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In Insurance, markets and equality collide

March 1st, 2011 Posted in Economics, EU Politics by

Insurance is a difficult, not widely understood industry, in which equal treatment and markets collide. Pensions are very specific form of income insurance.

What Insurance does is put a price on risk. It does that by assessing the different profiles of groups, across thousands of data points, and evaluates the likelihood of default.

By nature this work is discriminatory. If for example it is the case that women generally have fewer motor accidents than men, they pay less for their car insurance.

And this is usually a good thing. The differential pricing discourages higher risk groups from engaging in risky behaviour while benefitting the cautious.

It is not entirely fair. Cautious male drivers pay more than girl-racers, at least at first, until the weight of evidence of their actual behaviour cancels out the group assumption.

That though is largely unavoidable. Perfectly fair personal insurance would require perfect foresight and perfect information about an individual. Neither will ever exist. Even future health insurance based on genetic profiling is still a probabilities game. Insurance needs to make assumptions.

Today’s furore about an CJEU ruling that gender discrimination in insurance and pensions is illegal then removes one assumption they can make.

It is not as the press are reporting a particularly ‘bonkers’ judgement by the Daily Mail’s least favourite Euro-quango. More a direct consequence of the law agreed between Member States in the European Council in 2004, as this analysis makes clear.

If the decision is daft, it is direct consequence of a daft consensus between national governments.

Whether it is so daft is where economic and political liberalism offer conflicting advice. Purists from either tradition will reach opposite conclusions. Pointless intervention that will distort prices and create many examples of reverse discrimination, or a valuable protection against undue penalty.

In the muddy middle we tend to believe exemptions from discrimination prohibitions should be proporionate, evidence-based, and carry few unpleasant unintended consequences. You might consistently believe that race discrimination in insurance was completely unacceptable (it creates a poverty trap), whilst welcoming post-code discrimination (you can move), and gender discrimination (men die younger and should have cheaper pension annuities).

The data on this specific change though would tend to suggest the status quo is pretty reasonable. It’s not clear what problem this change is trying to solve or what benefit it brings. 

Discouraging testerone-fuelled video games fanatics from competing for the M40 title strikes me as generally more beneficial than the resolving the injustice it imposes on Kid Cautious in his lonely struggle to achieve perfect cruise control sensitive to the conditions of the road.

The Council of Ministers need to think again…

3 Responses to “In Insurance, markets and equality collide”

  1. Neil Says:

    I look forward to the day when I no name or other discriminatory data that makes me different to the other millions populating the EU.
    I shall be a number but never number one. No person shall make judgements upon me despite claims of legal, medical, educational or political experience for that experience is null when all are declared equal.


  2. Ed Joyce Says:

    I am surprised to read that the author is in the ‘muddy middle’ as this issue is crystal clear. Men have the right not to buy insurance from any company that is prejudiced against them. As long as they have that right which they plainly do why can they not simply go to another insurer that charges them a ‘fair’ price (more in many cases).

    What will happen now is that the rates for women will rise and vast amounts of advertising will be targeted at this now highly profitable sector. We will definitely be seeing a lot more Sheila’s Wheels type ads. This will consume ALL of the difference between the price for women and that for men – not a penny more, not a panny less. You don’t need a degree in Economics to understand this.

    There will be no productivity gain from this move. This is an utterly pointless gesture that will one day become a case study of the virtues of free markets, and will not help men in any way.

    Ed Joyce


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