The recent ECJ ruling that insurance companies cannot discriminate between the sexes in offering differential pricing predictably saw the topics of pensions and motor insurance grab the headlines.
Yet, the groundbreaking decision could have consequences far beyond annuities and insurances, which got me thinking how equity release providers differentiate customers in pricing and how they might adapt to meet the legal requirement.
Posing the question to my peers on the online business network ‘The Equity Release Group’ on LinkedIn, I got some interesting responses.
Simon Little, managing director of Autumn Life Retirement Solutions and group host, said: “This raises some interesting challenges for the industry, particularly in the short term, as they will find new ways to price differentiate other than on gender.
“For instance, impaired life annuities have been around for many years, are now commonplace and indeed now used in equity release underwriting. We have, for some years, seen rates for life assurance driven by postcodes and employment status. I’m sure these and other forms of differentiation will be developed in the equity release market.”
Effect on equity release
How does this work in equity release? Interestingly, while lifetime mortgage lenders don’t take the applicant’s sex into consideration, home reversion providers do.
Taking an 80-year-old with a £100,000 property with a 100% maximum release illustrates that men are offered much more money than women.
Bridgewater offers men £2,171 more than women, whereas Aviva narrows the gap to just £762 on their plan – curious as both companies receive funding from Grainger Plc, so each must perform their own actuarial calculation. Hodge has the widest gap at £2,276 on its maximum 90% home reversion plan.
At younger ages, the gap between the sexes is wider still. Bridgewater offers men £4,596 more than women.
Keen to learn how providers might equalise the sums, I asked Paul Barber, director of retirement solutions at Grainger Plc, who proffered his view.
“The ECJ ruling will have the most impact on younger customers because the differences in expected future lifetimes are greater at the older ages. At age 80, women are expected to outlive men by about one year, whereas at age 70, the differential is three years.”
Release amount allocation
So where are release amounts likely to be once we have moved to unisex rates?
Barber says: “Using simple arithmetic and assuming the mix of business is 50% male/50% female, we might expect that unisex rates would be at the midpoint between the current male and female rates.
“However, the current mix of business Bridgewater experiences isn’t 50/50 and is likely to change once unisex rates are introduced. (Females will find a reversion plan more attractive and males will find a reversion plan less attractive, so the mix is likely to move to a greater proportion of females.)
“We will not know exactly what the mix will be until unisex rates have been in place for some time, so, initially, pricing will conservatively reflect the additional risk that the assumed mix is incorrect (i.e. the risk of not getting enough male customers to provide sufficient cross-subsidy for the female customers). On balance, the unisex rates are likely to be closer to the current female rates than the current male rates.”
Rate change
When will rates change? Barber believes it unlikely that home reversion providers will change rates until legally required, as they risk distorting the cases they receive.
He concludes that once unisex rates are introduced, men (particularly younger ones) are likely to see a fair fall in the release amounts available for new plans or further releases.
Lifetime mortgage lenders take life expectancy into consideration, too, but only by age attained rather than sex. This seems odd, bearing in mind how women outlive men.
This could be explained by the fact that lifetime mortgage loans have been around for a relatively short time, so the experience of underwriting on mortality is in its infancy compared to the 45 year history of home reversions. Or more likely, it could be down to the complexities and costs of offering two levels of release.
It seems that product developers will have a third point to consider in addition to the usual longevity and property price quandary, and that is the male-to-female ratio.
Simon Chalk is a later life planner at Later Living
