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Insurance and rights

Can same-sex bathrooms be far behind?

Mar 3rd 2011, 14:29 by M.S.

ON TUESDAY the European Court for Human Rights ruled that insurers in the EU can no longer charge different premiums for men and women. The Financial Times' Lex writes:

The judgment is philosophically ignorant and practically almost pointless... As far as auto insurers are concerned, the genders are not equal, as there is overwhelming evidence that women are safer drivers than men (especially the young, high testosterone variety). They therefore charge them lower premiums. Unisex rates may abstractly be good for sexual equality, but they are unfair to the safer sex.

Life assurers can also scarcely fail to notice that women live longer. And health insurers will wonder how to calculate unisex rates for the risk of breast or prostate cancer. Men and women are different enough by nature that it seems fair to charge them different rates for life assurance and pensions (while discrimination on the basis of skin colour or religion would still plainly be unfair).

This seems to me to reflect a misunderstanding of the purpose of insurance, as well as an idiosyncratic use of the word "fair". In what sense is it fair to charge me more for car insurance because I am male, regardless of my actual driving behaviour? I didn't choose to be born male; what is fair about charging me a financial penalty for it, or about granting a woman with identical driving behaviour an award for having had the wisdom to be born female? The attempt to head off the analogy to racial discrimination doesn't work at all. Blacks have significantly shorter life expectancies than whites; if insurers are justified in charging women less for life insurance, they should be justified in charging blacks more. (In West Africa, perhaps they ought to charge blacks less, as whites are significantly more vulnerable to malaria.)

Ah, one objects, but blacks aren't shorter-lived because of their biology; it's because they are more likely to be poor, to smoke, and various other third factors. Insurance policies should incentivise blacks, like whites, to live healthily, not penalise them for the colour of their skin, which they can't control. Similarly, men don't crash cars because their penises get in the way of the steering wheel, but because they are more likely to drive recklessly. Insurance policies should incentivise men, like women, to drive carefully, not penalise them for being born with genitalia that are correlated with risky driving.

What we're seeing here really goes beyond questions of sexual egalitarianism; it goes to the heart of what insurance is for. The social purpose of insurance is to protect people from suffering unreasonable financial punishment due to factors beyond their control. One way to say this is that it's unfair for people to be punished for having bad luck, or for being who they are. Another way to say it is that by collectively smoothing the pointless risks of birth or accident, by softening the slings and arrows of outrageous fortune, we free people up to make more productive and efficient choices about the things they can control. If I have to pay more for car insurance because I'm a man, I will be discouraged from starting a delivery service, no matter how carefully I plan to drive, and even if a delivery service would otherwise be the most productive use of my skills.

The extension of this argument is more important to American readers. One often hears from people opposed to universal health insurance that making people unlikely to get sick pay higher premiums to compensate for the costs of people likely to get sick is not actuarially sound. This confuses the social purpose of insurance, to share pointless risks, with the profit incentives of insurers. Insurers will naturally try not to insure people likely to get sick through no fault of their own, who are, obviously, precisely the people insurance is designed to protect. Further, insurers will naturally choose to discriminate on the basis of sex or race where they are correlated with risk; sex and race are easy markers which cost insurers little to detect. But no social value is generated by charging people for things they can't do anything about. If the European ruling means insurers will have to take the extra effort to devise metrics that measure people's behaviour, creating incentives for improvement, it will have been a very productive ruling.

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Kaveh wrote:
Mar 3rd 2011 2:36 GMT

This post actually made me change my mind about the ruling. Not everyday that happens, thanks.

Tzimisces wrote:
Mar 3rd 2011 2:50 GMT

"If the European ruling means insurers will have to take the extra effort to devise metrics that measure people's behaviour, creating incentives for improvement, it will have been a very productive ruling."

While I find this a very interesting perspective, I am left thinking that it may be easier for insurance companies to simply use this ruling as a way to collect additional rents. Insurance rate increases for women can go through and be blamed on the government. Men are used to the higher insurance rates and will be happy with any decrease. Insurance companies seem likely at first glance to be able to raise women's rates by more than they decreases men's rates by, at least in the medium term.

