Con­tri­bu­tion levels

Price dif­fe­ren­tia­tion - eve­r­yone is dif­fe­rent

Is it justified that some insurance is more expensive for old people than for the young? Price differentiation by risk is a fundamental insurance principle.

The Petitions Committee of the German Bundestag received an unusual petition in which an older man claims age discrimination in relation to his motor insurance. The gentleman argues that age shouldn't be included when calculating insurance premiums.

Part of private insurers’ core business

Such allegations of discrimination call an elementary principle into question: differentiating between risk groups when setting contributions is part of private insurers’ core business. It is included in their business model to ensure a fair distribution of costs among the insured community. Six years ago, the European Court of Justice (ECJ) banned gender discrimination in insurance pricing, but they didn’t do away with the principle of risk-based differentiation.

Is that principle not reasonable anymore? Incentives for sporty people in statutory health insurance; higher life insurance premiums for people who are overweight – is this discriminatory?

Tilers and roofers pay more for their occupational disability cover than office workers. Applicants with severe pre-existing conditions can find their medical background a hindrance to taking out life insurance. Is all this suddenly unfair and socially reprehensible?

We are seeing different interest groups in Berlin and Brussels raising allegations of premium differentiation based on supposedly discriminatory criteria”, says Thomas Menning, head of the GDV department Mathematic Life and Products. However, premium differentiation on the basis of risk is not unfair discrimination per se. If insurers didn't distinguish between risk categories, they would have no alternative but to offer some unsustainable pricing structures.

Different contribution levels are not necessarily unjust. The legislator even allows differentiation by “recognised principles of risk-adequate calculation” for particularly sensitive criteria, such as age or disability, in accordance with para. 20, section 2 of the General Act on Equal Treatment (AGG). After all, it is not in the insurers’ interest to make false differentiations. Their goal is an accurate risk assessment.

Customised pricing benefits many customers

“The key question regarding premium differentiation is: are there specific, statistically proven and objectively justified risk features supporting the differentiation?”, explains Hans-Peter Schwintowski, professor of law at Humboldt University Berlin and former head of the Academic Advisory Board (Wissenschaftlicher Beirat) at the German Association of the Insured (BdV). Whoever can say yes to these questions is allowed to calculate different premium contributions, Schwintowski says. “This is not unfair discrimination, it’s simply categorising the insured into groups based on the level of risk involved.” Young motorists tend to have more accidents, for example. As a result, they pay higher motor insurance premiums on average than middle-aged drivers. Smokers tend to die sooner, so they pay higher life insurance premiums than non-smokers.

“However, consumers don’t seem to trust the insurance sector as much as they once did to calculate premiums accurately, fairly and appropriately”, says Schwintowski. “There is a growing public perception that insurers are increasingly tailoring risk profiles to individuals.” This is giving rise to the allegation that higher premiums for the overweight, sick, young or old are being used to filter out the bad risks.

Frank Hilbert is aware of this allegation. The CEO of Hannoversche Lebensversicherung, a member of the VHV Group, is in charge of biometry for the GDV mathematics committee. According to him, one cause of the mistrust towards insurers is their increasing use of modern data analytics, artificial intelligence and self-learning algorithms. A lot of consumers are worried about that, says Hilbert. “People are asking themselves whether some algorithm decides on their eligibility for insurance”. These concerns are to be taken seriously. On the other hand, Hilbert points out that statistical analysis of loss probability has always been part of the insurance business. The only difference is that modern computers are capable of more differentiated calculations.

What’s more, the algorithms are not operating in a legal vacuum. Consumer protection laws still apply regardless of the technology involved. Consumers are also entitled to challenge automated decisions through the General Data Protection Regulation and demand a manual review. Moreover, insurance is a highly regulated sector and closely supervised by the Federal Financial Supervisory Authority in Germany (BaFin).

If you compare the situation now to how it was ten years ago, there is definitely more differentiation, says Hilbert. This benefits many policyholders in the form of lower prices. “Digitalisation makes it possible to tailor offers more specifically to the individual through improved accuracy of risk calculation and commensurate insurance costs”, argues Hilbert.

Hilbert does not believe this customisation of pricing will sideline the group principle the insurance business is based on: “The fact that a non-smoker might pay less for health insurance than a smoker, or that the premium for a sporty person might be lower than for an overweight person, does not exclude anyone from the insured community”, he says. “I’m still insuring the same people. Everyone pays their own premium and everyone is assessed according to the same system.” Things that are equal are still treated equally. People who want uniform pricing are actually the ones deviating from the group principle, claims Hilbert. “Our job is to insure people against events that may take place, not to balance out insurance premiums for people with different levels of risk exposure.”

„Political debate often fails to distinguish between risk calculation and social, moral and ethical issues”

GDV mathematician Menning warns against lumping different subjects together: “Political debate often fails to distinguish between risk calculation and social, moral and ethical issues.” Most people would actually pay more in a standard-rate system than with a more discerning approach. Furthermore, some types of cover would actually have to be withdrawn.

This did not prevent the European Court of Justice from imposing unisex premiums: it was prepared to accept higher costs to avoid men and women paying different premiums. “The added costs of unisex premiums are still manageable”, says Menning, adding on a warning note: “Were these allegations of age discrimination to trigger serious debate on uniform premiums for people of all ages, or if insurers were to be prohibited from taking prior illnesses into account, the consequences would be considerably more severe.”

It would also be the start of a slippery slope, according to Menning: “It’s not fair on those customers posing a low risk to have a clearly identifiable group paying the same premiums in spite of being considerably more at risk.”

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