Insurance costs:: New laws mean women’s insurance costs set to soar

Thousands of women in Scotland face sharp increases in the cost of insurance later this year when new rules outlaw the use of gender in calculating premiums.

Men will also be affected by the legislation, and experts urge anyone planning on taking out new insurance or buying an annuity over the next year to take the changes into account before acting.

The EU ban on gender discrimination when setting prices for financial services comes into force on 21 December. It is the result of a controversial European Court of Justice judgment in March 2011 that means insurers can no longer charge men and women different premiums on the basis of gender risk differences.

David Gow, a chartered financial planner at Acumen Financial Planning in Edinburgh, said: “At present, insurance companies are allowed to discriminate between the sexes, meaning men pay more for car insurance, largely because younger male drivers are more likely to have a serious accident, but receive a bigger pension when they buy an annuity because of their shorter life expectancy.”

The rules won’t affect existing insurance policies, but they will impact on the pricing of those taken out after 20 December. Women will be hardest-hit in the form of potentially sharp increases in the cost of car, life and protection insurance (such as income protection).

Roger Edwards, proposition director at Edinburgh-based insurer Bright Grey, explained why. “Someone’s gender can currently have quite an impact on the premium they pay for a range of insurance products because insurers know that male and female policyholders can have different accident, mortality and morbidity risks,” he said.

Men will enjoy reduced premiums on some insurance products but they will also suffer fresh reductions in annuity rates.

Some people will be able to make savings by acting before the new rules come into force. For others, it will be a case of finding other ways to reduce their insurance costs.

Here are the main products affected by the ruling and who they will affect.

LIFE INSURANCE

Women could end up paying 10 to 15 per cent more for life insurance as a result of gender pricing ban, according to Edwards. They currently pay lower premiums because they are less likely than men to die early, but that factor must be taken out of the equation under the new rules.

The 10 to 15 per cent estimate could yet prove too conservative as the ruling comes into force at roughly the same time as separate legislation that will increase the amount of tax that insurers have to pay. That could add another 10 per cent to premiums regardless of gender as insurers pass on their increased costs to customers.

Six in ten women don’t currently have life insurance, according to Bright Grey research. If you’re among them but feel you should do something about it, act before December. And remember, the longer you leave it the more expensive it gets.

Edwards said: “Life insurance is probably never going to be top of any woman’s shopping list, but there’s nothing quite like the prospect of a bargain, and that’s effectively what any woman who buys life insurance before 21 December is going to get.”

CAR INSURANCE

Women taking out car insurance after 20 December could pay up to 25 per cent more than now, experts predict.

Young women in particular pay less than half the premiums quoted for young men, but that gap is likely to narrow, precisely because it is the biggest gender difference in costs.

Young men could see their premiums fall by some 10 per cent, according to AA Insurance, while young women can expect to find their premiums increase by between 11 and 25 per cent.

Simon Douglas, director of AA Insurance, said: “The use of gender in calculating insurance risk has been a fundamental principle of the UK’s risk-based motor insurance structure for decades, although it has been a thorn in the EU’s side since 2002.”

He believes insurers will look for “proxies” for gender, perhaps by placing more emphasis on jobs with a gender bias either way, such as midwifery or construction.

The cost increases women are likely to see next year may later level out. “Motor insurance is an extremely competitive market,” said Douglas. “We are likely to find that the initial increase will start to be eroded as insurers begin to develop a more sophisticated response to the loss of gender for rating purposes.”

But some car insurers may seek to pull out of the young driver market altogether, he warned.

“That would reduce competition, leading to higher prices.”

Some insurers are beginning to amend their pricing ahead of the rules coming into force. The latest AA premium index shows that premiums are steadily increasing for young women while those for young men have fallen – a trend the AA expects to continue.

ANNUITIES

The pension income paid by annuities is likely to fall by more than 10 per cent for men after the legislation comes into force.

As with insurance, gender is one of several factors used as a basis for the rates offered to individuals. Men get more income than women of the same age because their lower life expectancy means the insurer doesn’t typically have to pay an income for as long.

That factor – paying men more than women – will have to go and lower annuity rates for men will lead to an estimated cut of up to 13 per cent in their pension.

Annuity rates have already been pushed down over the last couple of years by a combination of longer life expectancy, market volatility and the effects of the government’s quantitative easing programme (which has depressed the gilt yields on which annuity rates are based).

That’s why the gender rules will come at the worst possible time for men retiring in the months following their introduction.

“Every week, 5,000 people turn their pension pot into an income for life by buying an annuity, but annuities have never been such bad value,” said Gow.

That makes it more important than ever to shop around for the best value annuity on the market and not just accept the one your pension provider offers. With around a 20 per cent gap between the highest and lowest annuities, securing the best deal possible can boost your retirement income significantly.

Those who smoke or have health issues (from high blood pressure or diabetes to cancer or heart disease) can quality for enhanced annuities, which pay out up to 40 per cent more than normal annuities.

“You could also think about splitting your pension pot and using only part to buy an annuity now in the hope that rates might recover in the future,” said Gow. “Or you could go for a fixed-term annuity, which pays an income for a specific term, after which you will have a guaranteed amount to purchase another annuity.” Thousands of women in Scotland face sharp increases in the cost of insurance later this year when new rules outlaw the use of gender in calculating premiums.