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Addressing insurance price discrimination in an era of diversity, equity, and inclusion

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  • David A. Cather

Abstract

The early 2020s diversity, equity, and inclusion movement has prompted debate about banning the use of suspect insurance pricing variables because they discriminate against protected classes, such as gender. This paper demonstrates how banning an insurance pricing variable currently used in insurance pricing models can result in regulatory adverse selection if the ban heterogeneously combines policyowners with different expected losses into the same risk class, contrary to risk‐based pricing. The paper begins by describing several recent regulatory and judicial decisions to ban insurance pricing variables. It next describes the process used by insurers to set insurance prices, followed by a discussion of applicable insurance discrimination laws. Using a simple risk aversion model, the paper next examines whether a ban on gender‐based auto insurance pricing in California in 2019 results in regulatory adverse selection. The paper concludes by describing possible alternative pricing variables available to auto insurers if gender‐based pricing is banned.

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  • David A. Cather, 2023. "Addressing insurance price discrimination in an era of diversity, equity, and inclusion," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 26(3), pages 407-429, October.
    • Handle: RePEc:bla:rmgtin:v:26:y:2023:i:3:p:407-429
    DOI: 10.1111/rmir.12249
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    References listed on IDEAS

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    1. David A. Cather, 2010. "A Gentle Introduction to Risk Aversion and Utility Theory," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 13(1), pages 127-145, March.
    2. Mattias K. Polborn & Michael Hoy & Asha Sadanand, 2006. "Advantageous Effects of Regulatory Adverse Selection in the Life Insurance Market," Economic Journal, Royal Economic Society, vol. 116(508), pages 327-354, January.
    3. Mario L. Small & Devah Pager, 2020. "Sociological Perspectives on Racial Discrimination," Journal of Economic Perspectives, American Economic Association, vol. 34(2), pages 49-67, Spring.
    4. Michael Hoy, 1982. "Categorizing Risks in the Insurance Industry," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 97(2), pages 321-336.
    5. Dickson,David C. M., 2005. "Insurance Risk and Ruin," Cambridge Books, Cambridge University Press, number 9780521846400.
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