Of course, this depends a lot on market structure, so my suggestion could all fall apart based on that. How large are the insurance companies in Europe? What are the regulations they operate under? How much more expensive would new metrics for measuring behavior be and how do these metrics interact with privacy laws?

On the whole though, I guess I think you may be right in the long term, but in the shorter term I would bet that insurance companies will manage to get significant rents for several years out of this. It will be interesting to find out how this impacts insurance companies' profits for the next few years as well as how it impacts politics in European countries. However crude the correlation of driving habits and sex may be, it is easy and cheap to note and it is a strong correlation. What will replace it, how expensive will any replacement be to adminster, and what will be the short and medium term political fallout of the increased prospects for rent seeking while the market settles into a new equilibrium?

Chestertonian wrote:
Mar 3rd 2011 2:54 GMT

M.S. wrote: "One often hears from people opposed to universal health insurance that making people unlikely to get sick pay higher premiums to compensate for the costs of people likely to get sick is not actuarially sound. This confuses the social purpose of insurance, to share pointless risks, with the profit incentives of insurers."

That would be a great argument if health "insurance" in America was actually insurance, instead of an absurdly inefficient financing mechanism.

If we end up with a catastrophic coverage mandate and a genuinely free market for all other health services, then I'd gladly support your conclusion. But as it stands, most Americans overconsume health care because the current system provides poor incentives to economize, and a huge number are in poor health for no reason other than the lifestyle choices they make.

Forcing me to subsidize care for those who overconsume and can't be bothered to take care of themselves because they're not picking up the check is indeed *unfair*.

Penguintopia wrote:
Mar 3rd 2011 3:00 GMT

If you are going to fundamentally change the historic, tradition idea of insurance (actuarial, loss based premiums), then you need to do so across the board. And that does not work. One example is insuring ones home.

Insurance for a home is based on the value of the home and the value of the person's possessions. If we apply the same logic ('egalitarian, non-actuarial, non-risk-based') to this, then everyone pays the same, no matter the risk to the insurance company, and no matter the potential benefit. This penalizes those who have smaller risk and thus ought to have a lower premium.

And that does not make sense.

Health care is different, though, since health insurance conflates pre-paid preventative care with sick/emergent care and thus is not purely loss based, so one has to separate the components to talk about in in an 'insurance' context.

Bottom line - it makes perfect sense that lower risk results in lower premiums. Actuarial loss tables are not sexist, racist or biased. They simply reflect actual loss rates. And it makes sense to charge premiums based on actual risk/loss in most cases.

Manly Horse wrote:
Mar 3rd 2011 3:15 GMT

I think that you're right.

However, I'm thinking about the practice of charging higher insurance premiums for home or car insurance for people who live in areas where the incidence of burglary or car theft is higher. Is that okay? What if the areas with higher premiums have a relatively high proportion of ethnic minority residents? Is that indirect discrimination?

I also have a recollection that a few years ago an Australian health insurer was ordered to charge higher premiums to older people on the grounds that premiums which did not take account of the costs incurred by different age groups were discriminatory against younger people. Does that discriminate against a healthy older person? I would have thought that the answer was yes.

Mar 3rd 2011 3:19 GMT

"Similarly, men don't crash cars because their penises get in the way of the steering wheel, but because they are more likely to drive recklessly."

M.S., it appears the two of us face different obstacles in life. My penis has been blamed for many car crashes.

Mar 3rd 2011 3:25 GMT

As to the meat of the post:

I actually had a long argument about this topic (except it was about car insurance premiums), in which I argued that differential rates should be charged to men and women, because young men would have to pay higher premiums, be less likely to drive, and less likely to crash.

I'm not sure if I completely agree with myself, but I think that the car insurance and health insurance situations are different. Young males driving creates external risk, whereas being a woman or man creates internal risks for health insurance/life insurance purposes. Differential pricing by sex in the car insurance arena can help to incentivize young men to find other ways to get places rather than driving recklessly. Differential pricing in health insurance and life insurance would not have this beneficial incentive effect.

merch79 wrote:
Mar 3rd 2011 3:36 GMT

It will be interesting to see what effect this ruling has on insurance rates. The obvious answer is that women will pay more and men will pay less as rates settle at some in-between point. If car insurance (for example) were an optional purchase, we would expect men to flock to the new low rates, and women to flee, which would change the composition of the pool. With the new, riskier, clientele, rates would increase, and men would be back in the same boat as before.

