Let’s talk about sex

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.