Con los precios unisex de las rentas vitalicias, ¿pierden tanto las mujeres como los hombres y los proveedores?

Juha Alho has argued against the EU directive on unisex pricing for annuities. This directive  not only changes the pricing of annuities, it also applies to health insurances, life insurances  and car insurances. For this reason, I want to take a somewhat broader perspective in my  comment, although I completely support his negative view. Being an economist, I ask  whether there could be an economic case for unisex pricing of insurance products? What  could be the general economic guidelines or rational to apply? Based on these guidelines, how  would we then asses the unisex pricing of various insurance products? 

An economic price of an insurance product (or any other product) typically reflects the  individual benefit (or in economic terms the utility) the buyer generates from consuming that  product. In most cases, we are dealing with purely private benefits so that my own  consumption has no impact on other people. If I only benefit from my own consumption, there is at least no clear intuitive reason, why the price should deviate from my individual  benefit. Of course, this reasoning does not apply any more when my consumption or cost also  affect other people in a positive or a negative way. In such cases, the (in an economic sense)  appropriate price I pay also has to reflect such externalities. 

For example, until 2008 the cost  of child birth and motherhood were only borne by women in the German private health  insurance. This practice ended in 2008 and I guess that hardly anybody would argue in favour  of such gender-specific premiums. At least implicitly we have in mind that not only the  mother, but also the father and at the end the whole society benefits from children. The reform  reduced the premiums for women slightly but they still had to pay 15 to 20 percent higher  premiums because of additional cost due to longer life spans. This practice ended in 2012  with the implementation of the EU directive. In my opinion, an equity argument could justify gender independent premiums in such mandatory health insurance contracts. But why does  this not apply to annuity pricing? First, annuities are a typical private product where no externalities are involved. 

Consequently, there is no justification for unisex pricing based on  efficiency or allocative reasons. Second, there is in my opinion also no equity argument in  favour of unisex pricing. Annuity products are typically not mandatory such as health  insurance. If the insurance provider asks an average, gender independent price, the insurance  premium rises for men and decreases for women. Consequently, fewer men will buy the  product so that the price increases further until at the end only women buy the annuity at the  previous gender-specific price.  Consequently, women are not better off than before, but men  are now excluded from the market. This is a clear deterioration in the sense of Pareto. 

Of  course, the same argumentation applies in the case of life insurances, but here women will be excluded from the market at the end. On the other hand, this argument does not apply in the  case of car insurances. They are mandatory and the past driving behaviour can be taken into  account when calculating individual premiums. I see no clear argument against unisex  pricing.

I think that unisex pricing which is intended to prevent gender  discrimination may induce in some situations more discrimination once the market reactions  are taken into account.

Consequently, one has to be very careful to apply unisex pricing to  insurance products. I do not completely dismiss it for all insurance products, but I see no  economic case for unisex annuity pricing.  

There is a great lack of knowledge of lifetime annuity insurance by a large part of the population, understood as a product that combines pension provision with an efficient means of saving or investment, as an alternative to the traditional offers of the banking sector, which prevents it from developing in Spain as it has in most European countries.

The excessive survival of people means that the savings made throughout their professional lives are insufficient to meet the needs of the last years of life, so we must ensure the payment of decent pensions throughout their lives, however long they may be.

To this end, it is necessary to start as soon as possible a social welfare system complementary to the social security system, and life annuity insurance is an excellent product for this purpose.

Life insurance companies operate through the grouping of risks and the law of large numbers, in such a way that, although it is not possible to know when the event is going to occur, it is possible to estimate the number of events in a certain period of time for a large number of insured persons through mortality tables.

Every welfare system must consider the coverage of the following contingencies:

1.- The sudden death of the person, leaving economic instability for their relatives.
2.- Excessive survival, so that the savings made throughout a person's professional life are insufficient to cover the needs of these final years.
3.- The occurrence of a violent, sudden and external accident or illness that diminishes or cancels the obtaining of current and future income.

The insurance company is in charge of the administration and control of all the contributions or premiums made by the different components of the group, as well as establishing the relationship between the money contributed by each of the components and the guaranteed sum insured that corresponds to them, depending on a series of variables, such as the valuation of the actuarial age, the financial profitability obtained on the funds of the money invested and the duration of the payment of the annuities.

