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

Abstract

AbstractThe 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.