Non-Discrimination in EU Insurance
Article published in the April 2010 issue of Benefits & Compensation International.
Dr Valentin Petkantchin, Research Director at the Institut économique Molinari, based in Brussels and Paris, addressed the subject of tackling discrimination and risk management in the EU. The subtitle of his presentation was ‘how crucial it is not to repeat the US sub-prime mistakes’ and he began with a brief description of the US sub-prime example. While lax monetary policy and bank-lending criteria, coupled with a property bubble, had contributed to the recent financial crisis, Dr Petkantchin believed that it was US non-discrimination policy that had led to the relaxation of the rules. Back in the 1970s and 1980s US banks had been accused of discrimination and this had led to a legislative amendment in 1989 requiring information to be compiled on the racial origin of borrowers. Then in 1991 data showing the loan rejection rates by race were made available and the following year a Boston Federal Reserve Study concluded erroneously that discrimination in mortgage lending was systematic. By 1995 the Community Reinvestment Act had been strengthened, by which banks were required (under threat of penalty) to provide loans, with no distinction being made in the treatment of minorities. As a result, banks had been forced to change their criteria, leading to no analysis of the risks being taken and no downpayments being required; in other words, traditional banking standards had been thrown out of the window. The outcome had been:
- irresponsible lending,
- the bad risk management of payment defaults, and
- the insolvency of lenders, bail-outs, etc.
Dr Petkantchin then considered the position in the EU. There had been a directive on the subject of non-discrimination in 2004 (Directive 2004/113/EC), which had come into effect in 2007, prohibiting in principle:
“…the use of sex as a factor in the calculation of premiums and benefits for the purposes of insurance and related financial services.”
An opt-out had been allowed under certain circumstances and, indeed, some countries had opted out. However, he was concerned that the EU was going to go further. In 2008 a Directive Proposal – COM(2008) 426 – had been issued requiring:
“…‘equal treatment’ regardless of a person’s religion, convictions, disability, age or sexual orientation.”
Dr Petkantchin feared the consequences of this for the insurance sector and its ability to function properly. The insurance market in the EU represented about one trillion euro and performed a major economic role for both businesses and individuals. He believed that some of the most expensive products would be affected (for example, car insurance and health insurance). Dr. Petkantchin stressed that insurers’ ability to differentiate was affected by the EU antidiscrimination legislation. Differentiation played a dual role in the existence of an efficient and viable insurance sector. First, it enabled insurance companies to manage adverse selection. Individuals who presented a high-risk profile logically paid higher premiums for the same coverage. Second, differentiation allowed insurance companies to manage the moral hazard problem, whereby there were incentives for the insured person to limit risk taking.
In his view, the EU legislation was working against insurance logic. He wondered whether there might be the possibility of an opt-out, whereby disability or age was not viewed as discrimination where it was the key factor in the risk. As the proposal stood, differentiation was subject to several arbitrary conditions. Public authorities decide if and when:
- a personal characteristic (age, disability, etc.) could be used to differentiate premiums; and
- data was judged as “relevant” (premium differentiation then perhaps being allowed).
The burden of proof was on insurers, who were presumed guilty unless they charged uniform premiums. If this practice were adopted, consumers with higher-risk profiles would be subsidized by the rest of the policyholders. This meant that other policyholders, who might be less well off, would be penalized. In addition, insurers would be unable to deal correctly with adverse selection and moral hazard. There was also a risk that the costs of insurance would go up or certain contracts might be removed from the market.
Dr Petkantchin’s fear was that in the long run insurers would be handicapped and all consumers would be penalized. “We mustn’t follow the US anti-discrimination mistakes,” he concluded.