XPRIMM: What main issues does "Getting the balance right - private insurance for social needs" address to the insurance professionals? How could this balance between the needs of society against fundamentals of insurance be set right?
John TURNER: 'Getting the balance right' was an event started three years ago, as it was clear to us at SWISS Re that the risk to the industry, and our consumers, of increasing regulatory restrictions on what we can and cannot do, had real potential to undermine our whole business model. Simply put, some were trying to force the obligatory social model for insurance onto the voluntary private sector, which simply does not work. The event was about setting forth all different aspects of the debate and encouraging a constructive dialogue. It was partially about helping to inform regulators and interest groups about the requirements of the private insurance model in order for it to function, but at the same time giving those same bodies an opportunity to let us know about their concerns. It was a real opportunity for all to listen to the debate from different perspectives.

As to how this balance can be achieved, that is a more difficult question, since there really are no simple answers, but what we have achieved is a greater readiness to listen, and hopefully, compromise on both sides. It is clear that some of the more extreme demands from interest groups and individual politicians cannot be achieved within a voluntary insurance framework, but it is also clear that society will not tolerate some of the practices which the industry used in the past, but had the potential to really blur the lines between discrimination and differentiation.

XPRIMM: Gender risk differentiation in calculating rates by gender has been practiced for many years by the insurance industry. Why has the European Union only now begun to implement such anti-discriminatory measures and what are the industry's concerns regarding these measures?
J. T.: Risk differentiation by insurers based on gender was simply obvious in the minds of insurers; the risks are very different for many forms of insurance, so it seemed only fair to offer a price to each gender which matched their risks. If a man is at greater risk of crashing his car, or of early death, it seemed only appropriate to us that we charge that man a higher price to cover this risk. However, the industry failed to recognize this early enough, and the political drive for equality contained within the various EU treaties is definitely not something new; we did not regard it as discrimination, so we did not think it applied to us. This resulted in last minute lobbying on the original Gender Directive which led to the member state opting out the clause for insurance which was subsequently voided by the European Court of Justice. Now the reasoning behind the ruling is still subject to much debate. Some regard it as being done on a technicality, or a fault in the compromise wording. But others see the ruling as having greater consequences and the court placing greater weight on the original aims of the EU treaties which could have serious consequences for the debates to come on other areas of potential anti-discrimination legislation.

XPRIMM: What other anti-discriminatory measures is the European Union planning and how did the SWISS Re's event attendants react? How did the debates go on?
J. T.: For a while now there has been additional legislation on planning within the EU to bring together the remaining areas of anti-discrimination legislation, the two key areas which for the insurance industry are age and disability. It is clear to most stakeholders that the industry will survive uni-gender pricing and benefits, even if few, if any, policy holders will benefit, but the loss of age and disability (or health, depending on how you define it) would have catastrophic consequences for the private insurance industry. Simply put, if you remove the ability to price many of our products on age (just think of the term "life insurance", for example) it is impossible to offer a single price which is sustainable; no young people would buy, and all old ones would, rapidly undermining any assumptions of cross subsidization. With regard to disability, this is a much more emotional debate, not helped by the confusion and overlap between health and disability. What is clear, however, is that if laws are implemented which prevent selection based on major risk factors such as health, you remove any incentive for people to buy insurance whilst healthy, and end up with only those who are significantly above the average risk of buying that product, again an unsustainable solution.

As concerns the debate at the event, this was mostly very constructive, although there will always be more extreme views on both sides. But what many of the interest groups were proposing was actually quite reasonable and it is important that we listen and respond as an industry, because helping to solve some of their more acute concerns could help us to defend on longer term those factors which we absolutely must retain in order to survive. A major concern, however, remains that, even if no one is really pushing for an end to age related pricing or the use of health for individual insurance policicies where there is a relevant risk factor, the laws will still be in force and the courts could once again surprise the industry in a very unpleasant way. It is vital therefore that insurance associations and senior members of the insurance companies keep this issue on their radar and engage with regulators at every opportunity.

