Fitch Ratings expects UK life insurers to face no serious impacts to their business when they adapt their pricing to comply with the European Court of Justice ruling on gender-neutral insurance premiums. The agency believes that insurers have the necessary underwriting and pricing expertise to maintain profitability as they adjust to the new requirements. Fitch does not envisage any changes to insurers' credit ratings driven by the consequences of the ruling.
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 (GBP10-15bn of new business a year) and life protection market (around GBP1bn 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% 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.
Premium/annuity rates for joint-life business are unlikely to change significantly as a result of the ruling, as they typically cover one life of each gender. Most annuity business and a significant proportion of protection business is joint-life.
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.
"Most protection customers have a clear need for life cover, often in connection with a mortgage, and will have little option but to accept the post-gender-ruling premium rates available," says Prowse. "The annuity market is dominated by savers converting their pension pots into a retirement income. Typically, they have little alternative, given the restrictions on how pensions savings can be accessed, so they too will largely have to accept the new rates."
"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.
Fitch analysts will be covering the gender ruling and other UK life topics in a seminar, "The UK Life Insurance Market", on Friday 6 July. Although the event is free of charge, pre-registration is required at: http://fitchratings.nyws.com/Page.asp?ID=2338.
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