Background to Test-Achats
The Treaty on the Functioning of the European Union, the Charter of Fundamental Rights and (most of) the Gender Directive*:
- Prohibit discrimination based on gender; and
- Require equal treatment of men and women.
However, article 5(2) of the Directive allows insurers domiciled in the United Kingdom, Belgium, France, Germany, Holland, Ireland, Italy and Spain (the "relevant jurisdictions") to:
"...permit proportionate differences in individuals' premiums and benefits where the use of sex is a determining factor in the assessment of risk based on relevant and accurate actuarial and statistical data".
Article 5(2) of the Directive therefore appears to be incompatible with the Treaty, the Charter and the rest of the Directive.
In Test-Achats (C-236/09), the European Court of Justice (ECJ) was asked to decide whether that meant article 5(2) of the Directive is unlawful.
On 1 March 2011, the Court decided that article 5(2) is lawful, but only as a transitional measure that expires on 20 December 2012.
(* Directive 2004/113/EC implementing the principle of equal treatment between men and women.)
Test-Achats: new policies
An insurer domiciled in a relevant jurisdiction may, until 20 December 2012, continue to offer, and enter into, contracts of insurance where the premiums and benefits differ according to the policyholder's gender, provided that:
- The differences are proportionate;
- The use of sex is only a determining factor in the assessment of risk; and
- The risk assessment is based on relevant and accurate actuarial and statistical data.
Such a contract will be lawful and binding on the insurer and policyholder after 20 December 2012, unless the policyholder lawfully exercises a right to cancel.
After 20 December 2012, all new contracts of insurance must be gender neutral. In accordance with normal principles, contract renewals will be regarded as new contracts and must be gender neutral as well.
Test-Achats: insurer has right or duty to vary policy terms
An insurer exercising a lawful right to vary the premiums or benefits under a contract of insurance will probably be obliged to make the varied terms gender neutral if the right is exercised on or after 21 December 2012, even if the contract was effected before that date.
There are two reasons:
- If a term is varied, the insurer will be required to vary it in a way that is consistent with the law as it stands at the date of the variation, not the date of inception (if the law has changed); and
- Anything less would be inconsistent with the Financial Services Authorities (FSA's) treating policyholders fairly principle and rules. This is especially likely in circumstances where a Test-Achats consistent review would give some policyholders lower premiums or better benefits than they would be entitled to if Test-Achats was left entirely out of account.
If that is right, it creates risk for insurers. For example, an insurer with a right or obligation to vary may face:
- Adverse PR if a review generates material premium increases or benefit losses for some policyholders;
- A significant rise in policy cancellations (unless, perhaps, it is impossible to get more competitive cover from another provider after the variation takes effect);
- Legal and regulatory challenges based on the validity of its right to vary policy terms. Those challenges could be based on an assertion that the insurer's right to vary is unenforceable as a result of the Unfair Terms in Consumer Contracts Regulations or the Unfair Commercial Practices Directive; and/or
- Regulatory challenge if the FSA believes, for example, that its treating policyholders fairly principle and rules have been breached.
An insurer choosing not to exercise its right to vary policy terms may also be challenged if a policyholder believes the cost of his cover would fall, or his benefits would be broader and deeper, if a Test-Achats consistent review occurred.
Test-Achats - impact on portfolio management
In principle, insurers will still be able to take gender into account at an insurance book level when they assess and manage their insurance risks. However, this will only be possible if there is no direct or indirect differential impact on the premiums charged and the benefits paid to men and women.
If that is right, a long-term insurer could, for example, still invest in bonds and gilts with different maturity dates according to the balance of male and female insureds on its books. Doing that might allow the insurer better to match its assets and liabilities even on contracts sold on or after 21 December 2012.
Test-Achats and reinsurers
Test-Achats only applies to the relationship between insurers and their policyholders. It does not apply to reinsurance. A reinsurer could therefore price a reinsurance agreement differently according to the proportion of men and women insureds in the underlying book. However, over time, a reinsurance agreement priced in that way may become unattractive to insurers. The FSA's detailed Conduct of Business rules may also restrict an insurers' ability to enter into such an agreement.
Test-Achats and pension buy-ins and buy-outs
The Directive only applies to insurance and pensions which are private, voluntary and separate from the employment relationship. Bulk annuity contracts issued to pension trustees as part of a pension buy-in or buy-out should not therefore be affected by Test-Achats. If that is right, buy-in and buy-out contracts can still be priced taking gender into account.
Test-Achats - age and disability
Test-Achats used the Gender Directive to obtain an ECJ ruling that will make it unlawful for insurers to take gender into account when they calculate insurance premiums and benefits. The European Commission is developing a proposal for a Directive on the principle of equal treatment between persons irrespective of religion or belief, disability, age or sexual orientation.
The current draft of that Directive seems to include provisions on age and disability that are like those used in Article 5 of the Gender Directive. If those proposals made their way into a Directive adopted by the Parliament and Council, there is at least a risk that a Test-Achats type challenge would be used to make it unlawful for insurers to offer different premiums or benefits according to the policyholder's age or disability.
Such a fundamental change in the law would have serious consequences for the insurance industry. Insurers may therefore wish to maintain a watching brief on the Commission's proposals and to consider making representations to the Financial Services Authority, HM Treasury and the Commission in due course.
Read on for more practical tips on the action insurers can take now.