Business Ethics and Social Responsibility

European Court Abolishes Sexual Discrimination In Insurance Pricing

Index

Introduction ………………………………………………………………………………………………...... 3

Sexual Discrimination and Insurance ………………………………………………………………… 4

Normative Ethics and the Discrimination in Insurance ……………………………………... 5

Utilitarianism ……………………………………………………………………………………………………. 5

Kant Deonthological Ethic Theory ……………………………………………………………………. 7

Critical Opinion ……………………………………………………………………………………………….. 8

Bibliography ……………………………………………………………………………………………………. 9

Introduction

The aim of this report is to discuss a controversial and very recent issue regarding business ethics: The sexual discrimination in the Insurance markets.
I decided to do further research and build on this subject, because, after reading in the newspaper about it, I still do not know how the future is going to be concerning all the details and crucial aspects of dealing with such a sensitive subject.
In this essay there will be an evaluation of the status quo from an economic point of view and an assessment of the market impacts of a potential ban on the use of gender as a differentiating factor of private insurance prices in EU.

The question that first arises is: Is the abolishment of the inequalities in insurance premiums and benefits going to have positive consequences for the customers of private European insurance companies?

To get the reader closer to the functioning of pricing by private insurance companies, some basic information is going to be provided.

Firstly, it is important to know the principles governing insurance provision:

1- Risk-based provision: insurers have to price insurance on the basis of the risk of the insured, including the probability of a claim being made against the policy and the cost of that claim

2- Risk solidarity within risk pools: risk is shared between individuals within risk pools, and the premiums of the many pay for the losses of the few.

Gender is not used as a differentiator factor across all insurance markets. Rather, it is used in the provision of only those insurance products that cover risks, which differ by gender, for example: accident risk, pension annuities, morbidity risk and mortality risk.

Risk-based pricing in the insurance industry is key to the efficient operation of the private insurance markets, but before further develop on the case, it is very important to highlight that just removing gender as rating factor does not necessarily achieve neutrality in insurance prices. Gender-neutral pricing would often be very costly, in not impossible, to achieve.

Sexual Discrimination and Insurance

Since the beginning of times that we live in a society where gender discrimination holds. In fact, men and women are seen and treated in different ways, with all limitations and privileges that it implies.
This fact that seems to be intrinsic to so many areas and environments, is also present in the business world, and of course in the insurance sector.

When setting prices for insurance products, insurers take into account several factors to ensure that their prices reflect the risks and other costs of provision. Gender is one such factor and has long been used by European insurers in pricing insurance products, covering risks that differ between men and women.

The EU Gender Directive of 13 December 2004 (Council Directive 2004/113/EC) provides for equal treatment between men and women in the access and supply of goods and services. While this Directive prohibits insurers from using gender in the calculation of premiums and benefits, it contains an exemption to this rule: Member States can opt out from banning the use of gender and can allow proportionate differences in insurance premiums and benefits where the use of gender is a determining factor in the assessment of risk based on the relevant and accurate actuarial and statistical data, provided that Member States ensure that such data is compiled, published and regularly updated. The regulations came into force on April 6th 2008 and appliance to insurance contracts entered from that date.
Under the regulations, the use of gender as a factor in the assessment of insurance risk must be based on actuarial and statistical data published in accordance with guidelines issued by the European Court.

In fact, the Directive was silent on how long this exemption could continue. It did, however, require those member states that chose to implement it to review their decision by 21st December 2012, five years after the Directive came into force.

Despite this objective justification, the use of gender in insurance pricing remains subject to debate at European level, and claims of unfair and unequal treatment between men and women in insurance provision continue to be advanced against insurers by some stakeholders.

On 1st March 2011, however, the European Court ruled in a test case that Article mentioned above would be invalid from that date.
“The Court of Justice applied the prohibition of direct discrimination which does not permit any specific justification, unlike indirect discrimination, in the sector of insurance which is particularly important from an economic perspective. From 21 December 2012, discrimination based on the gender will be prohibited”
From 21st December 2012, insurers will no longer be able to use gender as a differentiator factor in the calculation of premiums and benefits, following a ruling by the European Court of Justice.
The decision means insurers will have to change the way they price life and critical illness policies, annuities, private medical insurance, travel insurance, motor insurance and other types of cover where data shows that the sex of the insured can have an effect on the risk.
With the banning of such directive, some crucial questions arise:

* Is this exception favouring the insurance customers? Or is it favouring the insurance companies itself?

* Should we blame the insurance companies of abusing of that exception?

* Should the exception be completely abolished?

Normative Ethics and the Discrimination in Insurance

Some may consider gender differentials in insurance pricing to be an unacceptable issue, even if this can be justified by objective evidence and is fair from an actuarial perspective (insurance calculations perspective). Irrespective of what views are taken on what is fair or socially acceptable, a ban on a relevant risk-rating factor such as gender cannot be achieved without costs. These costs can be high where gender is highly correlated with risk. Where there is no correlation, there is no impact (and gender would not be used in product pricing in the first place).

In the next section, the positions of various normative ethical theories will be exposed, since they provide guidelines for decision-making in situations of conflict of interests. Utilitarianism and Deonthological Kantian ethic theories will be focused with more detail.

Utilitarianism

Utilitarianism is a consequentialist theory of maximizing wellfare and “happiness” - calculating the best consequences relating them with the worst ones, maximizing the sum of benefits and minimizing the sum of the losses.
It is easy to conclude that this theory can be analyzed from different perspectives, but it is crucial that we focus on consumers (as a man and woman) and on the European insurance companies.

