Valid Discrimination

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So, the EU have said it's illegal to charge women less for their car insurance than men.

That's a good thing, surely? Stamping out discrimination wherever we find it...yay for the advancement of society.

Actually, I happen to think this is a bad judgement. It over-simplfies what is a fairly complex subject.

So, for anyone who's interested, here's Insurance 101...and by insurance I mean pure risk stuff - push investment into the equation and life gets more fraught still.

My explanation is beyond simple and shouldn't be taken as based on actual statistics.

Principles of Insurance
1. Insurable interest
This means that you can only insure against an event happening if that event occurring causes you financial loss.
This means you can't take out life insurance on celebrities or on your neighbour's house.

2. Utmost Good Faith
This means that, when taking out insurance, you must disclosure relevant facts you're aware of to the insurer even if they don't ask for them.
This allows the insurer to price the risk fairly and accurately and stops you from insuring against something that you know is pretty likely to happen.

3. The cost of the premium must relate to the risk
So you wouldn't charge someone £20 premium for the potential loss of a £1 biro. You would refuse the insurance.
Also you take into account risk factors for the risk being insured.

4. Premiums for similar risks are to be pooled
So you keep the monies for life assurance premiums separate from those for household insurance.


Pricing the Risk

This is the crux of the soundbite story...and it starts with large numbers, claims experience, and a knowledge of statistics - or ready access to an infinite supply of actuaries with an infinite number of abacusses. Or something like that.

Let's ignore motor insurance at the moment and examine life assurance.

We all want to insure against the risk of us dying in the next year. We want to insure for £1000 just to pay for our funeral. There are 1000 of in the group.

We're going to do this as a sort of mutual arrangement with no profit, admin charge or anything like that.

We check with the ONS (I haven't, BTW) and determine that the mortality rate for the whole of the UK population is one death per thousand per year.

This keeps the maths nice and simple and we each put £1 in the fund a year.

During the ensuing 12 month period there is one death and the fund is paid out.

This carries on for a few years. Sometimes the fund lies untouched because no one died, some years two people die. But on the whole the fund meets claims as required.

You have an uneasy feeling that because you're 27 the chances of your family benefitting from the fund are are smaller - actually, much smaller than 99 year-old Doris who is also in the pool.

You start to feel that your £1 stake in the venture against Doris' £1 is rather unfair.

No one wants to start the year having a doctor poke them about, check their health and ask them loads of annoying questions about the amount they smoke, drink and go to the gym. But you all agree that 99 year-olds should be charged more than 27 year olds for the £1000 insurance.

So the pool is restructured, more people are recruited and now all the 99 year olds are pooled together and charged the same amount of money as each other. The chances of them dying is calculated as 1/10, therefore 100 claims are expected so the premium for everyone is £100 for the year.

In the 27 year-old's pool the claims rate is calculated as 1/10,000 and therefore the annual premium is £0.10

(I'm praying I've got the maths right here).

We can acutally put all the pools together and the premium charging will still be fair as long as keep the differential pricing.

I can't imagine that anyone reading this thinks this is in any way discriminatory.

The bigger the pool gets, the more accurate our prediction become and the chance of there not being enough money in the pool to pay claims reduces considerably.

I don't even have to prove the statistics to you, you know them already.

What if I was to factor in smoking? We're all used to smoker/non-smoker premiums. Why should non-smokers pay the same insurance premium as smokers?

What about drinking?

What about racing drivers?

What about miners?

What about Glaswegians?

What about people with high Blood Pressure?

Still reasonably comfortable with this?

OK, lets move on...

What about people with a family history of breast cancer, or cardiac disease, or Huntingdon's disease?

Hang on...this isn't about the people in the pool any more. People can't do anything about their family history - it just gets handed to them.

I would argue that, try as I might, I can't do anything about being 47 either but you were happy that I paid more towards the fund than you at your mere 27 years...

So, you're grudgingly on my side on that.

We're 50 years into our fund now and I've kept scrupulous records of everyone in the pool and, more importantly, how old they were when they died. For some reason, I included information about hair, eye and skin colour. Religion, musical taste and sexual orientation.

I can prove to you that fair-skinned, gay, Roman Catholics with a penchant for Judas Priest survive, on average, 5 years longer than the average population - no matter where they live and whether they smoke.
I have no idea why, but the numbers demonstrate it.

Should we charge them less?

Or are the straight, dark-skinned protestants going to feel discriminated against?

And back in the real world

Yes, that last example was preposterous. Nevertheless, this is where "Sheilas' Wheels" comes in.

On the whole, insurance isn't a matter of morals - it's a matter of numbers. Charging premiums according to risk is NOT discriminatory (leastways not in the way that word is usually used). It's about us paying our fair share for the risks we bring to the pool.

The problem is, some of these factors that affect our risk are rather emotive and the transition from factors we're comfortable with to factors we aren't isn't so much a grey area, as a big muddy quagmire.

So what are we to do?

I don't think the EU needed this particular sledgehammer to deal with this particular nut.

In the UK, proper monitoring of existing principles-based regulation - with particular reference to "Treating Customers Fairly" would have gotten the job done.

I honestly believe that the age-old principles of insurance are sound and generally work to ensure that insurance as a whole is calculated fairly.

But insurance has to existing in the outside world, too...

One of my friends, TT, made a very good point about the divisive nature of differential insurance premiums and this needs to be considered but it's not about insurance risk, it's about the way society expects us to behave.

Take compulsory insurances - the most readily understood example of which is motor insurance.

You're not allowed to drive without it but if you're a 17 year-old male Scouser you probably pay considerably more than your female counterpart in Surrey, even if you're both driving the same class of car.

The cost may be so great that it's unaffordable, or you may even be denied insurance through the normal route.
These are the cases when legislation has to come in to protect the minority of the population and "Act only" insurance comes into play. Time was, when your existing insurer couldn't refuse you insurance completely, but at a minimum would have to offer you "Act Only" insurance which provided the minimum requirement to make you road legal.

So the state can step in to provide a framework to reduce the level of disadvantage for some quarters of society.

And if you think it'll stop insurance companies charging differential rates for different risks, you're probably wrong.
Experience tells us (and, let's face it, insurance is all about experience) that the financial bods will find a way to skirt around legislation they believe to inappropriate.

I'm not condoning this, only suggesting that the legislation itself is likely to be largely ineffective - as well as very heavily flawed.

...oh and for the comments I've seen on news sites on the matter - women don't get all insurances cheaper, and never had. Long term disability insurance (or Income protection as it's also known) is significantly more expensive for women. I'd hazard a guess that medical insurance is too.



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