Monday, July 23, 2012
IMPACTS OF GENDER NEUTRAL PRICING ON THE LIFE INSURANCE INDUSTRY FROM 21st DECEMBER 2012
Life Insurance Pricing
Typically, Life Insurers currently use 3 main rating factors for calculating life insurance premium rates - age, gender, and wether or not the individual smokes. For over 80% of customers, the premium rate will be calculated based on this information only. The health of the individual is only taken account of in a small minority of cases, with a loading to standard rates applied if the underwriter determines that the individual has a lower than average life expentancy. This may be due to the individual's medical history, occupation, family history or ill-health etc.
For smokers, the cost of life insurance can be more than double the cost for non-smokers. This reflects the fact that smoking shortens average life expectancy by up to 10 years.
For females, the cost of life insurance is typically 25-30% less than the cost for males. Throughout history, females have tended to live longer than males, and, currently, females live on average about 5 years longer than males. The reasons for this are not completely clear - it has been speculated that this is due primarily to lifestyle and occupation factors, rather than genetic factors. For example, males tend to drink more alcohol than females and also tend to have poorer quality diets. Both of these factors will tend to result in females living longer. In addition, males tend to have much higher rates of suicide than females and are much more likely to die as a result of a road traffic accident.
However, there is also some evidence that females are genetically more likely to live longer. Females have higher life expectancy in all countries in the world, and longer female life expectancy is also found in most animal species. The gap between female and male life expectancy has been gradually declining in recent years, presumably as a result of female and male occupations, and lifestyles, becoming more similar.
Whatever the exact breakdown of the different factors which go into explaining the gap between female and male life expectancy, life insurers have found gender to be a very useful proxy for the various risk factors involved. From 21st December, this approach will no longer be possible.
Initially, it is likely that life insurers will simply calculate new premium rates based on the expected mix of males and females in their portfolio of business, using the existing separate premium rates which they have for males and females as a base. There will be some uncertainty about the mix of new business between males and females, and therefore insurers are likely to take a somewhat conservative view on business mix to beging with.
This will result in males paying a similar rate to current rates for life insurance, and females paying significantly more (30% to 50% more, depending on age). So, for females needing life insurance cover, now is time to buy!
Income Protection Pricing
For Income Protection products, insurers use a somewhat more sophisticated pricing approach, taking account of occupation class in addition to the usual factors of age, sex and smoker status. Occupations which are office based typically pay a lot less than occupations involving significant manual work. For some occupations, insurers do not provide income protection cover because of the high risk of injury or disability.
All other rating factors being equal, females are currently charged 50-60% more for Income Protection cover compared to males. In setting a gender-neutral price, insurers will take account of the expected mix of business, in the same way as on other product lines. This is likely to result in a rate which is closer to the current male rate than to the female rate, because insurers will not expect a major change to their mix of business. Therefore, females requiring income protection cover might be well advised to review their cover, and the price they are paying for it, after the introduction of gender neutral rates on 21st December 2012.
Impact on existing business
Life insurance contracts are typically written on a long-term basis. The Test-Achats judgement does not impact the premium rates which Life Insurers can charge on existing contracts, even where gender has been taken account of in calculating those rates. This means that clients with existing contracts need not worry that their premium rates could be increased as a result of the introduction of gender neutral pricing. However, life insurers need to be aware that any changes made to an existing policy, which are not part of the original terms and conditions, may result in a need to apply gender neutral pricing to the policy.
Gender-neutral pricing is the most significant change to the pricing of life insurance products in Ireland which we have seen in the last 10 years. The impact of gender-neutral pricing will vary depending on the product line, and insurers are likely to take a prudent view on calculating gender-neutral rates until the market settles down. Over time, life insurers may look to develop more sophisticated pricing approaches and the introduction of gender-neutral pricing may be a spur for greater product innovation.
If you are a female and you are thinking to take a life cover or you already have one, do not hesitate to contact us to review your premium rates or benefit of the advantages before the gender-neutral pricing takes place from 21st December 2012.