if a gender ban was imposed. The extra capital potentially required was estimated at around 1-2% of new single premiums for annuities, 3-4% of annual premiums for motor insurance, together with a higher percentage (30-40%) of new regular premiums for life insurance.[6]

The latest figures obtained from the Association of British Insurers put new premiums for annuities at £11.1bn (2010); for motor insurance at £9.8bn (2009); and for life insurance at £805m (2010). In total, applying these percentages to current levels or premium income, this gives the figure of £936m.

Michaela Koller, head of the European Insurance Federation, has warned that, “The core principle of risk assessment is that people in comparable situations are treated equally and those in different situations are treated differently. If this risk-based, factual principle is not maintained, premiums will increase, coverage will decrease and some products will be withdrawn from the market entirely.”[7]

The UK insurance industry will be disproportionately affected as the UK is currently the largest market in Europe and the third largest in the world.[8]

Impact on motor insurance and road safety

The Association of British Insurers (ABI) estimates that, on average, female drivers under the age of 26 are likely to see increased costs of around 25% while men under the age of 26 will see reductions of around 10% on average.[9] Applying these increases/reductions to the average annual male and female insurance premiums for ages 17 through to 26, Open Europe has reached the cumulative costs of the expected ruling.[10]

Looking beyond the average impact, we also examined the worst case scenario which could see female premiums increase by 50% and male premiums not decrease at all. As with the average impact we assumed premiums would decrease at a rate of around 1% per year throughout our age range (based on ABI estimations).[11]

The ruling could also have significant implications for road safety as less risky young women drivers will be forced to subsidise riskier young male drivers. Incentives may also be created for young men to use the money saved from cheaper prices to insure higher powered cars. The AA has previously warned that, “Prohibiting insurers from applying rates related to risk would result in a statistically safer group of drivers subsidising the less safe group.”[12]