Gender X and auto insurance: is gender rating unfairly discriminatory?

Abstract

There are three goals of insurance rate regulation. Rates must be: 1) adequate; 2) not excessive; and 3) not unfairly discriminatory. Rates that are adequate yet not excessive are overall high enough to pay claims and expenses, yet not so high overall that they result in unreasonable profiteering by insurers. The third regulatory goal—that rates are not unfairly discriminatory—is the topic of interest in our research. The concept of unfair discrimination in an insurance context—determining what constitutes fairness in pricing—can differ substantially from the thinking on fairness in a societal context. As a result, the term “discrimination” may be used quite differently in these two contexts. Discrimination, with negative societal connotations, is endemic in our world broadly and largely unjustifiable, yet in the narrower world of insurance, it is the basis for the entire industry’s viability and sustainability. In the insurance context, we can receive the term “discrimination” in a neutral manner, simply taking it to mean different treatment for different groups having different characteristics, without it necessarily connoting any negative intent or outcome. Indeed, the purpose in insurance for engaging in “fair discrimination” —that is, discrimination that price differentiates between discernibly different levels of risk—is itself rooted in economic fairness. An insurance carrier charges differential prices for its products based on differentials in risk. Nevertheless, when risk transfer to an insurer is priced based on uncontrollable and/or immutable classifications such as race and gender, there can be profoundly different views of what constitutes fairness. In many areas of U.S. law, discrimination on either the basis of gender or sexual identity is prohibited in a number of jurisdictions for a number of consumer situations. Yet the broad concept of societal fairness and the much narrower concept of actuarial fairness differ, and so within insurance markets, U.S. law has historically set insurance apart from other products in speaking to issues of fairness and discrimination (West, 2013). Within the last year, several states have enhanced their recognition of nonbinary or genderqueer identities by implementing a Gender X option on driver’s licenses. Insurance carriers are left with minimal direction on how to appropriately price this emerging class within the three goals of rate regulation. Additionally, as diversity and inclusion continue to be a strategic initiative within the insurance market, the insurance industry and its regulatory environment have to navigate carefully between the business imperatives for adequate pricing and inclusion efforts. This paper addresses the potential for unfair discrimination in some lines of business—with special focus on auto insurance—should gender-based rating be continued into the future. It also explores an immediate opportunity to enhance the insurance industry’s social compact with its insureds via recognition of the Gender X identity. Part I gives a primer on nonbinary and trans-identity followed by a brief history of the role of gender in insurance pricing, Part II discusses nonbinary, transgender, and the introduction of Gender X as an additional categorical level of the gender identify rating factor as used in insurance pricing. Part III and Part IV dive into the economic and social implications of movement in U.S. law toward more gender inclusivity.