Those of us who work in group insurance are accustomed to seeing unisex rates on insurance products offered at the workplace.
Whether it is life insurance, disability insurance, health insurance, annuities, or other ancillary products, the premium rates are typically unisex. This is different than insurance products marketed to individuals outside of the workplace, where rates are frequently sex-distinct. Veterans of the group insurance world who have worked in the industry since the late 1970s and early 1980s may remember how this came to be, but for others this article provides a brief history lesson.
For most products in the group insurance market, males and females do have different underlying probabilities of incurring a claim, and thus different claim costs. If we were able to use sex-distinct premium rates, males and females typically would pay different rates. For example, for life insurance or mortality-based products, the higher probability of death for males and shorter life expectancies would lead to males being charged higher rates than females. Using unisex rates on such products actually benefits the males, with the females subsidizing the males. Conversely, for longevity products (such as annuities or retirement benefits), where the benefits paid to the insured are higher if the insured lives longer, the longer life expectancy for females would lead to females being charged higher rates than males. Using unisex rates on these products benefits the females, with the males subsidizing the females.
The battle over whether the industry could charge sex-distinct rates was waged in the longevity products arena, and more specifically retirement benefits, where the practice of using sex-distinct rates meant females were paying higher rates than males. Below we trace the key piece of legislation and the two court cases that shaped the insurance industry's current understanding of unisex rates in the employee benefit marketplace.
The legislation that led to the court rulings resulting in unisex rates was The Civil Rights Act of 1964, which was enacted on July 2, 1964. This legislation covers a wide range of civil rights and areas of discrimination, but the provision that addresses discrimination in the workplace, and is pertinent to the issue of charging premium rates based on sex, is Title VII. Title VII states:
It shall be an unlawful employment practice for an employer -
(1) to fail or refuse to hire or to discharge any individual, or otherwise to discriminate against any individual with respect to his compensation, terms, conditions, or privileges of employment, because of such individual's race, color, religion, sex, or national origin;...
Although this legislation was enacted in 1964, the insurance industry did not discontinue the use of sex-distinct tables for a number of years. It wasn't until 1978 that the Supreme Court ruled on the first case that materially challenged the use of sex-distinct rates.
The Los Angeles Department of Water and Power maintained a self-insured, defined benefit pension plan. Under this mandatory pension plan, employees were required to make contributions to the plan to help cover the future cost of retirement benefits. The female employees' contributions were roughly 15% higher than their male counterparts due to the females' longer life expectancy and the resulting higher actuarial present value of their retirement benefits. The employee contributions were deducted from payroll, so a female earning the same annual salary as a male received less take-home pay.
Employee Marie Manhart alleged that this was discriminatory as defined in Title VII of the Civil Rights Act of 1964 and initiated a class action lawsuit against the Department. The lower courts ruled in favor of Manhart, the Department petitioned the Supreme Court to hear the case, and the Supreme Court agreed.
The Department argued to the Court that ultimately it was longevity, and not simply gender, that was being used in setting the higher contribution rates for females. The Court disagreed, and on April 25, 1978, it ruled that charging female employees higher contribution rates in an employer-operated, mandatory pension plan was discriminatory and violated Title VII. A key point the Court focused on in arriving at its decision was that a female would have less take-home pay than a similarly situated male due to the mandatory higher contributions.
The ramifications for the larger employee benefit insurance universe were somewhat unclear for several reasons. First, this was a self-insured, employer-operated plan without an insurance company involved. Second, the mandatory nature of the plan made it different than many insurance products offered at the workplace where participation is voluntary. Finally, the Supreme Court itself seemed hesitant to suggest that its decision on Manhart should be interpreted too broadly by stating, " Although we conclude that the Department's practice violated Title VII, we do not suggest that the statute was intended to revolutionize the insurance and pension industries. All that is at issue today is a requirement that men and women make unequal contributions to an employer-operated pension fund."
