There is no place for discrimination in today’s insurance marketplace. In addition to being fundamentally unfair, to discriminate on the basis of race, religion, ethnicity, sexual orientation – or any factor that doesn’t directly affect the risk being insured – would simply be bad business in today’s diverse society.
Concerns have been raised about the use of credit-based insurance scores, geography, home ownership, and motor vehicle records in setting home and car insurance premium rates. Critics say using such data can lead to “proxy discrimination,” with people of color sometimes being charged more than their neighbors for the same coverage. Insurers reply that these tools reliably predict claims and help them match premiums with risks – preventing lower-risk policyholders from subsidizing higher-risk ones.
Public confusion around insurance rating is understandable. The models used to determine insurance rates are complex, and actuaries have to distinguish causal relationships from superficial correlations to appropriately align insurers’ prices with the risks they’re covering. If they get it wrong, the insurers’ ability to keep their promises to pay policyholder claims could be compromised.
And they have to do this while complying with regulations and statutes in 50-plus U.S. jurisdictions. As one of the most heavily regulated industries in the world, insurers 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 papers, drilling down deep into the topic:
• Defining Discrimination in Insurance
• Methods for Quantifying Discriminatory Effects on Protected Classes in Insurance
• Understanding Potential Influences of Racial Bias on P&C Insurance: Four Rating Factors Explored
• Approaches to Address Racial Bias in Financial Services: Lessons for the Insurance Industry
“Insurance pricing is a high-wire act,” CAS says. “As regulation and society’s understanding of discrimination evolve, however, it is necessary for us to keep abreast of changes in the manner in which discrimination is defined and adjudicated.”
Insurers are well aware of the history of unfair discrimination in financial services. While it would be disingenuous to suggest that all traces of bias have been wrung out of the system, the insurance industry has been responsive over the decades to concerns about fairness and equity. Insurers and actuaries are uniquely positioned to continue helping policymakers, corporate decisionmakers, and the public understand these inequities and to play a constructive role in the policy discussion.