In the case of pure annuity insurance, where there is no coverage in the event of death, the totality of the premiums paid is dedicated to savings and capitalised at the technical interest rate, giving rise to mathematical provisions.

The application of the mortality tables by sex in the contracting of lifetime annuity insurance, generates that the interest rate applied, taking into account the probability of death (higher in men than in women) is higher due to the probability of not paying the lifetime annuities if the beneficiaries of these annuities die, for this reason, the approach is not that women lose out compared to men, but that the annuity received is higher for men, due to the fact that their probability of death is higher than that of women and, therefore, it is foreseeable that these annuities will cease to be paid earlier in the case of men.

Unisex pricing leads to an increase in the probability of death for women and a similarity to that of men, so that the annuities received are equal for men and women.

Gender differentiation in annuity pricing is justified by the fact that gender is a determining factor in risk assessment based on relevant and accurate actuarial and statistical data. 

Excluding sex in the pricing of individual life insurance, both survival and pure risk, does not make actuarial sense and must be understood as an application of the principle of equality of contributions, not of benefits, because if the premium is identical by sex, the benefits will be different. The logic of different rates used previously was that the same benefit was being insured, albeit with a different premium. We have therefore moved from a situation of "sex discrimination in the premium", where women and men paid for their own risk, to "sex discrimination in the benefit", where the unisex premium will depend on the male/female mix of the insurance provider. Nothing would prevent an "informed" consumer from arbitraging and taking out insurance products with a "favourable gender bias" and directing his or her savings to other financial products where it is unfavourable, especially in the current trend of not favouring some solutions over others within the third pillar. On the contrary, in company life insurance, in the second pillar, the pricing is by sex, so that we find that the same risk is priced differently, in an area, in the workplace, where the same criteria could be defended as in individual insurance.

It is not true that gender, like age, is the only variable that explains the premium. The world of Big Data may open the door to more precise, " near-individual " pricing, allowing insurers to reduce the current implicit risk by taking into account other factors (education, standard of living, income, medical factors, etc.). This argument, which is used to argue that the unification of rates by sex is consistent with principles of non-discrimination because rates can be adjusted for other factors, may clash with the consumers' point of view. For are consumers prepared to pay different premiums for risk factors of which they do not know the economic influence on the premium, and is there not a risk that future age discrimination, for example, will be prohibited by regulation? 

The further risk pricing moves away from its empirical measurement, the greater the margin of safety that insurers may require, and thus the less attractive the price becomes for customers.

Almost 20 years ago, in 2003, I shared an article by the European Commissioner for Employment and Social Affairs, Anna Diamantopoulou, entitled "For insurance without sexual discrimination" with my students of the Actuarial Degree at the University of Barcelona. In which, the Commissioner explained how women are systematically discriminated against in survival insurance for the simple fact that they have a higher life expectancy than men and, consequently, defended the European Commission's draft directive aimed at achieving a equal treatment in the insurance industry.

From the interesting debate that took place in class, and having previously accused this professor and all the actuaries and future actuaries, as well as the (female) future actuaries present there, of being sexist (obviously in a humorous sense and only as a catalyst to promote discussion in class), several conclusions that I think are interesting and valid 20 years later. Which I dare to summarize below.

The mission of actuaries is to assess the risks that we face as a society, for which we base ourselves on the empirical data available to us and, based on a series of calculations and mathematical models, obtain the best possible estimate of its future evolution. This should allow us to face these future risks in the best possible way from an economic perspective. Our ultimate goal is to die of success, that is, reduce the risk factor to probability 1 (which would make us mere financiers).

In the biometric field, to predict future survival or mortality, we rely on tables that are prepared in accordance with accumulated historical experience. This experience tells us that women live longer, therefore, if we must calculate a life annuity for women and another for men based on the same accumulated capital, consequently the income will be less for women, given that the experience accumulated up to the date (and it always has been) in table form tells us that it will live longer. But, on the contrary, if what we are asked to calculate is life insurance, that is, the probability of death as of today, the premium that the man will have to pay will be higher, since the probability of his death is elderly.

