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Weekend reading: Insurance, investing, and ISAs

Weekend reading

Some good money reads from around the web.

I was going to focus this week on the truly bonkers ruling from the European Court of Justice regarding gender discrimination and financial services:

Taking the gender of the insured individual into account as a risk factor in insurance contracts constitutes discrimination.

This isn’t so much a case of political correctness gone mad as political correctness gone to visit Alice in Wonderland!

  • Go to any old person’s home, or take your own oldest relatives a piece of cake this weekend. Generally you’ll see women, because women on average live five years longer than men.
  • When was the last time you heard about ‘girl racers’ crashing into a tight corner on a country lane? Overwhelmingly the worst young drives (under 25) are young men.

These are facts, not opinions or biases. Insurance is about weighting facts to balance risk and reward for both those seeking insurance and those providing.

If it impacts the insurance business, then this ruling can only mean more expensive car insurance for everyone – except for young boy racers, who’ll now find it more affordable to run a car into a wall. And it can only mean lower annuity payments for everyone. What nonsense.

However I’d rather focus on a clever verdict than this sort of silliness, and it was provided by Felix Salmon, writing for Reuters.

Talking about new academic research that shows you should concentrate on consistent saving, Salmon says that:

Investing can be exciting, especially when it’s done wrong.

You follow the markets rising and falling, you obsess about your retirement-fund balance, you rotate out of this and into that, you read books and magazines and blogs to try to learn more about what to do. You might even, in a moment of weakness, find yourself watching CNBC.

Budgeting, by contrast, is like going on a diet: it’s a drag, and it’s hard to get any pleasure or excitement out of it. But the latter is much more likely to get you well-set in retirement than the former.

Well said, even if somewhat ignored by myself with some of my money. So please do read my co-blogger The Accumulator’s take on passive investing for boring strategies that should form the bulk of your saving plan.

Finally, a reminder that you only have one month from today to use up your ISA allowance for 2010 to 2011.

You can put £10,200 into ISAs in total, with a maximum £5,100 going into cash. The deadline is 5th April. There is no reason to delay!

Money and investing blog posts

From the mainstream media

  • Bricks & Slaughter: Property is a risky asset class – The Economist
  • A cheaper way to buy technology shares – The Motley Fool UK
  • Exotic ETF risks exposed by FSA [China tracking errror 18%!]FT
  • The future is uncertain for global investment trusts… – FT
  • …especially given some are increasing charges – Merryn/FT
  • Looking for tradeable risk on/off patterns in the market – FT
  • Mervyn King: UK at risk of another financial crisis – Telegraph
  • Ideas for new part-time/extra income streams – Telegraph
  • Buying cheaper than renting [until a 1% rise in rates!] Telegraph
  • Average age of first-time buyers on track to reach 44 – Telegraph
  • Shared ownership schemes are still a stretch – The Guardian

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{ 3 comments… add one }
  • 1 Andy March 5, 2011, 9:19 pm

    I’m a growing fan of both you and the Accumulator but I have to say I’m inclined to disagree on your (and much mainstream media) comment on the ECJ insurance ruling.

    I used to be a 17 year old male driver and I was always really annoyed at the idea of having to stump up far more than the women who were learning at the same time as me. I understood why the insurance companies did it, statistically I would have been a much riskier client and I’ve always blamed the boy racer types (including some of my best friends) rather than the insurance companies. Looking back now on (virtual touch wood) ten accident free years, I can’t help but think that I would have been a great customer (luckily for me I was covered on my parents policy).

    Hopefully with this new ruling more attention will be placed on being a good driver (no claims bonus etc.) rather than happening to share a gender with bad drivers. I understand why women would be annoyed that they have to pay more but only as much as the rest of us who have always paid a “boy racer premium”.

    In the same way I don’t begrudge women getting higher annuities. At the moment some women will die earlier than men with much higher annuities just because the rest of their gender got lucky. If the average annuity rate reduces after this ruling it’ll be a lack of competition (failure of the open market option) that’s to blame, though that’s a different debate…….

  • 2 The Investor March 6, 2011, 12:52 pm

    @Andy – Thanks for your thoughts, although as you say I don’t agree with them.

    This is all at heart about the nature of insurance. Do we want to pay a flat fee for insurance against something, or do we think that the fee we pay should reflect our particular risks?

    From what you’ve written you felt aggrieved to have to pay the boy racer premium, when you felt that didn’t reflect your risks of an accident. So you’re in the latter camp. And if we want those risks to be weighted as fairly as possible, it’s counterproductive to take out critical information such as gender when it has such a key impact. (Needless to say, a no-claims bonus isn’t much of an indicator with respect to a teenager who started driving three months ago).

    There’s no way around it: if the payout pot needs to be £100 million, say, then all the people to be insured need to put in £100 million (or rather a little over, due to costs and profit taking by the insurer). If young males now pay less, everyone else will pay more, despite their riskiness not increasing.

    Similarly with annuities – a woman who dies young (or a man for that matter) can’t really feel aggrieved – s/he bought the annuity as an insurance policy covering the rest of her life. One can no more feel bad if you die before it was profitable than one can complain to a travel insurance agent if you don’t get robbed when you’re on holiday! And needless to say, on the flip side nobody would support cutting annuity payments to somebody who happens to live longer than predicted!

    So again, annuity providers will have a pot of cash, which they will now need to distribute in a less efficient fashion, and I’d say unfairly.

    If this ruling does stand, I think there’ll be two consequences.

    Firstly, costs of insurance and annuities etc will rise, simply because the inefficiencies will enable more costs to be hidden in the fee structure – at least for a few years until competition works some of this padding away. At least one major insurer, Admiral, has already come out and admitted as much.

    Second, insurers may try to provide proxies for gender. “Have you ever played rugby, even in school?” etc. How much they’ll be able to get away with this I can’t say, but if it means they’ll be able to legitimately offer more attractive annuity payments to men – and so win more business – they’ve every incentive to do it.

    Cheers for stopping by!

  • 3 Andy March 9, 2011, 8:49 pm

    Thanks for the reply investor, you haven’t convinced me yet though. I think I take a more nuanced view than you on the “flat rate for protection versus paying for particular risks” question. I think all insurance is somewhere between these two extremes, after all if we took paying for particular risks to its conclusion then insurance wouldn’t exist at all since at some level it is always a means to aggregate particular risks across a general group.

    For me, I’m happy to particularise for risks that people control or have a choice over but would rather generalise risk factors that are outside our control. There may be some cases where it’s hard to tell which side of the line to go but so few people choose their gender that I don’t think that will be one. (One obvious exception to this general rule for example would be impaired annuities for people with health problems).

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