Markets get around silly regulations

Advocates of free markets often bemoan all the regulation that firms are subjected to under modern neoliberalism. One thing they forget is that this is a sign that capitalism has won, not that it has lost! The debate now is about restraining or editing or improving capitalism, and never about overthrowing it. All the major officially anti-capitalist countries are gone or anti-capitalist only by name and not by nature.

But another thing you often see them overlook is how markets work their way around regulations and can effectively neuter them. Ban one financial instrument and if the instrument served a purpose, and is missed, you will soon see another instrument, technically different but substantively filling the same niche, creating almost as much value as the older one did.

According to a new paper from Stephen McDonald at Newcastle Business School, this also works for car insurance. In its ridiculous Test-Achats decision of 2011 the European Court of Justice decided that insurance firms can no longer use gender/sex as a risk factor to price insurance.

That is: the ECJ recognises that men have more accidents and women have fewer, so male drivers are more costly to insurance firms and society and women drivers are less. And that a random male driver is more likely to be costly to a given insurance firm than a random woman. But despite men driving more recklessly and women driving more safely, the insurance firm cannot use these true facts to price their services more efficiently. The decision was not even driven by identity politics and social justice rhetoric; since barely anyone thinks men are discriminated against.

Thankfully, markets have worked around the issue, and found proxies for gender they can use to eliminate most of the inefficiencies generated by forcing them not to use useful and important information. "Indirect Gender Discrimination and the Test-Achats Ruling: A Field Experiment in the UK Motor Insurance Market" (which Dr. McDonald kindly sent me a pre-publication version of; I hope he doesn't mind me quoting from it) shows us how.

Following the ‘Test-Achats Ruling’ by the European Court of Justice, firms in the European Union can no longer use gender as a risk factor to price insurance contracts. However, the Ruling allows factors correlated to gender to continue to be used, thus raising the possibility of indirect discrimination. This paper examines the effect of the Ruling in the UK motor insurance market where gender-sensitive pricing was previously common.

Using a difference-in-difference-in-differences estimation approach, it is found that gender is no longer used directly to price contracts, but that there is some evidence of indirect discrimination in which occupations are used as a proxy for gender. Specifically, it is found that prices for young (21-year old) drivers become relatively cheaper for those in occupations with a higher proportion of female workers, but increase for occupations usually performed by males. There is no evidence that this occurs for older drivers or that car type is used as a proxy for gender

Good old market mechanisms!