FSA chairman Callum McCarthy has warned cost of buying insurance cover is set to rise if a European Directive preventing gender discrimination in premium pricing comes into force.
Speaking at the Global Financial Leadership Forum in London yesterday, McCarthy said insurance prices would rise considerably and could even exceed £1bn if the UK government presses ahead with the European Commission proposal.
The new European directive on equal treatment will forbid EU-based insurance firms from considering a person's gender when calculating the price of a product - something which will in particular affect products such as annuities, life insurance, income protection insurance and motor car insurance.
While the proposed directive itself sounds like a good idea, the regulator expects it will further increase the price for different insurance covers as firms will not know in advance the proportions of men and women who might in the future buy their non-gender differentiated products. With this in mind, they are likely to include margins in their pricing of products to cover the risk their predictions have been incorrect, McCarthy said.
Furthermore, insuers may also be required to hold more capital to cover this risk than they currently maintain, he also pointed out.
"We would expect insurance prices to have to increase by some percentage points to cover this; and for an increase in capital for the insurance industry. This could be considerable, and come to and even exceed £1bn," said McCarthy.
The FSA also believes the proposal would require insurers to depart from realistic assessment of risk. This would run "counter to good sense", McCarthy deems.
According to estimates made by the regulator, the new regulations would, for example, see the annuity a woman purchases at the age of 60 increase in cost by 2% while the premium would be reduced by 3% for a man at the same age.
Mccarthy said: "All these changes will be driven not by the correction of any error in the present actuarial assessment of risk, but by the opposite - by a deliberate design for a good social objective to override realities of life expectancy or of actual behaviour.
"It is not surprising that the results of such a policy would have such arbitrary consequences for men and women - sometimes favouring men, sometimes women, but in no case corresponding to the underlying reality," he added.
Agreeing with McCarthy, LifeSearch's managing director Tom Baigrie says: “It certainly doesn’t seem that the EU has really thought this one through.
To ensure rates match insurers could apply a ‘meet in the middle’ approach. We fear, however, that due to the additional cost burden brought about by the increased difficultly in underwriting accurately, the net result will simply be higher premiums all round, with females paying more for life cover as a result, " he adds.IFAonline
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