ECJ gender ruling hits insurance costs

Young women drivers buying car insurance and any man considering retirement will get a worse deal from the end of next year, following a ruling prohibiting the use of gender in insurance underwriting.

The ruling, by the European court of justice, means insurers will no longer be able to use sex as a factor to determine whether someone represents a bigger risk in insurance terms, even though historical evidence shows that being male or female has a bearing on frequency and size of claims.

Maggie Craig, acting director general for the Association of British Insurers, said: "This gender ban is disappointing news for UK consumers and something the UK insurance industry has fought against for the last decade. The judgment ignores the fact that taking a person's gender into account, where relevant to the risk, enables men and women alike to get a more accurate price for their insurance."

The underwriting of car insurance, life insurance and pension annuities are particularly likely to be affected.

Insurers have until now charged young men significantly more to reflect the fact they are more likely to have serious accidents: a male driver under 21 is twice as likely to have an accident than a woman under 21. But the insurance industry will now have to rip up its current pricing model, and young men under the age of 25 are now likely to see premiums decrease by an average of 10%, and in some cases 25%.

Adrian Webb of esure said the prohibitively high cost of car insurance for young men has previously helped discourage them from buying high performance vehicles, thus reducing the risk to themselves and others.

"If young men's premiums are artificially reduced, this could lead to more opting to choose more powerful vehicles," he said. "It is particularly alarming given that the head of the Association of Police Officers in the UK in 2005 noted that the biggest killer of young women in Britain is their boyfriend's and male friends' driving."

At the same time, car insurance premiums for women under the age of 25 are expected to rise by an average of 25% by the end of 2012, but by up to 60% for the youngest drivers, which could translate into an extra £500-£1,000 a year for some.

Biba, the British Insurance Brokers' Association, said: "Effectively, females will now pay a cross-subsidy for males on their insurance premiums."

The AA warned that many insurers will find the young driver market "too risky" and pull out altogether, thereby reducing competition and pushing up prices.

But Martin Lewis, creator of MoneySavingExpert.com, believes banning the use of gender for car insurance is sensible: "With car insurance I think there is some logic to this ban – gender price differences are based on behaviour. Why should one man pay more because others behaved badly? Would we allow the same to happen based on racial differences?

"However, in the main it is ludicrous. Most cost differences are because women live longer – that's not bias, it's biology, and there is nothing wrong with factoring that into quotes. For example, it means women get better annuity rates but worse life-term assurance costs."

Women could see a 20% rise in the cost of life insurance while men could benefit from a fall of about 10%, the ABI said. More men than women take out life insurance, resulting in the different figures.

However, older men will suffer a fall of about 8% in income from their annuities on retirement. Until now insurers have been able to factor in the shorter life span of men compared to women when underwriting these contracts, allowing men to benefit from a higher income than women. The ABI says the income from women's annuities is likely to rise, but joint annuities, which pay out an income to the surviving spouse after the death of a husband or wife, will also be hit.

Wealthy investors with bigger pensions can avoid buying an annuity by drawing an income from their pension funds instead, subject to rules set by the government. But the level of income they can withdraw is also likely to be affected by the ruling, according to Tom McPhail, pension expert with independent financial adviser Hargreaves Lansdown.

He said: "The GAD rates on which the level of income you can draw down is based were under review, but HM Revenue and Customs said it would wait until the outcome of this ruling was known.

"The fact that the ruling has come out against the use of gender probably means the level of income men can withdraw will fall, while that withdrawn by women may rise slightly."

Craig added: "Insurers will now study this judgment carefully to manage negative effects for customers. Insurers will work hard to ensure that the UK insurance market remains one of the most competitive in the world offering a strong choice of products and prices for customers.

"It will be crucial to ensure this news does not put people off having vital insurance that protects them against accident or illness, or provides an income in retirement. Insurance remains good value for people and not all customers will be equally affected as the use of gender can vary significantly between products and different companies. Each company will have to respond to the ban in the way they feel is in their customers' interests."