Since car insurance is required by law in most places (UK, France, Germany, elsewhere?), though, it seems like there will be no change in the composition of the pool. Women will be forced to stay in the market for car insurance, and will, in effect, subsidize male drivers. And since many households feature male/female partnerships, many couples will not notice any bottom line difference on their monthly bill.

So the only people adversely affected will be a) single women, and b) homosexual women. So I guess this is a pro-heterosexual marriage/partnership law! Those crafty Europeans.

In all seriousness, though, the fact of male/female partnerships is one reason that sex discrimination in insurance might be perceived as acceptable in a way that racial discrimination would not be. Lots of people get married or cohabitate with a member of the opposite sex; not so many do the same across racial lines. So sexual discrimination could lead to an end result where most households don't see their total insurance bill change, but racial discrimination would lead to an equilibrium where households of one race pay very low rates and households of another race pay very high rates. You can see why that would be politically infeasible, not to mention offensive to most people's notions of justice.

Manly Horse wrote:
Mar 3rd 2011 3:36 GMT

One other difficult area is natural disasters. There's a lot of controversy in Australia at the moment in the aftermath of catastrophic floods (and usually after major bush-fires) about insurance. Should people who live in vulnerable areas be charged higher premiums? If they don't take out insurance should they be bailed out by the taxpayer? What about state and local governments whose assets are destroyed? Should they be required to take out insurance?

MSpaint wrote:
Mar 3rd 2011 3:46 GMT

Thanks, please tell Bagehot.

euphrax wrote:
Mar 3rd 2011 3:50 GMT

What if the actuaries cleverly massaging statistics show that certain other groups and immigrants minorities, ethnic, sexual, etc are a worse risk and should pay higher premiums?

Would that be fair? Would the public put up with it?

Most certainly the actuaries would show that poor people are worse drivers and should pay higher premiums than the wealthy.

That would be rich.

jbay wrote:
Mar 3rd 2011 3:53 GMT

Let’s take this a step further. Why should a couple who can effectively cut their expenditures by a half to a third pay the same tax rate I do even though there income is double? Why should seniors be afforded all types of tax loop holes that younger people don't get. Grandpa has had his entire life to save while I'm just starting out.

Our whole system is full of hypocrisy based on age, gender, sex, etc. Daily I'm confronted w. people whose only job is to sit in meetings and benefit from my work. I'm tired of it and I'm frustrated by it. There justification for doing so is not industry knowledge, business knowledge or any other ability beyond politics and age.

I get told daily to, "get out of the weeds", because not only do they not have acumen of our business but they have no business acumen of any shade or color. Then we stand perplexed, in society, as the Madoff's scurry from the shadows. What value are the politicians adding? That is my question because I see none.

OneAegis wrote:
Mar 3rd 2011 4:02 GMT

I pity the women who must make do with the horror that is a public men's restroom.

While I find the sentiment expressed in this post admirable, I feel it is an attempt to ignore reality. I don't see that passing down regulations to insurance companies is the place for government to try to manage equality. In fact it would seem to try to force insurance companies to make financially unsound decisions, which is harmful in the long run.

barrkel wrote:
Mar 3rd 2011 4:08 GMT

I made a similar comment along similar lines on Bagehot's article - http://www.economist.com/comment/846038#comment-846038 - but I don't think it's a complete slam-dunk argument. It depends on how central driving is to the good life. What if, instead of driving, we were talking about ski-gliding (ski / paraglide mashup, Google for videos)? The more optional the activity being insured, the more reasonable it is not to pool risks across the board, because the very choice of whether to engage in the insured activity is a behaviour within one's control.

Or to put it another way, it doesn't surprise me that relatively more car-centric Americans would find less fault with this ruling.

FWIW, I personally am in favour of the ruling.

barrkel wrote:
Mar 3rd 2011 4:14 GMT

OneAegis - I don't agree; that's a reflexive argument, but it it presumes the right to free commerce gets precedence over the right not to be sexually discriminated against.

