The recent decision of the European Court of Justice (ECJ) in the test case of Association Belge des Consommateurs Test-Achats ASBL and Others v Conseil des Ministres C-236/09 (Test-Achats) threatens to cause upheaval in the insurance industry. From 21 December 2012 insurers no longer will be able to use gender as a factor when pricing insurance contracts. Motor insurance, life insurance and annuities will be the hardest hit but the full effects could be far-reaching. Industry outrage at the decision has been voluminous, but is there any need to panic?
Sex, the Law and the ECJ
Equal treatment for men and women is a fundamental right under European Law (Article 6 of the EU Treaty). Expanding on that principle, in December 2004, the Gender Directive (2004/113/EC) was adopted requiring EU member states to legislate for equal treatment in access to and supply of goods and services. Article 5 of the Directive provides that in insurance contracts, the use of sex as a risk factor should not result in differences in premiums or benefits to an individual.
However, as the Directive recognised, the use of actuarial factors related to gender was widespread in insurance when the Directive was adopted in 2004, so a transitional period was incorporated that gave until 21 December 2007 for the differences to be abolished. Further, an exemption under Article 5(2) allowed premium and benefits differences where gender is a determining factor in the assessment of risk based on relevant and accurate actuarial and statistical data. In practice, this applies to motor, life and health insurance and annuities. However, the Directive included no long stop date for an end to this exemption.
Article 5(2) was challenged by Belgian consumer group Association Belge des Consommateurs Test-Achats on the grounds that it was incompatible with equality of treatment enshrined in EU law. In September 2010, Advocate-General Juliane Kokott (AG) issued her opinion that Article 5(2) was invalid because the exemption focussed on gender-based statistical differentials and did not take proper account of other factors influencing risk. As expected, the ECJ decision handed down in March agreed with the AG’s conclusion that Article 5(2) was incompatible with EU law. It ruled that the provision will be invalid from 21 December 2012.
The ECJ’s concise reasoning was that the indefinite application of Article 5(2) contravened the intention of the Gender Directive. The Gender Directive, the ECJ said, was based on the premise that for the purposes of applying the principle of equal treatment, the respective situations of men and women with regard to insurance premiums and benefits contracted by them are comparable. On this basis, an indefinite exemption could not be justified.
Implementation and Implications
After digesting the ECJ decision, the European Commission plans to meet with insurers to discuss the industry implications. It will then draft an amending directive to be implemented into domestic law by national governments.
As the change will not be retroactive, and as the UK is likely to introduce the amendment as late as possible, insurers will be able to continue relying on the Article 5(2) exemption up to and including 20.12.2012. With the exemption eliminated, Article 5(1) of the Gender Directive prohibits “the use of sex in the calculation of premiums and benefits”. This appears to apply not to an existing contractual relationship between insurer and policyholder, but to the underwriting decision immediately prior to inception of the contract. It should therefore not affect contracts incepting before the cut-off.
After 20 December 2012, all new insurance contracts will be required to be priced and to provide benefits on a unisex basis, not differentiated by gender. It is thought that contracts entered into before 21 December 2012 that have premiums or benefits payable after the cut-off date will not have to be changed if the premiums or benefits are fixed as at 21 December 2012, although this should be clarified in the domestic implementing legislation. If however the premiums or benefits in such contracts are reviewable by the insurer after 20 December 2012, it may be that such reviews must be conducted on a unisex basis. The situation is similarly uncertain for deferred annuities purchased before 21 December 2012 but with payment due after.
The most obvious impact of the ECJ decision is on motor and life insurance and annuities. It has widely been predicted that women’s motor insurance premiums will rise as they cross-subsidise men, who are (according to actuarial data) more accident-prone. Conversely, women’s annuity payments could rise because insurers will no longer be able to pay them lower benefits on the basis that they will generally live longer. The opposite effects should of course be true for men.
However, many feel that the removal of gender as a pricing factor will merely result in premium increases (and benefit reductions) for all as insurers must reassess data, alter their income structures, and change policy terms and marketing materials. Any ‘cross-subsidy’ of the type mentioned above would have to be delicately managed as it would require specific percentages of one sex taking out the policy as against the other sex in order to work. Using alternative lifestyle factors such as occupation to calculate risks could be complicated and problematic; concentrations of women doing care jobs or men in construction could lead to challenges that occupation is a form of indirect sex discrimination. And any companies that are tempted to adapt early to the amended legislation may suffer for their efforts. Customers are likely to desert insurers that raise premiums ahead of time, thus penalising efficient compliance departments by leaving their companies with less market share.
Where From Here?
The ECJ decision is final and cannot be appealed. As mentioned above, the European Commission now takes control of the process and will meet with stakeholders before amending the Gender Directive. It is conceivable that insurers’ views will be taken on board at that stage, particularly if it can be shown that in some instances the situations of men and women with regard to insurance premiums and benefits are not always comparable as is assumed under the Gender Directive. It may also be argued that unisex premiums would themselves be discriminatory where there is a clear difference in risk because of gender, as the cross-subsidies may be considered a form of indirect discrimination against one sex.
The decision could also have wider-reaching impacts. Pension schemes are not covered under the Gender Directive and so are unaffected by the Test¬Achats case but they are clearly a prime candidate for a similar legal challenge based on sex-specific factors. Other risk factors used by insurers could also be challenged on the same basis as in Test-Achats; of most concern to insurers would be age.
But the country whose consumers brought the Test-Achats case can also allay concerns about its practical consequences: Belgium has had unisex motor insurance since 2007 but has not seen the market problems feared by insurers. Premium growth has been restrained by strong competition and safer drivers of both sexes who build up no-claims bonuses have benefited.