There is no place for discrimination in today’s insurance market. In addition to being fundamentally unfairly discriminating on the basis of race, religion, ethnicity, sexual orientation – or any other factor that does not directly affect the risk of being insured ̵1; would simply be bad business in today’s diverse society.
Concerns have been raised about the use of credit-based insurance points, geography, homeownership and motor vehicle records when setting home and car insurance premiums. Critics say the use of such data could lead to “proxy discrimination”, with people of color sometimes being charged more than their neighbors for the same coverage. The insurance companies answer that these tools reliably predict claims and help them match premiums with risks – which prevents policyholders with lower risk from subsidizing higher risks.
General confusion about insurance ratings is understandable. The models used to determine insurance prices are complex, and actuaries must distinguish causation from superficial relationships in order to appropriately align insurance companies’ prices with the risks they cover. If they make a mistake, the insurers’ ability to keep their promises to pay the policyholder’s claims may be jeopardized.
And they must do so while complying with regulations and statutes in more than 50 U.S. jurisdictions. As one of the most regulated industries in the world, insurance companies have strong incentives to comply with anti-discrimination rules.
To help clarify this complexity, Triple-I has published an Issues Brief on the subject, and the Casualty Actuarial Society has published a series of four research articles that delve deep into the subject:
• Define discrimination in insurance
• Methods for quantifying discriminatory effects on protected classes in insurance
• Understanding the potential influences of racial prejudice on non-life insurance: four grading factors examined
• Approaches to addressing racial bias in financial services: lessons learned for the insurance industry
“Insurance pricing is a high thread,” says CAS. “As regulation and society’s understanding of discrimination develop, however, it is necessary for us to keep abreast of changes in how discrimination is defined and judged.”
Insurance companies are well aware of the history of unfair discrimination in financial services. While it would be frivolous to suggest that all traces of bias have been twisted out of the system, the insurance industry has been sensitive over the decades to concerns about justice and fairness. Insurers and actuaries are uniquely positioned to continue to help decision makers, corporate decision makers and the general public understand these injustices and to play a constructive role in policy discussion.