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The brave new world of customer profiling in the insurance sector

Getting cheaper insurance by generating the same level of damages as someone else? This is common unfair practice in insurance today in Europe. In this article, our expert Olivier Jérusalmy explains why discrimination based on our gender, age and physical ability goes against EU law and proposes a few solutions.

We as European citizens have the right to equal treatment. In theory.

In defining and implementing its policies and activities, the Union shall aim to combat discrimination based on sex, racial or ethnic origin, religion or belief, disability, age or sexual orientation.”

(The European Union) shall combat social exclusion and discrimination, and shall promote social justice and protection, equality between women and men, solidarity between generations and protection of the rights of the child.”

In practice, we are not equal if we go to an insurance company. The products we are offered and the price of our insurance premiums are different whether we are male or female, whether we are young or old and if we smoke or have a chronic health condition.

This is how it works: The insurance company has statistics on risks linked to all kinds of characteristics, such as gender, age, disabilities and behaviours. They collect people into groups, or segment them, according to these risks. For each group, an average person and their likeliness (or riskiness) to become sick/have an accident etc. is defined. The price for an insurance premium is then calculated on the riskiness of the average person of the group. And this means, if the average person of your group is riskier than you, you will pay a higher price for your insurance than you would normally deserve according to your own track record.

A hypothetical example: middle-aged women have been shown to take less risk than young men; because middle-aged female drivers smoke less and drive slower than young male drivers. Middle-aged women are therefore offered a lower insurance premium price than young men. 

In the EU until now this way of pricing insurance has been accepted, even though it conflicts with its own principles.

But the EU has already been challenged on the use of gender to price insurance contracts. In 2011, the Belgian consumer organisation ‘Test Achats’ successfully argued that insurance pricing could not be exempt from the EU regulation on equal treatment of men and women. This was a huge step forward in recognising that there is an issue with the use of identity to put us in groups and offer us insurance prices.

The idea of using lifestyle characteristics instead to determine the “riskiness” of a person, seems to create many of the same issues as using, because it is hard to prove which of our lifestyle choices actually mean we are more likely to case damages, that we are more risky. Using lifestyle choices can also be matched to gender, by assessing whether certain lifestyle choices are typically made by men or women. This means that gender can still indirectly be used as a basis for putting us into a particular group.

So what is the solution? Not being able to discriminate on the basis of a person’s identity for the financial services sector means that creating groups and up-front pricing should stop. The alternative in that case could be to use the bonus-malus system in insurance. This would mean that we are all offered the same standard insurance price up-front based and then changing it based on this record of our actual damages claimed for.

Using this standard premium based on our damages record would mean that we all start on equal footing under a fully mutualised system. We must not forget that mutualisation is the founding principle of insurance and financial services. By pooling risks through an insurance company we can have an affordable way to protect us against life accidents. Insurers analyse the risks that we all pose and match what they can earn from investing the money from premiums with the costs of damages they need to cover. If we can all access this pool and can contribute to it on fair non-discriminative basis then our right to equal treatment would have much more chance.

See also our policy brief in 2mn (video):

Olivier Jérusalmy

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