Developments on Gender and Age Discrimination in Financial Services
07 March 2011The view of the European Court of Justice last week was that the exemptions were intended to be used to support a transitional period, subject to review by member states in December 2012. Its concern was that instead, the exemptions looked set to be applied indefinitely - against the intention of the Directive. So, the Court ruled that as with effect from December 2012, the article which allows the exemptions will be invalid.
The eventual outcome of the judgment was suggested by an Opinion provided to the Court by the Advocate General, Juliane Kokott, in September 2010. This indicated that the exemption to discrimination based on gender ought to be discontinued.
However, a clear distinction was drawn between the appropriateness of using gender and age as characteristics in risk assessment. The Opinion stated:
"It is true that age is a characteristic which is also inseparably linked to an individual but every human being passes through different categories of age in his life. If insurance premiums and benefits are therefore calculated differently according to age, that does not yet as such give rise to any fear that the insured person will be disadvantaged as an individual. Everyone may, on the basis of age, in the course of his life be in receipt of insurance products which are more or less favourable to him."
There are currently no EU rules prohibiting use of age in goods and services, although an Anti-Discrimination Directive may be in the pipeline. In the UK, the Equality Act 2010 already seeks to remove this form of discrimination. However HM Treasury indicated some time ago that use of age as a factor in assessment for financial services would continue to be supported where reasonable and justifiable.
Further information has just been provided in a new consultation, "Equality Act 2010: Banning age discrimination in services, public functions and associations - A consultation on proposed exceptions to the ban".
The consultation states that:
"...an exception should be provided to allow financial services providers to continue to use age when assessing risk and deciding prices; and the use of age banding and age limits will also be permitted to continue. However, any use of age will need to be based on relevant information which is from a source on which it is reasonable to rely."
The Government also wants to improve transparency on how age is used in financial services so that consumers can have more confidence that it is not being arbitrarily applied. The ABI has been asked to publish appropriate aggregated data showing how age is used in insurance, with a view to forming an industry level agreement.
Insurers would also be required to help individuals who experience problems accessing cover due to age, through signposting or referring to other providers. Signposting provision is likely to be built on the existing BIBA referral service with input from the ABI, who would produce and oversee a Code of Practice governing its use.
The exemption is proposed to work as follows:
- Where age is to be used in risk assessment, this must "be done by reference to information which is both relevant to the assessment of risk and from a source on which it is reasonable to rely"
- Age banding will still be permitted for use as a part of this approach
- The use of age limits will also be able to continue, so providers who choose to specialise in serving particular age segments of the population can continue doing so (e.g. SAGA)
- Individuals will have the right to challenge a provider should they think an arbitrary age based decision has been made
- It is planned that an independent external body will review operation of the exemption three years after the age discrimination ban comes into effect
A statutory Code of Practice covering the new age discrimination provisions will be produced by the Equality and Human Rights Commission. This will be made available in final form at least 3 months before the prohibition comes into effect, which will not be before April 2012.
The consultation can be found here, at the Equalities Office website. It is open for response until 25 May 2011.
For insurers, the loss of the ability to use gender in risk assessment will have enormous impact on the provision of products. Being able to continue to proportionately and appropriately mitigate for the manner in which risk profiles change with age will at least provide some comfort to the industry, while they are forced to make plans to replace - as far as possible - the predictive value of gender.
Insurers will also need to revisit marketing strategies in terms of the mix of consumer prospects they attract. In the same way that credit providers look to attract creditworthy applicants who will pass unobstructed through the credit assessment, insurers will wish to encourage interest from whichever gender presents the lowest risk. In the past, justified differential pricing meant that the risk either way was correctly addressed, usually keeping advertising neutral. Now that this is no longer the case, we may see interesting shifts in how products are advertised and marketed.
For lenders, it has been a long time since gender was permitted to be used in assessment. However, age continues to form a very important factor in making the decision to lend. It is common sense that individuals' needs will vary throughout the course of their lives, and the way in which they will responsibly use credit to smooth consumption will vary to reflect this.
It is perhaps unsurprising as a result that age can be uniquely predictive of default risk. Allowing its continued use in credit assessment will support the ability to correctly rate and account for the default risk associated with individuals. This will protect credit availability and make sure that prices continue, as far as is possible, to genuinely reflect the risk in lending to specific consumers.
