Sex Stereotyping and Statistics-equality in an Insurance Context

• Publication year: 1983
• Citation: Vol. 7 No. 01

UNIVERSITY OF PUGET SOUND LAW REVIEWVolume 7, No. 1FALL 1983

COMMENTS

Sex Stereotyping and Statistics-Equality in an Insurance Context

I. Introduction

Women on the average live longer than men.(fn1) This fact is widely used by the insurance industry in calculating costs and benefits. The use of sex-specific characteristics, however, confronts courts and legislatures with difficult questions concerning discrimination in insurance practices.

The issue of sex discrimination is central to three cases granted certiorari in the 1982 term of the Supreme Court: Peters v. Wayne State University(fn2) ("Peters"), Spirt v. Teachers Insurance and Annuity Association(fn3) ("Spirt"), and Norris v. Arizona Governing Committee for Tax Deferred Annuity(fn4) ("Norris").(fn4.1) In all three cases, female employees claimed that unequal retirement benefits based on sex-segregated mortality tables violated Title VII of the Civil Rights Act of 1964, which forbids discrimination in employment.(fn5) The appellate courts in each case relied heavily on the Supreme Court's 1978 decision in City of Los Angeles, Department of Water and Power v. Manhart,(fn6) but disagreed with its application. The Manhart Court had found that an employer-provided retirement plan violated Title VII because women were required to make larger monthly contributions than men in order to receive the same monthly retirement benefits. The larger contributions reflected the higher cost of providing for women's greater longevity.(fn7)

In legislative action related to sex discrimination in insurance, the Senate Committee on Commerce, Science and Transportation favorably reported the Fair Insurance Practices Act (FIPA)(fn8) in the fall of 1982. Whereas Title VII applies only to discrimination in employment, FIPA would extend gender-neutral requirements to all insurance. Proponents of this bill justify its passage on civil rights principles.(fn9) As will be discussed below, FIPA is not required to fulfill civil rights goals. Moreover, it is contrary to basic insurance concepts which tie insurance costs to benefits received.

Providing insurance as employee compensation falls directly within Title VII's scope and involves considerations different from those attending insurance offered to the private buyer on the open market, a difference recognized in Manhart.(fn10) The mandatory nature of employer-provided group plans(fn11) clearly sets them apart from individually purchased policies. The Peters and Spirt insurance plans violate Title VII by providing greater retirement benefits to men than to women. Because these benefits represent a form of deferred wages, basing these benefits on gender constitutes discrimination in employment. The Norris plan, however, is based upon open market principles and represents an insurance plan that is compatible with nondiscrimination goals. While congressional action may be needed to clarify some issues that will not be resolved in current litigation, the expansive reach of FIPA effectively undermines basic insurance concepts and fails to meet traditional nondiscrimination goals.

This comment will first outline a few basic insurance concepts and distinguish employer-provided plans from individually purchased policies. It will then examine discrimination criteria and Manhart's application of Title VII and apply those principles to the pending Supreme Court cases. This Comment will also suggest that FIPA be revised to extend its gender-neutral requirements only to employer provided group plans.

II. Insurance Concepts

A. Assignment of Risks

Insurance represents a present purchase by the insured to protect against a future risk. The insurer seeks to collect premiums to match the risks assumed, and, to the extent possible, collect from the insured only the amount necessary to cover each individual risk.(fn12) A death benefit(fn13) insures against the risk of early death and the consequent financial hardship to the insured's dependents. The person with a high probability of early death would pay more for this type of policy than would a person with an anticipated long life. A lifetime annuity,(fn14) on the other hand, insures against longevity-the risk that an individual will outlive his savings. Consequently, the person with a high probability of long life would pay more for an annuity, and the person likely to die early would pay less.(fn15)

Both the insured and the insurer engage in a process of selection.(fn16) The insured bases his insurance purchase on his best estimate of life expectancy, his personal needs, and the cost to him. The insurer relies on the characteristics of the insured and on statistical probabilities to determine the risk. Each tries to win a competitive advantage by outguessing the other. In mandatory group plans, individual selection does not exist. The insurer accepts all covered risks regardless of classification and the individual gains coverage regardless of personal classification or need.(fn17)

B. Classification of Risks

In writing an individual policy, an insurer can consider a number of factors affecting mortality such as health, family history, and sports activities.(fn18) The premiums charged to the insured reflect each factor's effect on probability of long life for that individual. In group policies, however, isolating individual characteristics has not been economical, particularly since it would require continual monitoring of the groups. Some factors are sufficiently reliable and easily determined so that taking them into account is economically significant.(fn19) Age(fn20) and sex, for example, are two of the most accurate predictors of longevity.(fn21) The correlation is clear and acknowledged.(fn22) Unlike factors such as marriage, smoking, and health habits,(fn23) these characteristics are immutable.(fn24) Therefore, group plans universally base premium rates on the age and gender composition of the group.(fn25)

C. Adverse Selection

Classification of risks can be justified on the basis of fairness; that is, that the young should not subsidize the old, nor should the healthy subsidize the sickly. But the insurance industry goal of tailoring individual premiums to risks is largely dictated by economics. Were an insurer to charge all his death benefit policy holders the same premiums regardless of age, adverse selection would likely force the company out of business.(fn26) Adverse selection refers to the assumption that insurance, like any commodity, will respond to the economic forces of the market place where self-interest motivates individual purchases. In a competitive market, younger men are unlikely to purchase insurance from a company that bases premiums on the average life expectancy of all policy holders. Older men, however, would be attracted to the company's bargain rates. The average age would increase, along with the premiums, and cause more young and middle aged men to avoid the company. As the process continues, the company ultimately becomes unable to attract new policy holders. In this manner, adverse selection, occurring whenever options are available to an individual, distorts the basis for any group premium rate.

Adverse selection also applies to gender based annuity options. Consider an employer that contracts with an insurer to provide an annuity plan with cashout options(fn27) which differ by gender, but are actuarially equivalent(fn28) to the annuities.(fn29) Because of this equivalence, the insurer need not be concerned about the proportion of male to female employees who cash out their annuities. If gender-neutral cashout option factors are imposed,(fn30) the balance is upset. In that case a man could benefit by taking the lump sum and investing in a private retirement policy that would offer the advantage of gender based tables. Conversely, a woman gains an advantage in drawing an annuity from the group plan. The higher costs of funding gender-neutral cashout options for men combined with the all female annuities increases the overall cost of the group plan.(fn31)

III. Title VII and Manhart

A. Title VII Discrimination

Classifying individuals on the basis of group characteristics is the essence of unlawful discrimination.(fn32) Yet classifying individuals on the basis of group characteristics is an essential tool of the insurance industry.(fn33) While it is possible to test individuals for job skills, one cannot forecast when an individual will die.(fn34) The insurance industry's necessary reliance on past group experience to predict future events complicates the application of discrimination criteria.

The Supreme Court has found gender classifications discriminatory under Title VII(fn35) on the basis of the stigma that attaches to such classifications.(fn36) The Court's rationale for finding discrimination, however, does not logically apply to insurance. Women are not stigmatized by an assumption that they will live a greater number of years than men. The attribution of long life neither perpetuates past stereotypes nor hampers women in attaining full access to jobs and education.(fn37) Although the Court frequently determines unlawful discrimination on the basis of an immutable characteristic such as sex,(fn38) in an insurance context the immutable characteristic is not being used to oppress women. To the contrary, gender classification provides both a burden and...