28 June 2012

Fitch: UK life insurers to take gender ruling in stride

From 21 December 2012, insurers will no longer be allowed to charge different premium rates based on gender. This has the potential to distort pricing, introducing cross-subsidies between the genders, most notably in the annuity market (£10-15 billion of new business a year) and life protection market (around £1 billion a year).

"Mortality/longevity is the main risk in these markets, and insurers set their prices to reflect the risk for each policyholder", says David Prowse, Senior Director in Fitch's Insurance team. "They currently use gender as one of their main pricing factors, given the proven link between gender and mortality. Annuity rates, for example, differ by around 10 per cent between the genders, with women paying more to reflect their longer life expectancy. However, as a consequence of the gender ruling, annuity rates look set to fall for men and rise for women. In contrast, men may get a better deal on protection, at the expense of women."

Insurers will now place more weight on other factors such as age and health, when pricing their business. However, Fitch expects the impact of this to be limited because age and health are already more significant pricing factors than gender, as they are stronger indicators of mortality.

Annuity/premium rates vary significantly between competitors as they manoeuvre in response to market conditions and tactical positioning. Pricing impacts from the gender ruling could be blurred by these variations, and by other influences such as Solvency II, regulatory changes affecting distribution and - for protection business - tax changes.

Fitch does not expect pricing shifts between the genders to significantly affect overall business volumes in the protection and annuity markets.

"Shifts in pricing between the genders may lead to unpredictable changes in the gender mix of the business coming onto insurers' books, which could expose insurers to a higher risk profile than expected", says Clara Hughes, Senior Director in Fitch's Insurance team. "Insurers could be expected to add a loading into their premiums to reflect this uncertainty and for the cost of holding additional capital against it."

Implementation costs arising from the gender ruling may also be passed to customers through premium loadings, to recoup the industry's outlay on new pricing systems, for example. Some insurers may also look to make opportunistic price hikes at a time when prices generally are shifting with the introduction of the new rules.

The main area of uncertainty is indirect gender discrimination. Many risk factors used in pricing, such as occupation, have a disproportionate gender mix. The use of such factors may constitute indirect gender discrimination unless they can be demonstrated to be risk factors in their own right. Fitch expects clarity to evolve, with legal input likely to play a defining role.

Press release

© Fitch, Inc.