It may seem like older policyholders and drivers are unfairly charged higher premiums for vehicle insurance than other age groups. After all, when an older person enters their age into online comparison sites, disregarding any other factors, the premiums rise.

This is in fact standard practice for motor insurers, who set premium rates according to various factors, including the policyholder’s age. Some undertakings also adjust premiums according to the age of the user (driver). In both cases, this is allowed – provided the insurers comply with the statutory requirements. Do they comply with the requirements? And what can we learn by comparing the average premiums of different age groups? In order to answer these questions, BaFin conducted a market study.

BaFin’s market study

In order to conduct its study, BaFin analysed the annual recommendation of the German Insurance Association (Gesamtverband der Deutschen Versicherungswirtschaft – GDV). According to the recommendation, the policyholder’s age can be taken into account in rate making, including for private vehicles. Although the recommendation is not binding, it sends out a signal to the market since insurers use it as a guide when setting their premium rates. Premium rates are calculated according to age for motor vehicle liability insurance, partial motor vehicle insurance and comprehensive motor vehicle insurance. Whilst liability and comprehensive cover policies include additional costs for both younger users and older policyholders, only younger users pay extra for partial motor vehicle insurance. BaFin critically reviewed the statistical records used by the GDV to determine its recommendation for premium rates and discussed these records with the GDV.

In addition, BaFin examined the premium structures of 40 insurance undertakings and groups domiciled in Germany and four branches of insurers domiciled in the European Economic Area. This corresponded to market coverage of more than 75% of all insurance contributions generated and insurance contracts concluded in Germany in the area of motor insurance. In particular, BaFin wanted to know which methods the undertakings use for rate making according to age. BaFin analysed the information provided by insurers, but also used on-site random sampling. An analysis of relevant key figures and average premiums completed the picture.

Requirements for rate making according to age

Rate making according to age is permissible when it is based on recognised principles of risk-adequate calculations (see info box “Requirements under the German General Act on Equal Treatment”).

In the insurance business, past claims experience forms the basis for rate making. Actuaries compare claims expenditures with the number of risks in order to determine the claims cost per insured risk (see info box “Key terms in rate making”). Anstatt “Key terms in premium calculations”.

Risk-adequate calculation

The market study confirmed that, in order to determine the risks typically associated with specific claims experiences, insurers analyse in greater detail certain criteria such as age, place of residence and mileage. A large number of possible combinations can be derived from just a few such criteria; in industry jargon, these combinations are referred to as “rate cells”. As a result, some rate cells may only be allocated a few risks. Even rate cells with an average number of risks are not immune to random major losses that can distort the claims experience. In order to stabilise their results and compensate for random fluctuations, insurers use mathematical methods and take into account the claims experience of adjacent rate cells. These are permissible and recognised actuarial methods. From BaFin’s point of view, there is therefore no reason to object to insurers applying these methods to motor vehicle insurance premiums, which have the most diverse rates of all types of property and casualty insurance in Germany.

Insurance undertakings often compare their own datasets with the data held by the GDV, which bases its calculations on datasets from all of its member undertakings, corresponding to a large portion of the German motor insurance sector. The GDV’s calculations are therefore based on a very stable and informative pool of data. The GDV ensures the quality of its data by checking whether the information is correct. In addition, the data are subject to random sampling carried out by an independent trustee. The independent trustee also reviews the GDV’s processes with regard to the vehicle type and regional statistics. The software used by the GDV to create vehicle type and regional classifications is also used to determine the age-dependent premium increases and discounts.

Common cause for complaint

Consumers often object to age-dependent premium rates on the grounds that older policyholders make up a smaller portion of road users, claiming that senior drivers should thus have to pay less than other policyholders

However, older drivers’ lower road usage is only relevant where mileage-based policies take this into consideration. Otherwise, in accordance with the principle of equivalence, premium rates are determined by developments in the frequency of claims and the claims cost per insured risk within the individual risk groups. Since both of these things increase in old age, BaFin has no objections to insurers’ practice of increasing premiums accordingly. Such increases in premiums reflect the proven higher underwriting risk associated with older age.

This also emerged from the annual statistics on the development of claims in motor vehicle liability insurance (Jahresgemeinschaftsstatistik – JGS). The JGS have been collected by the GDV and provided to BaFin for publication since 1994. Age categories have been applied in the statistics since 2012, and even before that, a distinction was drawn between users below and above the age of 23.

Older drivers benefit from insurers adjusting their premium rates according to various factors. Because of their age, they can achieve higher no claims discounts than younger drivers. Lower annual mileage also reduces insurance premiums.

Comparison of average premiums

BaFin has discovered that policyholders between the ages of 63 and 67 have the lowest average premiums of all age groups – in spite of certain age-related price increases. On average, those over the age of 82 pay around half that of 18 year-old drivers, who cannot benefit from high no claims discounts. And with increasing age, premium rates for partial motor vehicle insurance fall, with the cheapest age class “82 years and above”.

In its analysis of claims ratios according to age groups, BaFin noticed that many insurance undertakings do not make full use of the potential price increases for seniors that would be permissible based on actuarial calculations. The price increases actually applied are lower than would theoretically be appropriate based on the data.

Distinction from the solidarity principle

The methods for rate making used by insurers are distinct from the solidarity principle applied in social insurance. Statutory health insurance, for example, adjusts contributions according to income. In private insurance, however, the actuarial principle of equivalence applies. This requires that expected premium payments correspond to expected insurance benefits. This balance between payment (premiums) and service in return (risk assumption) is a core principle without which motor vehicle insurers would not be able to guarantee fulfilment of the commitments they made in the insurance contracts. Customers pay their premiums solely so that the insurer assumes the risks of financial consequences arising from damage during the contract term, which usually corresponds to one year. With their premiums, policyholders are not saving any capital.

Conclusion

Where motor vehicle insurers set their premium rates according to age, they are following the same principles applied to all other premium rate criteria used in motor insurance. From an actuarial perspective, this is nothing special.

BaFin has concluded that setting premium rates according to age in motor insurance is based on recognised principles of risk-adequate calculation. There are no indications that this violates the provisions of section 20 (2) sentence 2 of the AGG.

Simply adjusting the parameter “age” in an insurance premium calculator will provide an inaccurate picture of actual insurance premiums. A more realistic picture can be gained by also adjusting the no claims discount, and potentially also the mileage class.