European Court of Justice ruling hits Insurance Premiums
March 13th, 2012
We are probably all fairly aware that when we apply for car insurance or life assurance that women tend to pay lower premiums than their male counterparts. In simple terms this is because women are statistically a lower-risk group (for example, for car insurance) and in terms of life assurance, women tend to have a live longer than men.
However, all this is about to change and it is important to consider the potential repercussions in terms of your financial planning. In what was a landmark case for insurance companies in March 2011 the European Court of Justice (ECJ) ruled that it would, in future, be unlawful for EU member states to use gender as a factor in the calculation of insurance premiums and benefits with effect from 21 December 2012.
So what does this mean for policies taken out on or after 21 December 2012?
In straightforward terms this means that the calculations insurance companies now make will result in ‘unisex’ premiums as they can no longer factor in gender-specific risks. This will essentially mean that women will see the comparative cost of insurance premiums rise (as they effectively ‘cross-subsidise’ their higher-risk male counterparts) whilst premiums for males should fall as a result.
For example, an HM Treasury press release on the impact of this ruling calculates that the cost of a 10 year life assurance plan providing life cover of £150,000 for a 50 year old non-smoker would result in a monthly unisex premium of around £20. This compares with a current monthly premium of around £17 for females and £22 for males.
Notably however, the judgement also disallows the use of gender when calculating benefits payable from certain insurance products. Perhaps the most important repercussion here is in terms of pension annuity rates as insurance companies can currently factor in the gender-based differences in longevity. Currently a pension fund of £100,000 would buy a annuity (annual pension) of around £5,200 for a 60 year old male non-smoker, compared to around £4,970 for a female non-smoker of the same age*
From the 21 December 2012, however, insurance companies will only be able to offer unisex annuity rates. In reality, this is likely to mean that males will find the income they can secure with their pension fund will fall as a result.
Will this affect any existing policies that I have?
The short answer is it will depend on the policy. For example, car insurance policies operate on an annual basis so, when your policy is due to be renewed the new rules will apply for renewal dates falling on or after 21 December 2012
For annuities and other types of insurance policies (such as life assurance and critical illness cover) the ECJ ruling only affects policies issued on or after the 21 December 2012 deadline, although there could be certain scenarios where policies effected before this date are affected. For example, some policies have ‘reviewable’ rather than ‘guaranteed’ premiums.
Do I need to take any action?
Certainly, if you are a male approaching retirement it is worthwhile considering whether it will be better to purchase your annuity before the changes take effect – especially given that annuity rates for males could fall by up to 13% as a result of the ECJ ruling** On the other hand of course, women are likely to benefit by delaying buying an annuity until after the changes take effect.
Any decision to bring forward or defer buying an annuity should not be influenced solely by the switch to unisex rates though as this ruling is not the only factor which affects annuity rates. Your age, health, the current yields on gilts (Government bonds), and even your post code all affect the rate you can get. In addition, some insurers may already be transitioning towards gender-neutral pricing so the effects may be more gradual as we approach the 21 December 2012 deadline.
To add to the confusion there will also be changes from 6 April 2012 to funds built up from ‘contracting-out’ of the second state pension (S2P), known as ‘protected rights’ funds. From 6 April 2012 it will not longer be possible to individually contract out of S2P and the concept of ‘protected rights’ will be abolished
Currently protected rights funds are already subject to unisex annuity rates. As these rights simply become ‘ordinary’ rights a knock-on effect is that gender-specific annuity rates can apply to these funds between 6 April and 21 December 2012. In addition it will not longer be mandatory to include a 50% spouse’s pension and therefore it may be particularly advantageous for married males to defer purchasing an annuity with their protected rights fund until after 5 April 2012.
Of course, as previously mentioned, you should not base any decision on these changes in isolation and obtaining advice is therefore essential.
Whilst we know the key implications of the move towards unisex rates for insurance policies it is important to note that HM Treasury are still engaged in a consultation with the financial services industry (particularly in terms of what exact amendments should be made to the Equality Act 2010 in order to comply with the ECJ ruling).
In the meantime, it is important to seek financial advice if you think you may be affected by these changes.
* Source: www.moneyfacts.co.uk (the amount quoted is for a single life annuity that will not increase in payment)
**Source: “UK response to the 1 March European Court of Justice ruling that insurance benefits and Premiums after 21 December 2012 should be gender-neutral” – HM Treasury Consultation Paper December 2011