Sex, Lies, and Life Insurance

Abstract

In this short and informal essay, I address two recent developments in insurance law that may appear at first to be unrelated: (1) the ruling by the European Court of Justice that gender-based rates for life insurance products violate EU anti-discrimination law, and (2) the decision of the New York Court of Appeals that the law does not prohibit an individual from obtaining an insurance policy on his own life and immediately transferring the policy to a third party who has no insurable interest in the life of the insured. The ruling by the ECJ seems to conflict with the notion that (other things equal) it is cheaper to insure the life of woman than that of a man because women live longer than men. Thus, the usual argument is that if we charge women and men the same rates for insurance, men will pay too little and buy too much. But as I show here the subsidy that seems to be implicit in unisex pricing disappears if one focuses on the income that the beneficiary can generate with the proceeds. Again, because women live longer than men, a woman must pay more for an annuity to generate the same income as a man. Thus, a widow who uses the proceeds from her husband's life insurance policy to buy an annuity loses twice with unisex rates: first because she and her husband forwent more income to buy his insurance and second because she must pay more for an annuity or suffer lower lifetime income. In short, if one focuses on income rather than lump sum value, unisex pricing appears to serve consumers better. But this is true only if men cannot take advantage by cashing in on cheap life insurance. That is precisely the effect of the New York court's ruling since it permits a man to buy a life insurance policy and immediately sell it – usually to a hedge fund that assembles a portfolio of such policies on insured individuals who are likely to die relatively soon. Although such life settlements may be acceptable in some circumstances (such as where an individual buys an insurance policy and later contracts a disease that requires expensive medical care), the law should prohibit any such deal in which the insurance policy is obtained with a view to its sale to a buyer who has no insurable interest in the life of the insured. To permit such trading in insurance policies reduces aggregate consumer welfare since it precludes the gains that consumers would enjoy from unisex pricing.