XPRIMM: Gender-ban and other anti-discriminatory measures mean more or less expensive rates for different types of clients -for example, important price increases for young female drivers are expected. How should insurers balance the new prices in order to avoid affecting only "one gender" by this new unisex legislation and, thus, "discriminating"?
J. T.: This is a much more complex question than many would suspect. Certainly, when the ruling was announced, there was a concern from politicians that the industry would "abuse the ruling to increase prices", and prices were expected to simply meet in the middle. Unfortunately, we know this is much more complex than that, with vastly different take up rates by gender for each insurance product. For life insurance we knew that more males bought life cover than females, despite the previously higher male price, and this was especially the case at higher sums assured; so a weighted unisex price for a sum assured would already need to be closer to the original male price than to the one for females. Any move to a single price, however, was feared to distort buying behaviour further, with males, who see a cheaper price than their risk, choosing to buy more, and females, who face a higher price than their risk, choosing to stay away from insurance or only buying the minimum. The extent of this effect was always going to be difficult to predict and would also vary widely across different products and even by sales channel, so insurers needed to include some safety margin to cover this unknown future portfolio mix risk. Making overly aggressive assumptions about the number of females who buy would result in a unisex price which would not bring in sufficient premiums to cover the claims, which would be to everyone's disadvantage. Eventually those safety margins are likely to be eroded once we become more confident again concerning the male/female buying behaviours, and companies learn how to use marketing (excluded from the Directive) to influence that ratio.

One other way which we can continue to match price to risk would be to better use differentiating factors that are not areas of anti-discrimination legislation. In the motor example you mention, the industry is being encouraged to use technology to better predict risky driving before the accident happens and price accordingly. Life insurers are looking at multiple other ways to differentiate risks, including better use of existing factors, such as smoking behaviour and occupation, but also newer areas that look at people's lifestyle, such as diet and exercise to better segment overall risk. I personally think this is a very exciting time for what became very traditional products, and the ability of insurers to innovate has been restricted only by the resource constraints of companies complying with the court ruling on gender in time. Much more can be expected in the next few years.

XPRIMM: Considering the debates carried out at this second edition of "Getting the balance right", how do you see the future of risk differentiation in private insurance?
J. T.: As indicated above, I was very pleased by the constructive approach taken by most speakers at the event, but it was also clear that to have any chances of retaining the vital differentiators which we use, that we help regulators to really understand the differences between private voluntary insurance and the obligatory social insurance model. That said, we can help ourselves enormously through some relatively simple changes. Establishing national best practice documents which guide each insurer how to behave ethically is well received by the European Commission and coincidentally tends to be good for business, as they these documents change negative perceptions of the industry held by our customers. Similarly, we should avoid using factors such as age in an arbitrary way, with age cut offs that do not reflect modern aging. Also useful would be to work on educating our underwriters better, as unfairly or inappropriately declining or over rating lives will result in a greater upward pressure on regulators to act. Being told you are not as healthy as you may have thought is a stressful time, but, if handled well by the underwriter and salesman, this can actually improve completion rates on rated business and help ensure the clients are more satisfied.

On the more positive side, I think through events such as "Getting the balance right" we have gained better access to, and respect from, the regulators, and are now better positioned to help influence future legislation. It must be recognized at senior levels within each company that such legislation will eventually come in one form or another, and our ability and desire to engage early will be key to ensuring that we end up with a wording which provides legal certainty, while allowing us to continue to differentiate, but not discriminate. Most countries within the EU and beyond already demonstrate a major protection gap for most types of insurance, and this is likely to widen further as governments struggle to provide some of the social benefits they may have in the past. If we are to help reduce that gap, through the provision of the very valuable services which our industry provides to individuals and society as a whole, then it is vital that we retain the ability to match price to risk for voluntary insurance.