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Friday, March 4, 2011

No gender bias in Insurance rating rules European Court of Justice

Insurance is a contract which offers financial protection against possible future losses or damages.  The most common and popular form is Motor Insurance and in India for long the rates, terms and conditions were regulated by All India Motor Tariff.  The provisions of the Tariff were binding on all concerned.  Primarily the age of the vehicle, its cubic capacity and the area of operation besides the value were the determinants of premium.  

As any prudent businessman would do, there was need for proper evaluation of the risk and differential rating based on risk factors which  brought in many other factors – the Insurers started collecting the details of Make, Manufacture, colour, age of the owner, gender, the habits of the owner, further break up of area of operation, the devices fitted to the vehicle, safety features, the odometer reading and more.  In some countries, the GPS based reading the rating of insured / driver are also additional parameters.  

Obviously there have been attempts to analyse the risk in Property insurance.  In more prominent Life insurance, age, gender, physical health all have been directly impacting the premium rates.  It is commonly held that as one ages, the cost of premium would also go up and Insurers tried to have a younger basket as a prescription for their health also.   Historically in European market, men average more miles driven per year than women do and the accident involvement of women were calculated lower !! Never believe your individual experience – this is not because women are better drivers but because of the fact that average no. of vehicles driven by feminine gender is far less..

Teenage drivers with no driving record were being charged higher rates and senior drivers were often considered to drive less.  Some counted the marital status too.  Now this is not about the way risks are to be rated.

Recently, (Mar 2011]  European Court of Justice [ECJ] has ruled that gender can no longer be used as a consideration for reckoning insurance premium.  This decision is likely to have far reaching impact on the industry, more so on the annuity plans and pension products of life insurance companies.  The Court ruling makes it that women can no longer be charged lower car insurance premium based on gender alone.  

A Belgian Consumer Group has  brought up an action against the Belgian Council of Ministers seeking annulment of those provisions of Belgian law which implement European Directive 2004/113 – which creates a framework for preventing discrimination based on sex, specifically in relation to the supply of goods and services.  ECJ was to determine the  compatibility of the Directive with the provisions of European Union law, specifically the principle requiring sexual equality and non-discrimination.

The treaty of European Union mandates Member States to guarantee the fundamental rights as contained the European convention on human rights.  Articles of the charter prohibit discrimination based on gender.    ECJ concluded that taking the gender of the insured into account as risk factor in insurance contracts constitutes discrimination.

This could have significant implication for an industry which always at wits end in charging appropriate premium due to the competition and its own woes.  The ruling will immediately impact motor, medical and life insurances.  It will adversely impact the Pension industry.  It is reported that as a standard practice men receive higher annuities than women.  The present ruling will require that both sexes are entitled to receive proportionately similar annuities.

It is reported that ECJ ruling of unisex premium and benefits would apply effective Dec 2012.  Now the question is whether this ruling would affect he Insurers or the Consumers ??

Regards – S. Sampathkumar.

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