If this empirical fact changes, the first interested in reflecting it in insurance prices will be the actuaries and the insurance market itself, since otherwise we will cease to be competitive and, above all, we will run the risk that our financial provisions will not cover the risk assumed.

In any case, we actuaries have always made our calculations and we will continue to do so, as it cannot be otherwise, based on the information available and if this information has any reduction or limitation for whatever reason, we will simply adapt . However, the less information we consider, the greater variability and risk in the future, so the safety margins applied should be higher. Otherwise, the insurer is in danger of going bankrupt and that all its clients are left without the protection for which they have paid.

Finally, in any healthy market and trade, the principle of free competition must exist and every customer must pay a fair price in relation to the goods and services that he requires. Also in the insurance market.

From a technical point of view, there is no problem in ignoring the gender variable, and we could even stop using other variables such as age, level of training, place of residence, etc. We will continue to produce insurance, and although we will undoubtedly obtain more egalitarians, the price will go up since precision is obviously lost.

Taking into account the above and in the specific case of ignoring the gender variable, a higher price is obtained globally for both men and women and, although it may seem otherwise, no one will win, not even the insurance companies, since with some products more expensive, surely the market will also suffer, in addition to the fact that it will promote situations of imbalance and anti-selection (a greater number of men will formalize life insurance, as their premium decreases, and a greater number of women will subscribe to savings insurance, as their benefit increases) and in At the extreme end, ignoring the empirical data, the insurance market will stop fulfilling its mission and we actuaries will die of failure given that there will only be a single equal premium without any relation to reality.

The actuarial complexity of gender.

Gender equality is a fact and a legal, social and human right that sometimes clashes with economic reality.

A simple idea that, however, hides a much more complex reality. It has been demonstrated that, whatever the time, country, race or region of the world, women live longer and, as such, actuarial logic leads us to think that higher rates and greater mathematical provisions should be applied in life annuities, although for the last 15 years this has not been possible in a generalised manner in the calculation of the premium due to the application of Organic Law 3/2007, which transposed a European directive in this sense; specifically Council Directive 2004/113/EC of 13 December 2004 implementing the principle of equal treatment between men and women in the access to and supply of goods and services. Thus, Article 71 of the Organic Law, concerning actuarial factors, established in its first paragraph that it prohibited the conclusion of insurance or related financial services contracts in which, by considering sex as a factor in the calculation of premiums and benefits, differences in the premiums and benefits of insured persons are generated.

However, the Organic Law, like the Community Directive it transposed, opened a loophole to circumvent this natural right to equality and established an exception on the application in the calculation of the premium of actuarial tables that differentiate survival according to sex.

The Organic Law itself, in the second paragraph of its article 71.1, transposed the permissive text of the directive verbatim, where it was stated that cases could be established in which proportionate differences in premiums and benefits of persons considered individually are admitted, if sex constitutes a determining factor in the assessment of risk based on relevant and reliable actuarial and statistical data -something quite easy-. Consequently, the entire insurance industry in Europe continued to apply different tariffs according to gender.

This was the case until the judgment of the Court of Justice of the European Union (Grand Chamber) of 1 March 2011 in case C-236/09 (Association belge des Consommateurs Test-Achats ASBL) ruled that Article 5(2) of Council Directive 2004/113/EC of 13 December 2004 implementing the principle of equal treatment between men and women in the access to and supply of goods and services was declared invalid with effect from 21 December 2012.

From that moment on, the cat flap was tightly closed in pricing, totally to differentiate between the sexes, even though there was data verifying the higher life expectancy of women. This ruling repealed the "famous" second paragraph of article 71.1, which had until then left equality "in the doldrums" until 21 December 2012.

Now, of course, this legal prohibition is only for insurance contracts from financial services, i.e. individual insurance, because group insurance has its own legislation where, in the calculation of the premium, the differentiation of actuarial tables by sex is permitted. This is included in the current Law 20/2015, of 14 July, on the regulation, supervision and solvency of insurance and reinsurance companies, where in the third paragraph of article 94, relating to premium rates and technical bases, it is established, with regard to the principle of equal treatment between men and women, that insurance contracts linked to an employment relationship are exempt from this, in which differentiation in premiums and benefits is permitted when justified by actuarial factors. This is in accordance with Directive 2006/54/EC of the European Parliament and of the Council of 5 July 2006 on the implementation of the principle of equal opportunities and equal treatment of men and women in matters of employment and occupation.

