Sheila's Fails? The statistics of biological risk
Why the ECJ insurance judgment might not be the right road after all
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.
Next page: Just the first worm from a pretty big can
The law is an ass
In the discussions of this ECJ ruling I have heard time and time again 'Insurers are just greedy bastards' and words to that effect.
Insurance, and re-insurance, is just a business. It needs to make profits to survive just like any other business. And, like all other businesses insurers are in direct competition with other insurers.
So, unless you can prove collusion and price fixing within the industry each insurer must try to keep their costs, and thus premiums down to the minimum that they can. This is simple business sense.
Another, often voiced, claim is that insurers think that one group of people are 'better' or 'worse' drivers than another group. this is just untrue. The insurers _know_ that one group of people is a higher risk than another. And another group is a much lower risk than others. Yes this is based on statistics. And it is based on actual experience.
If I do a SELECT on my claims database, and group the output to show total payments, broken by age ranges, and split by gender, then the output, from a history of actual claims, is obvious. Younger males are a greater risk than older females. This is a fact. I don't care if you scream discrimination, all motor insurers will be able to show the same outputs from their own data. Facts do not discriminate. They are just facts.
So, this judgment is purely social engineering. Trying to ignore reality and impose a world view on to facts that doesn't fit, damages, not only the businesses it relates to, but the people who use those businesses.
If we take into account age as well, then similar data mining will show the obvious results. Women, on average, live longer than men. Don't blame me for this, it too is a fact. On average men have different medical histories than women. No matter how loud you demand that these be made equal, it won't happen. These are facts. And facts do not care what social engineers think.
You are missing the Big Fat Hairy Deal there.
From a motor insurance perspective (I have a couple of friends in the statistical end of the business), your young women will likely break a light or bend a wing. Your young bloke is infinitely more likely to wrap his Eurobox round a tree at 70mph while shitfaced, killing himself and most importantly, the four mates he has in the car at the time. Substitute "oncoming vehicle" for "tree" and the problem is compounded. Get thee over to the press sites and lookup all the "[n] teenagers killed in horrific crash" stories. Now note how many female drivers are represented. See?
Personal injury / death compensation claims make vehicle repair / replacement costs look pathetic.
Incidently this is why, for a young driver, the best premiums are to be had on a Smart ForTwo. The fact that it only has two occupants dramatically reduces the likely payout in the event of serious fuckup and the level of possible fuckup is significantly lower than with other two seat vehicles.
...experience != population norms.
I am a male and I have had a few mishaps (from stupid stuff in a car park at sub-5mph to a head-on*). So am I proof that males are more dangerous? Nup. I am only proof that *I* am possibly more dangerous (or I driver in riskier conditions, or...)
One must be careful about abstracting generalities from a statistically insignificant set (especially one with selection bias such as yours).
*I do not recommend it one bit. Although getting run over by the cop afterwards hurt even more**.
**I really wish I was making this up.