The Treasury made the claim in setting out how the Government intends to comply with a ruling by the European Court of Justice (ECJ) which earlier this year determined that using gender to determine insurance risk when setting the price of premiums was contrary to EU law. The Court said that the practice breached the EU's Gender Directive and that an exception that permitted the activity was "invalid with effect from 21 December 2012".
The Treasury plans to make amendments to the Equality Act in order to comply with the ruling. It has confirmed, however, that insurance contracts concluded before 21 December next year will not have to be altered, even if gender was taken into account in assessing the risk. Industry has been asked for its opinion on the proposed changes. Respondents have until 29 February to make their views known.
"We believe the judgment will have unintended and unpredictable consequences beyond simply achieving gender-neutral pricing – including for women and vulnerable groups who can least afford it, such as the elderly," the Treasury said in its consultation (36-page / 503KB PDF).
"We made very clear our concerns about any move to prevent the use of gender as a risk factor in the pricing of individual insurance policies. We believe that the ability of insurers to price on the basis of risk is integral to their need to conduct business efficiently. Due to the nature of the ruling, however, there is no right of appeal against the outcome. The only option available is to implement the ruling, in this case by secondary legislation, which is likely to be made in the spring of 2012," it said.
The Treasury said that the ECJ ruling would adversely affect both consumers and insurers. It said that although many male drivers in the motor insurance market stood to benefit from the changes, the "net cost" to motorists would be approximately £300m.
"Gender is one of the most important risk indicators that an insurer can use to price a number of business lines," the Treasury said. "However, if insurers were unable to take gender into account when assessing the risk that they are covering, insurers are likely to have to average prices between high and low-risk individuals in those lines where gender in a risk factor. In such a scenario, a policy at an average price would be more attractive to higher risk individuals, as the policy would not be priced according to their risk."
"Conversely, lower risk individuals would find the product unattractive, as they would effectively be overcharged when compared to their fully risk-priced premium. This is likely to result in adverse selection, whereby the overall risk profile of an insurer’s book becomes more risky as the ‘adverse’ high-risk individuals are incentivised to buy cover and low-risk individuals depart the market," it said.
The Treasury said it expects insurers to lose out as a result of the changes because "low-risk" customers will "leave the market" as a result of facing higher premium costs.
"The Government believes that nobody should be treated unfairly because of their gender, but that financial services providers should be allowed to make sensible decisions based on sound analysis of relevant risk factors," it said.