Ethics of insurance pricing
Gradient Institute Fellows Chris Dolman, Seth Lazar and Dimitri Semenovich, alongside Chief Scientist Tiberio Caetano, have written a paper investigating the question of which data should be used to price insurance policies. The paper argues that even if the use of some “rating factor” is lawful and helps predict risk, there can be legitimate reasons to reject its use.
A common question asked of insurance professionals is whether or not a rating factor ought to be permitted for price setting. To answer this question one often falls back on a set of heuristics, for example, is the factor commonly used in the market, does it predict well, would people generally expect it to be used, or is it visible to customers. However, the underlying principles behind such intuitions are not necessarily appreciated or understood.
In this paper, we draw on contemporary ideas in procedural and distributive justice to decompose the classical notion of risk into risk types that in turn allow development of semi-formal criteria by which rating factors may be evaluated. We hope that this new set of conceptual tools will allow practitioners to reason with greater clarity about ethical questions surrounding pricing systems.
Read the full paper here.
