The inequality of unisex pricing
Equality before the law is a foundational principle of American democracy. Many policymakers are proud to pursue efforts to realize that principle. Perhaps that is why, cloaked by a sense of constitutional righteousness, California legislators have adopted a high level of deference for proposals intended to achieve equality.
As a matter of politics or philosophy, their devotion is laudable. As a matter of policy development, their enthusiasm is sometimes misdirected.
One such equality-inspired proposal, A.B. 1553, seeks to prohibit long-term care insurance premiums from reflecting the cost differences between insuring men and insuring women. Authored by Assemblymember Mariko Yamada, D-Davis, AB 1553 may be well meaning, but by restricting insurers from using actuarially sound rating factors, it does more harm than good.
The very nature of insurance demands concessions to distinctions based on immutable physical realities. For instance: women live longer than men.
In the case of long-term care insurance, the product is designed to provide insurance coverage to people as they age and become infirm. It does so by spreading the cost of their care among a pool of similarly situated individuals. The fact that policyholders are charged a premium that reflects the risk of similarly situated individuals ensures that those who pose a greater risk of utilizing the coverage do not inflate the premiums of others, whose risk is less.
Because women live longer than men, and are more likely to utilize their coverage, their rates must be higher. In fact, according to the Society of Actuaries, their premiums should be between 15 and 30 percent higher than men. Failing this, adverse selection can occur.
Adverse selection is what happens when insureds have more knowledge about the likelihood of loss than an insurer does. Even the best case outcome of adverse selection – one group paying to subsidize the risk of another, more expensive group – is problematic. The worst case outcome is a “death spiral,” which becomes progressively more expensive until the market simply collapses.
The risk that unisex pricing poses to long-term care insurance is different than the doomsday scenarios espoused by the right concerning the Affordable Care Act. Unlike the health-care market under the ACA, which compels participation and in which the possibility of a death spiral is contingent upon the failure of the law’s penalties and subsidies, the long-term care market is structurally vulnerable to a death spiral as a result of its voluntary participation.
Consider the following scenario. Faced with prices that do not reflect the true cost of their risk, lower-risk individuals (men) choose not to purchase long-term-care insurance. They steadily abandon the market. When only high-risk candidates (women) enter or remain in the pool, policy premiums inevitably increase, since those providing subsidies are gone. Higher prices result in a cascading decrease in both demand and product availability, as companies withdraw from unprofitable lines of business.
Because there is such a strong actuarial case for treating men and women differently in long-term care, the consequence of not doing so is the potential removal of the product from the market. Therein lies the great calamity of Yamada’s bill.
Sham equality hurts those that it claims to help. Thus, in the context of long-term care rating, treating men and women differently is not pernicious – it is essential. Fortunately for California women, the bill died in the Assembly Insurance Committee, for lack of a second motion to proceed to a vote.
