Ashton Berkhauer, Commercial Director of uSwitch

A recent European Court of Justice ruling has made it illegal for insurance companies to price their insurance products differently on the grounds of gender. In this article there are a couple of items which could be debated all night long. The one I won’t be commenting on is whether a European Court of non-elected judges should have the right to enforce decisions that impact on cases such as this. I am no legal or political commentator so please forgive me for giving this one a miss.  However now the decision has been made by the ECJ what could this mean?

Firstly, this hasn’t come as a bolt out of the blue. Insurers have known that this was a possibility for quite a long time. In addition to this is the fact that the ruling doesn’t come in to force until December 2012. So they certainly have plenty of time to prepare.

Why are insurers making such a fuss about this change?  As a general rule when insurers ask questions during a quotation process  for car insurance they capture information on you (the policyholder) for mainly two reasons:

1) they use it for a basis to calculate the premium they want to charge you for the insurance policy or

2) they think they can use it to understand you better in order sell you more products (not as sophisticated or efficient as Tesco and their clubcard though, but that is a whole different story).

In relation to point one, calculating the premium, gender has always been used as a big differentiator in pricing. It is a piece of information that insurers have had access to for decades when calculating premiums and lots of claims experience with it.

So if you have two people living in the same house driving exactly the same model of car with the same driving history, i.e. no accidents or points on their driving license.  On face value would you charge these people the same amount for insurance, probably yes. But let’s say from experience you know that the male driver is likely to have an accident in the next 12 months because that is what other male drivers have done.  So now it makes sense that you charge him more because he is likely to cost you lots of money when you pay out for a claim he is going to have.

Statistically speaking, the motor insurance market will say that a young, testosterone pumped male with only a few years driving experience is going to have a more expensive accident that a young women in the same position. In fact the British Insurance Brokers Association (BIBA) statistics currently state that the cost of the average car claim by an 18-year old man is £4,400, while that for an 18-year old woman is £2,700. So it is not just down to having more claims but having a more expensive claims.

So from December 21st 2012 insurers will no longer be allowed to charge extra for motor insurance the young man that is likely to have a claim costing over 40% more. It has been suggested that the price for a woman’s policy could go up by as much as 30% and a man’s policy is likely to fall by a figure in the region of 10%.

Insurance companies in the UK are many and also successful in the main. Much of our financial strength in the City of London has been born out of having a market and world leading insurance epicentre. So even though these changes being enforced by the ECJ may cause some initial problems it is a long way from being the demise of insurance as we know it. Some of the most highly paid individuals within insurance companies are the actuaries. These very intelligent work horses spend many a waking hour understanding the relationship between claims that are paid out for by the insurance companies and working out what prices should be set. These guys will already be beavering away working out which factors or answers you have given to the questions they ask which can be used instead of gender. It may be that more emphasis gets placed upon the number of miles you drive each year for example.

If there is one thing you can be sure of it is that we have an incredibly competitive insurance market. Although the calculations used to work out how much we pay may change you can still be sure that it will maintain to be competitive as long as people continue to demand a good deal. So do yourself a favour and make sure you keep your insurance company on its toes by not accepting the first renewal price they offer you and making sure you check around to get the best deal.