Insurance is a betting market; the insurer bets against the event occurring, while the insured bets for it happening (though they have ancillary costs that presumably are greater than their "win", otherwise incentives are misaligned). And in this case, insurers are the ones choosing the odds. If their actuarial models are sophisticated enough to figure out the cost of being male, they are surely sophisticated enough to figure out the cost of treating both sexes equally (which should be little more than a weighted average of premia times expected payout).

doublehelix wrote:
Mar 3rd 2011 4:14 GMT

"The social purpose of insurance is to protect people from suffering unreasonable financial punishment due to factors beyond their control. One way to say this is that it's unfair for people to be punished for having bad luck, or for being who they are."

Fair enough, but with any insurance product one must also consider the moral hazard involved, as well as the financial feasibility of offering a single rate. It would be folly to expect home insurance carriers to write policies on houses that are on fire, but that is pretty much what people like Obama expect of the health insurance industry. Such regulations can only increase the cost of insurance for everyone. Also, with rampant obesity in the US and incessant calls from the nanny state to eat healthy, exercise and lose weight, I find it strange that we are providing disincentives to do so while we add further cost pressures to an expensive product with a pricetag that continues to spiral out of control.

Faedrus wrote:
Mar 3rd 2011 4:24 GMT

"Similarly, men don't crash cars because their penises get in the way of the steering wheel..."

Speak for yourself, cowboy...

john bauman wrote:
Mar 3rd 2011 4:26 GMT

"If I have to pay more for car insurance because I'm a man, I will be discouraged from starting a delivery service, no matter how carefully I plan to drive, and even if a delivery service would otherwise be the most productive use of my skills"

What if your increased accident-proneness causes your delivery business to be a net loss to society? Should we be subsidizing your business? Of course, you may say that you plan to drive extremely carefully, but the insurance companies don't really have a way to verify that, even though they try with such things as good student, good driver, professional, and other discounts.

Mar 3rd 2011 4:34 GMT

It's also not fair that men eat more. Men should receive a food subsidy. And women need tampons. Maybe the food subsidy will cancel out the tampon subsidy. We should require that shoe manufacturers sell men's and women's shoes at the same price.

You inadvertently point out the difference with race. The risk factors associated with race are primarily external. Insurers can discriminate based on income, geography, education, etc. and arrive at an even better risk assessment than had they used race. The risk factors associated with gender are primarily biological. Men can't get pregnant. Gender is the best criterion for assessing these risks. The fact that you can't choose your gender doesn't mean that we must therefore ignore it. I find that too often, minorities are short changed by the majority's refusal to acknowledge them. Gender-blindness and color-blindness are not the solutions to unjust discrimination, they're part of the problem. Social Security and Medicare transfers wealth from blacks to non-blacks. You can justify it by arguing that it's really race neutral but that doesn't change the fact that blacks receive far less in SS and Medicare benefits than they put in. Instead of ignoring that fact, try to see if there's a better solution (e.g., individual accounts).

Even from behind a veil of ignorance, I wouldn't necessary prohibit gender rating insurance. It's not like we're talking about career advancement here. We're talking about consumption. There is nothing inherent unfair about charging people for what they consume or are expected to consume. We don't care if Meg Whitman has to pay higher premiums than a male her age. If insurers can gender rate, so can the government. Provide larger health care subsidies for poor women.

I am all for prohibiting discrimination based on pre-existing conditions though but here's why that's not inconsistent. In a world with perfect information and no fraud, we could just subsidize those with pre-existing conditions. That would be the preferred method. Unfortunately, if you try that in the real world, you'll need a bureaucracy to determine what each pre-existing condition is worth and to weed out fraud. It's much more efficient to prohibit discrimination based on pre-existing conditions. But gender is easy enough to sort out.

Garrett J wrote:
Mar 3rd 2011 4:39 GMT

I do see the logic here, but wouldn't that same exact logic apply to age? Why should 18 year-old drivers be charged more for insurance than their 40 year-old counterparts? One can't help being young after all and why should age result in a different rate any more than race or sex?

If we remove categories beyond our control from categories insurers are permitted to use, what does that leave?

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