The Financial Group
We simplify all those essential financial decisions
THE EDUCATION SECTION Every month we look at a particular financial topic in a little more detail. This month it is the EU Gender Directive & ‘I minus E’ ____________________________ What is the EU Gender Directive (G Day)? From 21 December 2012, premiums and benefits for all new insurance contracts will have to be calculated on a gender-neutral basis. Insurance spans a wide range of contracts that currently use gender as a risk rating factor. This includes car insurance, retirement annuities & life insurance. In this article we concentrate on the affect these changes will have on life & health protection policies as well as retirement annuities. In the field of financial services all new policies which start (ie: have been underwritten & go on risk) on or after 21 December 2012 will have to be priced on a gender neutral basis. These will include - o retirement annuities o individual income protection o critical illness & o life insurance policies What is the I minus E calculation? The I minus E (that's income minus expenses) taxation regime currently allows providers to offset the costs of their life insurance business, from the profits made on their investments. For new policies that go on risk from 1 January 2013, this will no longer be allowed. Whilst closing this 'loophole' will raise more revenue for HM Treasury, it's set to push up life insurance costs for insurers - which inevitably will get passed on to consumers through higher premiums. The increases to premiums will affect both life insurance and critical illness cover (as most critical illness is combined with life cover). The affect of I minus E is likely to wipe out any advantageous changes in premiums resulting from the Gender Directive discussed above. How will these changes affect your insurance premiums? The cumulative effects of Gender and I minus E are likely to result in the cost of life and critical illness increasing for most people but to what extent, will depend on their gender (amongst other factors). The table below is designed to give you an indication of how prices might change across the market post G-Day. It comes with caveats however. There are so many factors that affect premiums that it is impossible to give a single definitive figure that will apply to everyone. The extent of change will vary by provider, will differ by product class and be determined by your individual circumstances. Added to this, we expect to witness a fair amount of re- pricing activity in early 2013 as providers attempt to get to grips with the new gender neutral world. The figures we use are based on our analysis of the entire market and some of the predictions made by key stakeholders and experts, and can serve as a useful high level guide. Product type Currently, on average . . Potential impact to premiums Male Female Income protection Women pay 65% more than men +20% -28% Critical illness(with life) Men pay 10% more than women +6% +16% Term insurance Men pay 10% more than women +3% +22% Whole of life Men pay 20% more than women -5% +15% Where will rates settle? Gender neutral rates will not simply settle in the middle, and are likely to lean towards the more expensive sex. This is due to a number of reasons, including the historic and estimated mix of business (between genders), the effect of gender across the expected policyholder population and other influencing risk factors. How will these changes affect annuity rates? When people retire, many will choose to secure a future income by purchasing an annuity. The amount of annual income that you can buy will vary depending on a number of factors - primarily the size of your pension pot. At the moment, these factors also include whether you are male or female - but this is about to change on G- Day. Annuity rates could fall 3% to 4% for men, while women's rates could increase by 1% to 2%, according to retirement income company MGM Advantage. Therefore a man may believe it is best to buy an annuity before the gender directive comes into force in the hope of achieving a higher income. However, this decision should not be rushed into, an annuity purchase is for life, so it is just as important to ensure that the product is right, as it is to maximise the annuity rate. Meanwhile, women may be tempted to defer buying an annuity until after the gender directive takes effect. However, this is not a risk-free decision either, as it is difficult to say what rates will be offered immediately after the rule change comes into force. Also women should consider the income they would miss out on in the meantime. The potential impact! Hover over any of the headings below to see the potential impact of these changes - o Term insurance o Critical illness cover o Income protection cover o Whole of life cover