Accordingly to consumers in general, maximizing wellfare involves having equal opportunities, meaning an adjusted and fair price for each one, regarding the risk probabilities of their life, taking into account the historial acts and experiences of their lives. Nobody is capable of choosing his/her own sex, and being limited and discriminated by that intrinsic characteristic is obviously prejudicial and imoral.
Furthermore, it is possible to point several particular cases in which the sexual discrimination is bad for both:

1) In car insurance young male drivers have to pay higher premiums than women, since they statistically have more accidents, so carry a higher risk. But there are no guarantees regarding the fact mentioned above, and it may happen that a young man is paying more than a young ladie and the last one has more accidents than the first one (maximization of the losses for men).

2) In Pension annuities insurance, females are required to pay more than men because statistically they (women) have a higher life span. Therefore, insurance companies, to beware these situations that can have high costs, force women to pay higher values from the beginning of the contract. Again, there is no guarantee that a specific woman will live longer than a man (maximization of the losses for woman).

In a business perspective only, Utilitarianism is reflected in the economy through the increasing of profits and decreasing of prices and also through the maximization of production with limited economic resources, being this the principle of efficiency.
This way, it is easy to conclude that every insurance company will have maximum profit by discriminating its customers by gender. If they make one gender pay a higher price (as they have statistically higher risk probabilities), they are going to increase their profit margin. Likewise, being European Insurance Companies able to differentiate its prices by gender, makes them have a higher income in certain types of insurance, in which there is a higher statistical probability of risk and specially in those areas where gender is highly correlated with risk.

On the other hand, and as Utilitarianism approaches welfare as an end and not as a mean, according to the business and enterprise view, non-homogenization of prices implies that one gender benefit from it, paying a smaller value, thus having easier access to certain types of insurance, augmenting the number of sales by the insurance companies.

Although Utilitarianism defends that all costs must be weighted, in this specific case, when customers need insurance, they are actually going to make it, even if they are not happy with the conditions. It works as if they were obliged to consume.

Concluding, towards an Utilitarianism perspective, we do not arrive to a clear agreement, because in order to achieve maximization of profits by insurance companies, they need to differentiate prices by gender. However, for customers, while one gender benefits with the Directive, the other has to inherit extremely negative consequences.

Kant Deonthological Ethic Theory

Kant Deonthological Theory arises with a widely different perspective when comparing to the previous one.
In this case, we focus on the justification and the intention that lead to a certain action. Likewise, an action is only considerated valid if, and only if the action is done/practiced according to the duty, without taking into account its consequencies: “To act in a morally right way, people must act from duty”, “it is not the consequences of actions that make them right or wrong, but the motives of the person who carries out the action” (Emmanuel Kant, 1780).

In the particular case of the European Insurance Companies, its final objective is obviously to diminuish the risk when making insurance agreements. If companies can in fact have higher prices for people with higher risks, there is only rom for profit. Thus, the intention beyond this action/decision becomes clear: to increase profits. However it do not arise as a duty of the insurance company, but as a will and a desire.

Far beyond the intention and justification of the actions, Kant theory also implies and require respect for the others, and according to this, differentiation of genders is undoubtedly a way of discrimination, because two different people that are in the same situation end out being treated in a different way. Likewise, when assessing this specific problem we can conclude that there is no respect, being the customer seen exclusively as a mean to achieve the end objectives of others. Being an action considered ethically acceptable if and only if it respects everyone, this decision/action might not be considered ethically correct.

Concluding, following the Deontological Kantian theory, we can consider this action ethically reprehensible, because of the intention beyond it and also because of the consequences that directly affect and disrespect overall customers.

Critical Opinion

After a deep search about all the consequences and implications of the annulation of this directive , I can firstly arrive to the conclusion that the future is not know or predictable and diverse scenes can occur.

However, at first sight, and above any other interpretation, I am in favor of a Kantian opinion. Given that discrimination is by itself a wrong action, that can never be generalized or universalized, discrimination by gender in insurance pricing would be automatically and deeply incorrect and, therefore, ethically reprehensible.

On the other hand, I am forced to look at the picture through another corner. In fact, it is proven that most of the women live longer than men. Thus, if there is a harmonization of prices that does not lead to discrimination, this one is going to be carried out according to the highest price, because of the main objective of insurance companies: make profit. Therefore, in order to continue acting in the insurance industry, European Insurance Companies will have to safeguard themselves regarding the association of different risk levels to different genders.
This way, and adopting a more Utilitarianism perspective, if there is in fact an harmonization of prices following the highest ones, I do not see any benefit in the elimination of the directive. Although there is going to be an end to the so controversial discrimination, the only practical consequence of the annulation of the directive will be the increasing of insurance companies’ profit (that start using higher prices that covers the highest risk associated to them, safeguarding its participation and existence in the industry).

Concluding, such annulation should be considered as an important step to the clarification of the fundamental right of equality. However, if the consequences are necessarily going to be bad and reductive (harmonizing prices, putting them in its highest possible values), it would be sensate that such exception continues existing and in effect.

Bibliography

* http://www.bbc.co.uk/news/business-12606610 * http://www.echr.coe.int/ECHR/homepage_en * http://www.insuranceeurope.eu/key-issues/anti-discrimination * http://www.out-law.com/page-9368 * http://www.bbc.co.uk/news/business-12600284 * http://en.wikipedia.org/wiki/Deontological_ethics * http://www.algosobre.com.br/sociofilosofia/utilitarismo.html * Managing business ethics: Straight talk abut how to do it right / Linda K. Treviño, Katherine A. Nelson * J. C. das Neves, Introdução à Ética Empresarial * Slides from classes