Thursday, December 02, 2021

The EU forbids the use of gender to help calculate car insurance premiums, leading women to pay more and men to pay less

 See The elusive equilibrium by Koen Smets. Excerpt:

"Insurers only care about the risk, and not about gender. If a particular category of people poses a higher or lower risk, all else being equal, than another one, they will seek to reflect that in the premium. When, as a society, we do not want to have inequity in the premiums, then we should accept that a unified premium might lead to a different disequilibrium and new inequities.

Motor insurance in Europe forms a very interesting case study. Traditionally, insurers charged women less, because they tend to be safer drivers, and hence make fewer and smaller claims. Unlike life expectancy, the factors determining the risk here are much more linked to individual choice and behaviour. Since 2012, an EU directive forbids insurers to use gender as an element in the calculation of the premium. So, in Q4 2011, men paid on average 17% more than the overall average premium, while women paid 20% less. In 2018, that difference with the overall average premium had shrunk to a 5% uplift for male drivers, and a 6% discount for female drivers. (The residual difference stems from the fact that men tend to drive more miles per year, in more powerful cars.) So, relatively speaking, the ‘gender equity’ intervention has increased the average premium for the lower-risk women by more than 17%, while it has cut it by just under 10% for the higher-risk men. Is this an improvement? It’s not so sure."

If men are less safe, insurers need them to charge men more. But the EU police has forced the companies to charge men too little and women too much. It probably brings some dangerous male drivers into the market while causing some females to drop out. Overall, driving is probably less safe.

The insurance market has a problem, though. The customers don’t always tell their insurance company their bad habits (like smoking, riding a motor cycle without a helmut, etc.). So they don’t know how risky you are and therefore don’t know what price to charge you. So sometimes these markets are not efficient.

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Should Overweight People Pay More For Health Insurance?
Should We Pay People To Adopt A Healthy Lifestyle? 

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Some History of Insurance

1 comment:

Anonymous said...

"If men are less safe, insurers need them to charge men more.[...]"

Insurance is about spreading the risk, so by definition if a given social group has more risk it is advantaged by the insurance.

Adding your last paragraph make it almost sound like insurance should be only a temporal risk spread instead of a social and temporal spread. Which is probably not what was meant.

"So sometimes these markets are not efficient."

I'm not sure how to use an efficient market hypothesis when insurance is mandatory, and has a huge barrier to entry.