Although Manhart had these ambiguities, one key element to the ruling still holds true in standard employee benefit pricing practices today. The Court pointed out that even though charging different contribution rates for males and females was not allowed, the gender composition of a particular group could still be used in determining what the unisex contribution rates would be for that group. The Court stated that neither Title VII nor the Equal Pay Act (which was passed the year before Title VII) "makes it unlawful to determine the funding requirements for an establishment's benefit plan by considering the composition of the entire force." It also should be noted that in a concurring opinion for the Norris decision described below, Justice Sandra Day O'Connor reiterated this point and quoted this very statement from Manhart.
Much of the uncertainty left by the Manhart decision was removed five years later with the Norris decision. In this case, employees of the state of Arizona were offered the option of participating in a voluntary deferred compensation program (DCP) that allowed them to defer a portion of their earnings until retirement. Upon retirement, the employee chose one of three methods for receiving the deferred earnings: 1) a lump sum, 2) fixed monthly payments for a set period of time, or 3) a life annuity from one of the private insurance companies the state enlisted to offer this benefit. It was this third option that was at issue in the Norris case. All of the insurance companies used sex-distinct mortality tables to determine the employee's life expectancy, meaning females received lower lifetime monthly annuity benefits than males with the same level of deferred compensation.
Nathalie Norris, an employee of the Arizona Department of Economic Security, initiated a class action lawsuit alleging that the annuity plans offered by the state were discriminatory based on sex and violated Title VII. The lower courts agreed that it was discriminatory, the state petitioned the Supreme Court to hear the case, and the Court agreed.
The Arizona Governing Committee made a range of arguments before the Court, with a sampling of some of the main arguments summarized here. The Committee argued that the annuity plans were not discriminatory because they offered males and females the same actuarial present value of benefits at retirement. The Court rejected this and noted that the precedent set by Manhart still applied, meaning paying lower monthly benefits to a female at time of payout was as discriminatory as charging females a higher contribution rate at time of pay-in. The Committee also claimed that, unlike Manhart, the plan was voluntary, not mandatory, which limited employer involvement. The Court rejected this argument and noted that purchasing voluntary products was a privilege of employment and thus still an employment issue covered by Title VII. The Committee also pointed out that employees had two other options at retirement (the lump sum option and the fixed monthly benefit option) that were not discriminatory. The Court rejected the notion that the existence of non-discriminatory options allowed other offered options to be discriminatory. Another argument made by the Committee was that the products in question were offered by insurance companies and insurance companies are not subject to Title VII. The Court rejected this as well and stated that offering a product under which females get lower monthly benefits than similarly situated males was an "employment practice," regardless of whether the product offered was through an insurance company, and thus Title VII still applied.
On July 6, 1983, the Supreme Court ruled that is was discriminatory to pay a retired woman lower monthly benefits than a man who had deferred an equal amount of compensation. This decision and the Court's so roundly rejecting the Committee's arguments, along with the lack of a caveat (such as what was included in Manhart) that appeared to limit the decision's scope, gave employers and insurers a clearer direction regarding the use of sex-distinct rates. Although Norris dealt specifically with retirement benefits, there was nothing in the decision that suggested similar reasoning would not be applied to other employee benefits offered at the workplace.
That leaves us where we are today, where the industry's interpretation of these court cases has led to the common industry practices in the employee benefit marketplace of:
Could a unisex pricing mandate one day be imposed on all individual (retail) insurance? That may sound farfetched, but it has already happened overseas. In a judgment handed down on March 1, 2011, the European Court of Justice decided that a provision in the European Union Gender Directive that permitted using gender for insurance pricing or determining benefit amounts is incompatible with the fundamental right of equality between men and women and therefore invalid. Effective December 21, 2012, all insurance products must now be unisex in nature. Only time will tell whether this trend emigrates from the European Union.
Vice President and Lead Actuary Life, Accident and Special Risk (LASR), U.S. Group Reinsurance