Therefore, ladies and gentlemen, the actuarial legal gibberish is being served up, because at present, in the calculation of the premium, actuarial discrimination is permitted in the field of group insurance, i.e. in the field of employment, but actuarial discrimination is not permitted in the field of individual insurance, i.e. in the financial field. And, as if that were not enough, when calculating the mathematical provisions of the insurer, the use of the fact that women have a longer life expectancy is permitted in all cases.

The problem of gender discrimination due to women's longer life expectancy, a paradoxical situation, is not always solved by forcing - or recommending - the legislator to use unisex actuarial tables. 

In the field of individual insurance, the mandatory use of a unisex table does solve gender discrimination, but it has its drawbacks, including the generalised increase in prices - assuming that the insurer is a rational economic agent - in order to maintain solvency ratios and the higher capital costs it entails. Therefore, the application of gender-differentiated tables improves the solvency of the system. At the same time, de facto, the application of unisex tables means that only insurance consumers finance this laudable social policy. Consequently, it is not society as a whole - applying criteria of equity and redistributive justice - that bears the cost of the gender equality policy, but only the consumers of the product. It can be said that, perhaps, the diffuse nature of this cost does not generate too much rejection, but, in any case, it exists and, therefore, it must be highlighted.

But in the field of employment, i.e. group insurance - including occupational pension schemes - using a unisex table does not solve gender discrimination, which is why the legislator allows differentiation by sex.

It is therefore necessary to provide for other measures to alleviate discrimination, especially in these products that fall within the scope of employment and whose contributions by employers - contributions - are wages. In this case, it is not discrimination based on the use of financial services, but wage discrimination, which is even more serious.

This is undoubtedly a complex issue on which there is no technical, political and social consensus. In 2006, the undersigned, together with Professor Dr. González Rabanal, published by the Institute of Fiscal Studies, carried out a study on the use of a unisex actuarial table and whether its use succeeded in avoiding discrimination between women and men. The conclusion was that with respect to individual insurance it does avoid discrimination - although it generates the problems mentioned above - but with respect to group insurance it does not. Alternatives in the field of employment, which are still in force, were analysed in order to fulfil the aim of non-discrimination, looking at what the economic cost would be and how it could be evaluated. Already then we fixed a solution through a subsidy to the employer, which can be instrumented as a deduction in his or her Corporate Tax quota, for the amount necessary to avoid discrimination and that this is calculated, for each fiscal year, as the difference in actuarial capitalisation that occurs between men and women.

Bibliography:

GONZÁLEZ RABANAL, Mª de la C. y SÁEZ DE JÁUREGUI SANZ. L. Mª (2006): La política comunitaria contra la discriminación de género: una propuesta de evaluación de su coste en los planes y fondos de pensiones de empleo. Su aplicación al caso español. INSTITUTO DE ESTUDIOS FISCALES. Madrid.

Directiva 2004/113/CE del Consejo, de 13 de diciembre de 2004, por la que se aplica el principio de igualdad de trato entre hombres y mujeres al acceso a bienes y servicios y su suministro.

Directiva 2006/54/CE del Parlamento Europeo y del Consejo, de 5 de julio de 2006, relativa a la aplicación del principio de igualdad de oportunidades e igualdad de trato entre hombres y mujeres en asuntos de empleo y ocupación.

Ley Orgánica 3/2007, de 22 de marzo, para la igualdad mujeres y hombres.

Ley 20/2015, de 14 de julio, de ordenación, supervisión y solvencia de las entidades aseguradoras y reaseguradoras.

SÁEZ DE JÁUREGUI SANZ, L. Mª (2007): "Las tablas actuariales de supervivencia y la igualdad efectiva de mujeres y hombres.". Indice: Revista de Estadística y Sociedad del INE, nº 23. Págs. 17-19.

SÁEZ DE JÁUREGUI SANZ, Mª Elena (2004): “La estrategia de discriminación de precios entre sexos en el sector asegurador: una cuestión de solvencia”. TESIS. Madrid. ICEA.

Sentencia del Tribunal de Justicia de la Unión Europea, de 1 de marzo de 2011.