Most people in the industry know by now that by 21 December 2012 all insurance pricing has to be on a unisex basis. But what is that likely to mean in practice for all the interested parties involved, and what will the changeover actually be like?
Currently premium rates differ between men and women but the size of the difference varies by product. Typically women pay about 20 per cent to 25 per cent less for life assurance, about 50 per cent to 80 per cent more for income protection and about the same or a little less for critical illness.
So what will rates look like once they are on a unisex basis? Common sense suggests they will be somewhere between male and female rates, and the exact position will depend on the mix of men and women assumed in the rates calculation.
Insurers will be looking closely at the current gender mix of the various blocks of business that they write and considering whether they could expect the same mix in future. For business through an estate agency chain, for example, the future mix may well be very similar to current. But for IFA businesses it may not be that simple as the current mix for any individual insurer will be influenced by how competitive the insurer is in the different product segments.
Joint-life rates are currently usually calculated from the sum of two single-life rates with a deduction of some sort, but the deduction approach may change slightly in future to reflect the gender mix of joint-life cases rather than the assumptions used for single-life cases. Although some joint policies are written on same-sex lives, the vast majority are written on a male and a female. Thus in future even if single life rates were calculated on a mix of, for example 60/40, a joint life rate should probably be very close indeed to 50/50.
But that is not all that the pricing actuaries have got to think about. On 1 January 2013 the taxation basis of the business within the insurance company will change and this will generally mean that life and critical illness rates for many companies will increase across the board. The biggest factor driving this is that insurers will no longer get tax relief on the commission paid and the costs of setting up the policies. It is predicted that the loss of this tax relief might result in rates increasing by about 10 per cent.
So when new rates are implemented in late December they will reflect both changes. For life cover on males the increase from taxation might broadly cancel out the reduction from gender cross-subsidy, while female rates will go up by more than they would otherwise. Critical illness rates will also increase although the amount will vary, but income protection is not affected by the tax changes.
The new unisex rates have to be in place by 21 December at the latest. The deadline is a very rigid one imposed by the European Union. Any contracts not concluded by that date cannot be processed on gender-specific rates, and that overrules any validity which may appear on a quote, so insurers will need to look at the relevant wording on their quotes to explain the deadline.
Insurers also have to look at the timing of their price changes. If they change their pricing basis early then they will be able to clear some of their pipeline business, which would be helpful to the adviser and their clients. But the insurer might then be open to anti-selection until other companies move to gender-neutral rates too.
Even if insurers are not willing to write business on gender-neutral terms before their competitors, they could choose to publicise what the new rates will be to enable customers to make informed decisions on when to complete their contract, but doing this on every case is likely to present logistical problems.
So much for standard premium rates, but what about underwriting, especially where there is a medical risk involved which is gender-specific? This issue was drawn to the attention of those producing the guidelines and it now seems clear that they listened and they recognise the nature of life and health underwriting and the need to reflect physiological differences. It will be acceptable to ask gender-specific questions, to operate different rules for requesting medical tests and to make the relevant underwriting decision on an individual reflecting on a risk which differs between men and women, so we will not after all have to impose odd decisions such as rating a male for a family history of breast cancer in female relatives.
Many products have been sold historically with terms and conditions which include options and reviews of various sorts. There will be a vast number of these policies in force at 21 December which subsequently undergo one of these processes. How will these be treated? Should they be regarded as ‘new contracts’ and so moved to gender-neutral terms, or can they stay on a gender-specific basis? The guidelines do provide some help but they can be very difficult to interpret in some situations even when the specific policy terms and conditions are analysed. Where the policy wordings set out very clear and specific details of the terms of the option then it can probably be exercised under the original contract but any ad hoc non-contractual alterations would need to be on gender-neutral terms. Unfortunately many options are somewhere between these two extremes. Reviews on policies with reviewable premiums are another category and these can probably be carried out on a gender-specific basis.
Despite their best intentions, companies may vary in their interpretation even where terms and conditions are very similar. It can sometimes be important to go back to first principles when problems arise. There is one important message within the guidelines, that they should avoid undue interference with existing rights, and preserve the legitimate expectations of all parties, which does at least seem to indicate a very reasonable spirit behind the intentions.
So the change to gender-neutral pricing is more than just a rather large reprice to be implemented the week before Christmas. For insurers there are a great many issues to consider and decisions to make, and advisers need to be alert to both the opportunities and the unavoidable frustrations which the change will bring.
Steve Payne is managing director of protection for Friends Life
