Equal Treatment: will rating on age and disability become unfair?

Should insurers be allowed to differentiate between risks on the basis of age and disability? The sector is worried that the 2011 ruling on gender in the Test-Achats case may be replicated for those other characteristics. Yet there’s a risk that this vital differentiation / discrimination debate will become skewed by an entrenching of perspectives.

A recent conference organised by Swiss Re’s Life and Health arm brought together insurers, politicians and campaigners to discuss the key issues associated with the differentiation / discrimination debate. There was clearly a willingness to understand each others’ perspective, although not a lot in the way of obvious progress.

The conference focused on the implementation of a proposed EU equal treatment directive that would prohibit discrimination based on age or disability in respect to access to and supply of goods and services. At the moment, such discrimination is illegal in terms of employment, but permitted in terms of goods and services.

On the face of it, removing age and disability from the toolkits of life and health underwriters (to name but two) could have many consequences. Yet the Directive’s wording is more nuanced than that. The proposed text states that in the provision of financial services, proportionate differences in treatment…

“…on the grounds of age do not constitute discrimination…, if age is a determining factor in the assessment of risk for the service in question and this assessment is based on actuarial principles and relevant and reliable statistical data.”

The same principle is being proposed in respect of disability. The proposed directive as currently worded goes on to state that …

“…providers of financial services who decide to apply proportionate differences of treatment on the grounds of age or disability shall, upon request, provide information to customers and relevant judicial and complaints bodies on the reasons explaining those differences of treatment.”

And this is then developed further in terms of the burden of proof,

“when persons who consider themselves wronged because the principle of equal treatment has not been applied to them, establish, before a court or other competent authority, facts from which it may be presumed that there has been direct or indirect discrimination, it shall be for the respondent to prove that there has been no breach of the prohibition of discrimination.”

In other words, the burden of proof lies with the insurer, who would have to prove that…

“age limits and age bands reflect proportionate differences of treatment on grounds of age and are set in a reasonable manner.”

Now I’m no legislator and the threads and nuances of directive negotiations are not for the faint hearted, but to me, as a reasonably experienced insurance professional, this points to the issue being less about differentiating between risks based upon age and disability (which will continued to be allowed) and more about proportionality, reasonableness and transparency.

Yet what insurance chief executive would appear on morning radio to argue against a directive that allows proportionate and reasonable business practices? The case against the directive has so far been framed in terms of adverse selection, but so long as risk differentiation around age and disability is applied proportionately and reasonably, should that really be a concern? After all, proportionailty and reasonableness should be familiar terms to any actuary.

Insurers will of course find it burdensome to have to provide evidence that their risk differentiation around age and disability comply with the proposed directive. It’s an extra cost of business. Yet should it really worry them, given that existing regulations already require them to treat customers fairly? Their fairness processes should already be reassuring their board of directors on this key point.

Does this point then to deep, underlying concerns within the sector about transparency? If so, that is a concern for the future health and well being of the insurance sector.

In the next post, I’ll be looking in a little more detail at one of the key legs that the equal treatment directive stands on: actuarial principles.