European Court of Justice Ruling on Insurance Companies

In March 2011 the European Court of Justice made a ruling that banned insurance companies from charging different premiums to men and women solely on the basis of their gender. Since the law came into effect in December 2012, it has had vital effects on the microeconomic policies that have affected the motor as well as the insurance industries. The European Union and the Court of Justice consider gender equality to be a fundamental right and had to ensure that the same applies to insurance pricing as well. Before the ruling, a male driver would pay more insurance premiums than a relatively less carful female driver just on the basis of their gender. Following the ruling, however, gender can no longer be used by insurance companies to determine the risk factors or to justify the premiums applied to an individual. The court’s ruling is only specific to gender and does not affect other insurance-related risk factors such as the health status or age and higher risk in these instances is reflected in the premium prices. 

The biggest implication of this ruling is that careful drivers will be required to pay decreased premiums based on their driving behavior, and not their gender (Aseervatham et al, 2012). Before the enactment of the law, insurance companies had a policy that was punitive to males. However, the insurance companies could not really have been said to be gender discriminative because the driving patterns of both genders have transformed over time. The concept of female drivers is relatively new to the modern society. Before civilization developed to the state it is today, women were primarily expected to do chores around the home that included taking care of their husbands and children as well as attending to domestic chores. They were also considered to lack mechanical or navigation skills required to operate machinery including motor vehicles. As such, when the elite category of women began driving vehicles following the development of civilization, the laws of the land were designed to be lenient on them. However, so much has changed since and the modern society has come to terms with the fact that women can navigate vehicles or other machinery as well as their male counterparts. This is what prompted the European Court of Justice to pass the new law in 2011. 

Gender has historically been a risk-rating factor especially in relation to the main product categories that include: motor insurance, private health insurance, and life insurance/annuities. However, it is likely that in all these three categories there will be a transition towards a pricing mechanism that is unisex with varying consequences on the benefits and/or premiums affecting both men and women alike. Thus, the premiums charged by the insurance companies may either increase or decrease depending on the specific product affecting all categories of the consumers. With the insurance industry being highly innovative and competitive, it is presented with the need to craft adjustments that are geared towards the provision of unisex products in such a way that the overall price level is justified. The unisex pricing passed on to consumers should have a level of fairness in price increases as well as price reductions (Varian, 2010). The ruling facilitated the European Justice Commission to come up with practical guidelines with implications that benefit not only the consumers, but the insurance companies as well. 

There are specific consumer outcomes realized as a result of the ruling. Among them is the cross-subsidization of both genders’ premiums. Crating a sense of equity in the administration of premiums paid by both male and female has the result of subsidizing the overall cost of the motor insurance products. For instance, if a female who is a more careful driver than their male counterpart is charged the same cost of insurance, the effect is that his insurance cost will be subsidized. Every motor insurance consumer tries to be as careful as possible so that there will be no or minimal issues when it comes to compensation in case an undesired event occurs. Before the rule was passed, it did not mean much if the male was more careful than the female because even the most careful male would be charged higher than a careless female driver anyway. However, the ruling not only created a sense of equity in the payment of insurance costs, but also in the general behavior among the drivers from both genders. 

The other effect for drivers is that the adverse selection created may cause the cost of insurance to rise and incentivize riskier behavior as a result. This is because even though the court assumes that both male and female drivers have the same level of proficiency, the statistics prove that men are the less risky drivers even though the women are generally more careful. For example, if insurance companies were to make the pricing of life insurance gender neutral, men would acquire better value because on average they have a lower life expectancy than women (Estrin et al, 2012). As a result, they would be incentivized to purchase it more than the women would. Consequently, the women would purchase it less because they would find lesser value since they are the lower risk people. Women have a higher life expectancy than men all over the world and neutralizing the cost of the insurance would make the portfolio of the insurer riskier and as a result, the insurance cost would have to rise in order to compensate for the risk. 

Gender-neutral pricing of motor insurance also has consequences on road safety. The driving habits of men and women are influenced by different factors. Generally, women purchase cars and drive for convenience purposes such as simply getting from one place to another. However, most men drivers seek to satisfy a desire that is beyond getting them from point A to point B.  They are generally more adventurous while driving which makes them riskier from the perspective of insurance companies. Therefore, the gender-neutralization of motor insurance makes the premiums cheaper for the male drivers and this may motivate them to purchase higher-powered cars that make them even more adventurous on the road and this has the effect of increasing the riskiness of their driving. 

The making of insurance premiums and benefits gender-neutral also has key impacts on the insurance industry. Even though the impact of pricing of individual insurance policies based on gender-neutrality is primarily felt by consumers, the industry has also faced impacts that are manifested in various ways. Among them is the fact that the categories of consumers in the lowest risk bracket may take a lower level or cover or even exit the market altogether. The insurers will feel high impact as a result because their revenues are affected significantly. The motor insurance companies targeting females have consumers with a low-risk pool to a large extent. This presents them with a high possibility of incurring losses and they may react by providing quotes that are more competitive than the ones with consumers with a higher-risk pool. This has the potential of changing the dynamics of the market in such a way that such companies may begin attracting higher risk consumers, consequently leading to increased premiums. 

The other impact to the insurance industry is that it might implement changes that cause it to incur high transitional costs. The industry has to re-invent itself in order to adapt to the changes in the market and this is a risky affair. For instance, the new law implies that the insurers have to adopt marketing changes to reach more profitable demographics. It also has to re-invent the sales approaches to increase their profitability edge and competitiveness. Moreover, the insurers must also implement changes in their underwriting practices in order to re-adjust effectively to the market forces. 

The changes also create the need to assess the overall risk that a particular group of customers present by collecting ample data on gender. For example, the insurance company may have a group of motor insurance customers that comprise of 30% women and 70% men. In this case, the insurer is forced to assess the overall risk that the group presents by taking the relative proportions of women and men in order to calculate the unisex premium that is applicable to the women and men in that particular pool (Ec.europa.eu. 2012). The insurers hope in this case is that the individual differences in gender do not affect the benefits and premiums involved.

The new rules of providing insurance products based on gender-neutrality have had significant implications on the consumers and insurers alike.  The insurance prices have since been rising and falling in the short and long term for different categories of consumers. The dynamics of driver behaviors have also changed for both men and women. The behaviors and perspectives of drivers representing both genders have either become riskier or more conservative depending on the premiums or benefits involved. The insurers have also been forced to restructure their business models to avoid incurring losses and also to make them more competitive. Following the enactment of the law, Europe has also made a significant move in relation to gender equality.  

References

Aseervatham, V., Lex, C. and Spindler, M. (2013), ‘Pitfalls in the implementation of non-discriminatory
premiums – the case of unisex tariffs in the German automobile insurance market’, Munich Risk and
Insurance Center Working Paper 16.

Ec.europa.eu. (2012). EU rules on gender-neutral pricing in insurance industry enter into force – European Commission. [online] Available at: http://ec.europa.eu/justice/newsroom/gender-equality/news/121220_en.htm [Accessed 26 Jun. 2017].

Estrin, S., Laidler, D. and Dietrich, M. (2012) Microeconomics. 6th ed. Pearson.Varian, H. (2010) Intermediate Microeconomics. 8th ed. Norton