On 1 March 2011 the European Court of Justice (“ECJ”) ruled that gender can no longer be used as a consideration in setting insurance premiums. The decision has sent shockwaves through the industry, and will have a far-reaching impact for years to come on almost everyone who buys and sells general insurance and life and pensions products. By way of example, it seems likely that women can no longer be charged lower car insurance premiums than men and industry commentators are warning that the cost of buying annuities will change with men possibly receiving less pension income.
In Association Belge des Consommateurs Test-Achats ASBL; Yann van Vugt; Charles Basselier v Conseil des Ministres Case C-236/09, Test Achats, a Belgian Consumer Group, brought an action against the Belgian Council of Ministers seeking annulment of those provisions of Belgian law which implement European Directive 2004/113 (“the Directive”). The Directive creates a framework for preventing discrimination based on sex, specifically in relation to the supply of goods and services.
The ECJ was asked to determine the compatibility of the Directive with the provisions of European Union law, specifically the principle requiring sexual equality and non-discrimination.
Article 6(2) of the EU Treaty requires Member States to guarantee the fundamental rights contained in the European Convention on Human Rights. These rights are incorporated into the Charter of Fundamental Rights of the European Union (the “Charter”) and so are binding on Member States.
Articles 21 and 23 of the Charter prohibit discrimination based on gender: put simply there must be equality between men and women in all areas. The European Council (and by extension the ECJ) has the power to take action where these principles are breached.
Article 5(1) of the Directive requires that, before 21 December 2007, Member States must abolish the practice of using “sex as a factor in the calculation of premiums and benefits for the purposes of insurance…”. However, Article 5(2) of the Directive permits Member States to apply an exemption to Article 5(1) where “relevant and accurate actuarial and statistical data” are used to assess risk based on the sex of the insured. If the exemption is invoked by a Member State, the decision to do so must be reviewed five years after implementation, in other words after 21 December 2012.
The ECJ noted that, although there is a five year review for the exemption, there is nothing in the Directive that limits the time period for allowing the differences in premiums based on the sex of the insured. Consequently, the ECJ believed that there was a risk that Member States could continue to apply the differences in cost of insurance premiums indefinitely.
The ECJ therefore concluded that, given the possibility of an indefinite time period by which Member States are allowed to rely on the exemption and permit differences in the treatment of men and women for insurance purposes, Article 5(2) contradicts the principle of equality and non-discrimination between men and women. The ECJ said that “taking the gender of the insured into account as a risk factor in insurance contracts constitutes discrimination”. Consequently, the Court found that Article 5(2) of Directive 2004/113 is invalid, with effect from 21 December 2012, and Member States must then abide by Article 5 (1).
The implications of this decision are substantial, not least for an industry already affected by the recent increase in insurance premium tax but also for consumers struggling with the double whammy of having less cash in their pockets as a result of Government cut backs, the increase in VAT and having to pay premiums that were on the rise in any event.
The decision will affect providers of all types of insurance, including car insurance, private medical insurance and life insurance.
It is industry practice for insurers to use gender as a risk factor when calculating insurance premiums for individuals: effectively this ability has been removed by the ECJ. By way of example, in circumstances where women previously enjoyed lower car insurance premiums, having been perceived as statistically safer drivers than men, they might now expect significantly higher costs despite their personal circumstances and individual criteria remaining the same. It may be that the industry has to change its risk and pricing modelling, which could lead to women effectively subsiding men on premiums.
Fundamentally, insurance providers will need to review existing parameters, procedures and assumptions to ensure that, going forward, men and women are insured on comparable terms, such that neither policy achieved an advantage or disadvantage based on gender.
Further, it is expected that the findings of the ECJ will directly affect the pensions industry. Currently, due to disparity in life expectancies, it is standard practice for men to receive higher annuities than women. The ECJ’s decision will likely require that both sexes are now entitled to receive proportionally similar annuities.
The decision in ASBL was not widely predicted and accordingly has come as a shock to insurance providers. It also potentially opens the door to similar issues being determined, for example regarding an insured’s age and/or medical history. At this stage it is safe to say that the insurance industry has been rocked by the decision and faces a turbulent time ahead.