1 November 2012Re/insurance

Opinion: an end to discrimination

On December 21, the cost of insurance on many personal lines in several European countries will increase for women, annuity income will fall for men, and smokers will receive their first reward in the past 10 years in the shape of improved annuity benefits. All this is courtesy of the European Insurance and Occupational Pensions Authority.

EIOPA is part of the European System of Financial Supervisors, which consists of three European supervisory authorities and the European Systemic Risk Board. EIOPA is an independent body that advises the European parliament and the Council of the EU. EIOPA’s core responsibilities are to support the stability of the financial system, to ensure transparency of markets and financial products, and to protect insurance policyholders, pension scheme members and beneficiaries.

EIOPA is the body making such hard work of Solvency II. It has decided to act against insurance policies that use statistical information to discriminate, say, good drivers from bad, longer-living women from men, and shorter-lived smokers from those with healthier lifestyles.

‘Discrimination’ is the key word in EIOPA’s thinking. Many insurance companies have traditionally based their pricing on the nature of the risk they are asked to adopt. Young men drive more aggressively than women. Women live longer than men. Smokers have shorter lives than non-smokers. These facts are not in dispute and few would argue that it makes sense to charge all drivers the same premium, or to calculate annuities by ignoring the likely age at which policyholders will die. It is the ability to quantify these risks that places actuaries among the most highly-paid professionals in the world.

EIOPA, however, is steering clear of such facts. For EIOPA, the fact that insurers discriminate is enough for the facts to be discarded and a one-price-fits-all scheme to be made mandatory.

What this means, of course, is that premiums will rise for those in whose favour insurance companies have, until now, correctly ’discriminated’. What is going on here is the inevitable outcome of pursuing political correctness, which may be defined as the rigid adherence to a set of rules in pursuit of the impossible: legislating how people think.

Insurance companies have not had much to say publicly on the new personal lines rules. In part, perhaps, this is through a desire not to upset the all-powerful regulators at EIOPA, or it may be because the new regulations will increase premium income without a corresponding increase in risk adopted. Imagine if insurers introduced such policies on their own.

If insurers see this as a win-win, they will be unpleasantly surprised when their new pricing causes an uproar and the bad press rebounds to their disadvantage. Hardly anyone outside the industry has ever heard of EIOPA, and very few in the industry could tell you who sits on its governing councils and committees. However, the losers in EIOPA’s high-handed and ill-considered rulings are the very people the agency was founded to protect.