Tackling Discrimination and Risk Management in the European Union: We Must Not Repeat the U. S. Subprime Mortgage Mistake!

Molinari Economic Institute
Issue CCXVII - November 15, 2009
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A new study from the Institut économique Molinari (IEM) says the European Union’s program of “tackling discrimination” presents many perverse effects that prevent effective risk management in society. The highly ambitious European agenda in this area will have an especially harmful impact on the insurance sector, penalising insurers and policyholders alike.


A factor that got the U.S. real estate bubble started


A lax approach by financial institutions in setting criteria for real estate lending played a widely recognised role in inflating the U.S. real estate bubble and thus in creating today’s economic crisis. One of the factors at the origin of this approach was a political “anti-discrimination” agenda!


Cautious lenders ran the risk of being accused of discrimination if they turned down applications from individuals belonging to minorities. Institutions that showed few scruples in managing non-payment risk (measured by analysis of a borrower’s credit history, income, and so forth) were actually protected by regulations.


The “struggle against discrimination” thereby facilitated reckless risk-taking and led to the current financial mess.


An obstacle to sound risk management in Europe


A political agenda of the same sort is under way in the European Union. It especially affects the insurance sector.


Although it is recognised that men and women do not incur the same risks, a directive that took effect in 2007 prohibits in principle “the use of sex as a factor in the calculation of premiums and benefits for the purposes of insurance and related financial services” (Member States are authorized to opt out under certain conditions).


A new proposed directive, awaiting European Parliament approval, aims for “equal treatment” without distinction, in particular according to age or disability. Although the specific nature of the insurance sector is recognised on paper, this directive introduces arbitrary requirements and interferes substantially with the possibility of differentiating contracts and fee structures based on an individual’s risk profile.


This differentiation lies at the heart of the insurance trade, however. It enables insurers to manage risk and ensure the viability of their companies. Individuals with higher risk profiles logically pay higher premiums for similar coverage.


A costly and discriminatory directive


The “anti-discrimination” regulations propose to subsidise high-risk individuals! This cost will be felt mostly by groups of insured people who, while not necessarily wealthier, present lower risks.


Women could be penalised in this way with respect to automobile insurance or coverage against serious illness.


Young, healthy individuals could be penalised as regards supplementary health insurance or life insurance, even though they are generally less wealthy than their elders.


In the longer term, all consumers risk being penalised. They will have to pay for more expensive insurance policies and run the risk of no longer being offered certain contracts.


If consumers wish to benefit from effective protection against the hazards of life, it is fundamental that the private insurance sector escape from European “anti-discrimination” legislation, the IEM study concludes.


Titled “Tackling discrimination in Europe: we must not repeat the American mistake,” the study is available at: http://www.institutmolinari.org/spip.php?article388


The Institut économique Molinari (IEM) is an independent, non-profit research and educational organization. Its mission is to promote an economic approach to the study of public policy issues by offering innovative solutions that foster prosperity for all.

Information and interview requests:

Valentin Petkantchin, PhD

Research director

Institut économique Molinari

GSM: +33 6 82 69 17 39




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