Feeds

Sheila's Fails? The statistics of biological risk

Why the ECJ insurance judgment might not be the right road after all

Beginner's guide to SSL certificates

Comment Yesterday’s ruling by the European Courts may have stirred the general public to a wide-ranging and not altogether informed debate on the issues of gender discrimination. Less obvious, but in the long run more serious, is the fundamental challenge it poses to the way in which two pillars of the establishment – the financial services and the equalities industries – use and abuse statistical concepts and statistical thinking.

On the surface, this was a victory for equality, a defeat for the insurers: in the long run, this result may have equally uncomfortable implications for both parties.

The central issue is the use of probabilities and probability data. Insurance, for all its outward respectability, is a form of gambling. Its modern origins lie in the coffee houses of London and Amsterdam, as merchants figured out that it was likely to be more profitable in the long run if they clubbed together to bet on whether their ships would return home safely.

For a relatively modest outlay, they could lay off the risk of individual ships falling prey to extreme weather. Informal clubs became formal syndicates: those prepared to take on the risk became less directly associated with the risk itself – and the insurance industry was born.

Similar developments followed the Great Fire in 1666, with the modern practice of gambling against household risk swiftly taking on a veneer of respectability entirely lacking in its Roman ancestor ("Pay your fire risk premium, or I bet this lighted torch might just fall on that pile of bedding over there!").

And that, for all the window-dressing, is pretty much all insurance is: a bet against the possibility of something untoward happening. Like bookies, insurers can spread risk around (through the use of re-insurance), and they'll take bets on some things bookies won't. Life insurance, for instance, is no more than a sophisticated gamble based on the most likely date of an individual’s death.

Despite that, the real income in insurance is not in the premiums – which do little more than cover the underlying risk – but in the investment income that accrues from investing billions of pounds of premiums in the months before that money has to be paid out in claims.

Insurers make much of "targeted risk", but that is not an issue that they obviously need to bother with. As explained above, it is a pooling of risk for social purposes. This is why, across the world, most states have now some form of regulation of the process of “red-lining” – the exclusion of individuals from insurance on the basis of some high-risk group characteristic they possess.

If it were possible to predict, Minority Report style, exactly who would be a crime victim, who would suffer a particular accident in the next 12 months, the insurance industry would cease to exist. It only works because we don’t know exactly who will be victim of some unfortunate circumstance that it makes sense to calculate the average probability of such an outcome, as well as the average cost of each incident, based on past occurrence, and provision accordingly.

So why are there different premiums for men and women? Why Sheila’s Wheels? The answer lies in competition and compromise.

First, as insurers identify new data sources that in turn allow them to quantify risk more precisely, they are able to fit premiums much more closely to the characteristics of specific groups. Admiral owed much of its early growth in the motor insurance market to exceedingly clever under-writing that allowed it to underwrite risks in parts of London that other insurers found difficult or impossible.

Second, sharp premiums are attractive to the punter – so if you wish to attract premium income for investment purposes, you need products that are competitively priced.

All of which, of course, flies absolutely in the face of ideas of insurance as a social good: and none of which explains why across a series of press reports yesterday, industry insiders were suggesting that removal of gender from the risk equation would inevitably lead to an upward pressure on prices, with premiums stabilising at a level that is, in aggregate, above the current aggregate.

The Reg asked the Association of British Insurers why this might be the case. It does not comment on pricing matters - nor, though, would the UK’s largest insurers. This leaves that question as something of a puzzle: the aggregate risk remains the same. All that has happened is that one predictor has been removed from the pot: the total cost to customers ought not to change.

If insurance is regarded as social good, the ruling by the European Court makes more sense. Whether it is viewed as right depends on the extent to which individuals believe society should equalise risk sharing across categories. Young males are riskier on average behind a steering wheel: older women do have longer life expectancies.

Those are statistical facts, and the debate boils down to whether we wish, as a society, to use them – to use gender - as a factor in apportioning risk and social benefit. The European Court of Justice was clear that we shouldn’t – and in that sense was wholly consistent with the broad thrust of equalities legislation as it has evolved over the last few decades.

Providing a secure and efficient Helpdesk

More from The Register

next story
Phones 4u slips into administration after EE cuts ties with Brit mobe retailer
More than 5,500 jobs could be axed if rescue mission fails
Special pleading against mass surveillance won't help anyone
Protecting journalists alone won't protect their sources
Phones 4u website DIES as wounded mobe retailer struggles to stay above water
Founder blames 'ruthless network partners' for implosion
Apple's iPhone 6 first-day sales are MEANINGLESS, mutters analyst
Big weekend queues only represent fruity firm's supply
Radio hams can encrypt, in emergencies, says Ofcom
Consultation promises new spectrum and hints at relaxed licence conditions
Bill Gates, drugs and the internet: Top 10 Larry Ellison quotes
'I certainly never expected to become rich ... this is surreal'
Big Content Australia just blew a big hole in its credibility
AHEDA's research on average content prices did not expose methodology, so appears less than rigourous
EMC, HP blockbuster 'merger' shocker comes a cropper
Stand down, FTC... you can put your feet up for a bit
prev story

Whitepapers

Providing a secure and efficient Helpdesk
A single remote control platform for user support is be key to providing an efficient helpdesk. Retain full control over the way in which screen and keystroke data is transmitted.
A strategic approach to identity relationship management
ForgeRock commissioned Forrester to evaluate companies’ IAM practices and requirements when it comes to customer-facing scenarios versus employee-facing ones.
Saudi Petroleum chooses Tegile storage solution
A storage solution that addresses company growth and performance for business-critical applications of caseware archive and search along with other key operational systems.
WIN a very cool portable ZX Spectrum
Win a one-off portable Spectrum built by legendary hardware hacker Ben Heck
The next step in data security
With recent increased privacy concerns and computers becoming more powerful, the chance of hackers being able to crack smaller-sized RSA keys increases.