Is the Market Classification of Risk Always Efficient? - Evidence from German Third Party Motor Insurance

The efficiency of market-determined risk classification in automobile insurance is a lasting matter of controversy. It can be traced back to the 1950s (Muir, 1957) and received broad economic attention in the 1980s when spiralling car insurance premiums in the US were blamed on tariff regulations prohibiting the use of sex, age and location as risk characteristics (Blackmon/ Zeckhauser 1991, Cummins/ Tennyson 1992, Harrington/ Doerpinghaus 1993). In a mirroring move the EU saw a heated political and legal debate on the use of special tariffs for foreigners, in the 1980s, which resulted in a legal ban of ‘discriminatory’ tariffs for mandatory insurance schemes in many European countries. The latest blow against risk classification in car insurance comes with the EU Employment and Social Affairs’ draft directive on gender equality which proposes to prohibit gender specific calculation of all private insurance products, including non-mandatory branches such as life, private health or comprehensive car insurance.