Tuesday, October 05, 2010

You Can't Legislate Biology

EU judge rules rates not based on sex :

BRUSSELS, Oct. 1 (UPI) -- Insurance policy rates shouldn't be based on sex because statistics don't reflect an innate difference between men and women, an EU jurist ruled.

The ruling Thursday by Advocate General Juliane Kokott of the European Court of Justice provoked anger by insurers in the European Union who had provided life and health policies based on whether they were for men or women, EUobserver reported Friday.

"The advocate general takes the view that it is legally inappropriate to link insurance risks to a person's sex," Kokott said. "Differences between people, which can be linked merely statistically to their sex, must not lead to different treatment of male and female insured persons when insurance products are developed.

"The use of a person's sex as a kind of substitute criterion for other distinguishing features is incompatible with the equal treatment of men and women."

If current trends continue, I imagine that in twenty years time the concept of insurance as originally intended will pretty much disappear. Now that the EU seems to be on the verge of telling insurance companies that they can no longer consider a person's sex when considering insurance risks, it's just a matter of time before they move on to prohibit other similar forms of discrimination. You could easily substitute the following in the jurist's statement:

"Differences between people, which can be linked merely statistically to their age, must not lead to different treatment of old and young insured persons when insurance products are developed."

Even here in the United States, we've now told insurance companies that they are no longer allowed to discriminate against people with existing medical conditions. While these efforts at fairness and equality may sound good on the surface, they undermine the entire basis of how insurance operates:

The most complicated aspect of the insurance business is the underwriting of policies. Using a wide assortment of data, insurers predict the likelihood that a claim will be made against their policies and price products accordingly. To this end, insurers use actuarial science to quantify the risks they are willing to assume and the premium they will charge to assume them. Data is analyzed to fairly accurately project the rate of future claims based on a given risk. Actuarial science uses statistics and probability to analyze the risks associated with the range of perils covered, and these scientific principles are used to determine an insurer's overall exposure. Upon termination of a given policy, the amount of premium collected and the investment gains thereon minus the amount paid out in claims is the insurer's underwriting profit on that policy. Of course, from the insurer's perspective, some policies are "winners" (i.e., the insurer pays out less in claims and expenses than it receives in premiums and investment income) and some are "losers" (i.e., the insurer pays out more in claims and expenses than it receives in premiums and investment income); insurance companies essentially use actuarial science to attempt to underwrite enough "winning" policies to pay out on the "losers" while still maintaining profitability.

Once you limit the insurance companies' ability to use various criteria to access risk, you limit their ability to quantify that risk and charge appropriate premiums to cover said risk. If they are forced to treat all those they insure as equals they will have to raise premiums for those with lower risks. These premium increases will drive some of these people out of the pool resulting in hiring premiums for those who remain. Eventually, a tipping point will be reached where there won't be enough money coming in through premiums to cover the costs going out and the companies will leave the market.

One possible solution is for the government to force people to join these pools and stay in them (sound familiar?). The problem is that you're not really talking insurance anymore, but rather a government program where people are forced to pay in to subsidize benefits for others. Not unlike Social Security, which come to think of it, bills itself as an "insurance" program. Not in the way most of us would think of it, but in a way that we may become all too familiar with in the future.