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News Release

August 18, 2006

Universal Insurance Premiums Can Benefit All, Says U of G Economist

A University of Guelph economist has found that instead of charging people different insurance rates based on their risk factors, insurance companies still come out ahead by charging everyone the same price.

“Most people in the insurance industry believe you should charge people who have different actuarial costs different prices and to not do so is discriminatory,” said Prof. Mike Hoy, whose research is published in The Geneva Papers.

“But I have a mathematical theorem that shows the equity benefits of charging everybody the same price could well outweigh the efficiency problem of doing so.”

Hoy’s theory says if factors are based on things like genetic diseases, which only affect small groups of people, charging everyone the same amount shouldn’t be a detriment to insurance companies.

His theory can be examined by looking at existing public health insurance, such as Ontario’s Health Insurance Plan (OHIP). OHIP has a strong advantage in providing adequate coverage without costing the province an inflated amount because it’s compulsory, he said. “You force the people who have low health risks to have the same amount of insurance as the people with high risks, so at the end of the day, the average cost is based on the whole population, not just on a group that frequently uses the health-care system.”

Although universal insurance premiums aren’t beneficial in all scenarios, said Hoy, “we do know that benefits will be guaranteed as long as the fraction of the high-risk types is ‘small enough.’”

More analysis needs to be done to determine exactly how small of a high-risk group is “small enough” to charge everyone the same premiums, but it’s safe to assume smaller variables like genetic tests will produce favourable results, he said.

However, Hoy says that when it comes to risk factors that are based on things like gender and age, it makes financial sense for insurance companies to charge different premiums because large groups of people are affected.

Starting in December 2007, new government regulations will require all European countries to offer services to both genders equally, said Hoy. “It’s tough to bring in legislation that promotes equity and fairness without creating problems in the way the market operates.”

Men are more likely to die earlier, so if insurance companies are forced to charge the same premiums for males and females, females will buy less, males will buy more and insurance companies’ costs would go up and they’d have to raise the premiums, said Hoy. “If the price goes up, females will buy even less life insurance because it wasn’t a great deal for them to begin with, then the price would go up even more to cover the costs of paying the men out. So such a regulation is hardly fruitful for anyone.”

Contact:
Mike Hoy
Department of Economics
519 824-4120, Ext. 52169 / mhoy@uoguelph.ca