EU sex ruling to drive insurance costs higher

The European Court of Justice (ECJ) will shortly rule on whether using a person's sex to calculate their insurance premiums breaches equality legislation.

Insurers are bracing themselves for the worst, having received legal opinion – from law firm Slaughter & May – that this outcome is a realistic possibility and could be implemented overnight as early as March. The move could reduce men's pensions. Men benefit from higher annuity rates as, statistically, they don't live as long as women. Perversely though, women will see only a marginal increase in their pension incomes.

In addition, many women could pay up to 25pc more for motor insurance. If it becomes illegal for insurers to use sex to assess risk, younger women will pay the same rate as their male counterparts, who cause far more serious road accidents. Some insurers may simply refuse to cover people in this age group. This ruling would also affect the pricing of life and health insurance.

The Association of British Insurers (ABI) said: "We are expecting a decision between February and May, but we don't know what it will be. It is sensible to make preparations and look at the potential ramifications of any ruling." The ABI maintains that using sex to calculate risk is beneficial for consumers, as it allows insurers to price premiums accurately. Removing it could have a negative impact for many policyholders, it said.

Why will so few benefit?

The biggest effects will be felt in the £14 billion-a-year annuity market. Currently men aged 65 get an income of £3,274 a year from a £50,000 pension fund, and women £2,993. In comparison, the unisex rate is £3,049 (certain types of pension already apply unisex rates).

Stephen Lowe of Just Retirement said: "There is only a small difference between the unisex rate and the female rate – women aren't gaining as much as men are losing."

Why isn't the rate midway between the two? Bob Bullivant of Annuity Direct said: "It will depend on how many men and women are covered by the annuity provider. But actuaries are a conservative bunch. There will be concerns that unisex pricing may mean they end up insuring a greater proportion of women, so they are more likely to err on the side of caution to ensure they don't make losses on this business."

A similar scenario is likely to emerge in the motor insurance market, particularly among younger drivers, where there is the biggest discrepancy between the rates paid by men and women. Insurers will have to look at the ratio of men and women insured and strike a price that reflects this.

As an extreme example, there will be companies such as Sheilas' Wheels that mainly insure women. This may mean that prices do not have to rise significantly if a unisex rate comes in. However, the number-crunchers in the actuarial department will have to consider whether this will lead to more men buying the policies, despite the brand's female-friendly marketing.

Adrian Webb of Sheilas' Wheels said: "Because we insure so many women, we aren't likely to have to raise prices as much as others. Even if more men join, it will take a significant period of time before they outnumber women."

What isn't known is whether unisex rates will apply across brands, such as Sheilas' Wheels, or companies – Sheilas' Wheels, for example, is part of the Esure group. Adopting the same rate across the group would have a more dramatic effect on premiums, Mr Webb said.

A recent ABI research paper suggested that some car insurers might initially set their unisex level at the male rate, particularly in the younger age bands. There are also fears that what younger men save on insurance will be spent on faster cars, potentially pushing up claims for this group further.

Greater equality?

Few in the insurance industry believe that these regulations will achieve greater equality. Insurers may put greater emphasis on other factors that reflect gender differences. For example, about 90pc of all three-litre cars are driven by men, and 90pc of one-litre cars driven by women. Engine size is already used to assess risk, but could influence premiums more significantly in future. Alternatively, insurers could pick completely irrelevant factors – such as shoe size – as a proxy for sex.

Equalising annuity rates may not improve the problem of female pensioner poverty either. Mr Bullivant said almost 80pc of all annuities bought were by men, and many of these pensions were used to support a couple. Rather than rebalancing the financial position of men and women in retirement, such a ruling could have detrimental effects for both.

What you can do now

WOMEN

Car insurance: If possible renew before the end of March to guard against potential rate rises, particularly for younger women.

Life insurance: If you don't have cover, look to buy it soon as rates will rise for women if gender-based pricing is banned.

Health insurance: Women pay more for critical illness cover and those under 50 pay more for medical cover. These women may benefit from holding off any imminent purchase as prices could dip if rules change.

Annuities: If possible, delay purchase, as the rate could rise marginally. But this is a once-in-a-lifetime decision, so seek independent advice.

MEN

Car insurance: Prices may fall after any ruling, so younger men could benefit from a delayed purchase. (But it is illegal to drive without insurance.)

Life insurance: Again, men may benefit from delaying.

Health insurance: Premiums will go up for men so they may want to buy or renew their cover shortly.

Annuities: Again, this is a complex issue. Those buying an annuity within the next few months may want to ensure it is done before any possible ruling, as rates could be cut. Seek advice.

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