Wednesday, March 16, 2011

European Court of Justice Ruling

A big topic in the actuarial world is a recent ruling by the European Court of Justice banning the use of gender to set insurance rates. For example, insurance companies in Europe can no longer charge men ages 16-25 more for auto insurance than they do women in that age bracket. At least, the fact that they're male can't be the reason they're charged more.

That's a huge change for insurance pricing and is expected to have mixed results in terms of how it affects gender economics. The auto insurance example is the first most of us experience, but later in life, men can get annuities with higher payouts. So while we typically think of men getting shafted by insurance companies, that's only because it's the experience most of us have personally seen. Gender affected rating actually adversely affects women significantly. And these are just two examples to illustrate the contrast between how insurance companies see men and women.

A lot of actuaries are taking the ECJ ruling as a "you guys have been getting it wrong" indictment. Taken as a criticism of their calculations, that would be absurd. Young men are charged more for auto insurance because they get into more costly accidents. Women receive lower annuity payments because they're likely to live longer. Actuaries don't have that wrong. What I think actuaries are taking as more damning is the implication that "you guys are reinforcing a social division that is wrong". From the actuarial point of view, the division isn't wrong. It's just the way things are. However, from a social justice perspective, simply because something is, doesn't mean it is right.

Personally, I don't think it should be taken as an indictment so much as an expression of how society is changing. Sure, actuaries have been rating a certain way for insurance companies forever. Over time, however, the general public (i.e. insurance customers) has come to view treating men and women differently in certain areas as wrong. Not all areas, maybe, but economics is certainly one area society has decided men and women should be treated equally.

Let's assume insurance companies, or at least the people in the companies, being human beings from the same society, agree that men and women should be treated economically equally. Which company is going to be the first to say, "Okay, we'll charge men and women the same rates." That's just not feasible in a competitive industry. Men will buy that company's auto insurance, while women flock to its competitors' lower auto rates. Women will buy life annuities from it, but men will look elsewhere for higher pay outs. That company will end up with all the bad risks and quickly go out of business.

The ECJ has given insurance companies an opportunity to make the change. It is putting societal values into something enforceable. It is societies way to bring insurance companies into line with its values. Personally, I think the ruling is okay. There are insurance companies kicking up a storm over it. It will be costly for them to redo their rates. But I think it's the right thing to do. Especially from the perspective of someone soon to enter the profession, I think telling insurance companies, "hey, you need to do a lot of actuarial work" . . . well, I'm kinda' hoping they do.


  1. Jack, I find this very interesting. I can certainly see that putting this new ruling into effect is more "politically correct" and that it would absolutely open up a better job market for you to enter. However, since teenage boys who drive [i]do[/i] cost an insurance company more money than teenage girl drivers, why should their rates be equal? And since women generally [i]do[/i] live longer than men and will require a later-in-life pay-off (and often a lower one) for life insurance than men, why should their rates be equal? I'm not convinced that this instance of being PC is all that terrific....

  2. I don't think it's just about treating men and women the same. It's about them having the same opportunities. Economics has such a huge impact on what people can do, on the choices they have available to make. Limiting economics based on gender seems somehow fundementally unfair.

    Charging men more for auto insurance because it costs more to insure them isn't really an issue that should impede insurance companies. Requiring them to charge an equal amount doesn't mean they have to charge men as little as women currently pay. It simply means they have to change their rates such that gender isn't taken into consideration. Men will be charged less than they were, women will be charged more.

    At least as a base rate. It also doesn't mean those rates will stay fixed. As a given individual has accidents or gets speeding tickets, or some other relevant and objective criteria, his rate will increase based on that criteria. The end result is that most men will likely end up paying more for insurance, but it won't be based on gender. It's actually, probably a whole lot more fair. You know, for guys who are awesome drivers like me. :)