Alyssa Lane
Insurance underwriters are allowed to discriminate to a certain extent. While insurance companies are prohibited from discriminating based on factors like race, they use specific facts about people to measure risk and set rates. This means that some form of discrimination is both necessary and legal. Insurance companies use underwriting guidelines to set rates and determine who they will insure, and companies set rates based on risk and factors that they're legally allowed to consider, such as an applicant's gender. While insurance companies say certain factors are actuarially sound criteria for setting rates, consumer advocates think companies should determine rates using factors that people can control.
| Characteristics | Values |
|---|---|
| Race | Not allowed |
| National origin | Not allowed |
| Sex | Allowed |
| Religion | Not allowed |
| Physical or mental condition | Allowed |
| Previous mold damage | Not allowed |
| Political affiliation or expression | Not allowed |
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What You'll Learn
Overt racial discrimination
Insurance companies are in the business of discrimination. Insurers attempt to segregate insureds into separate risk pools based on differences in their risk profiles. This allows them to charge different premiums to different groups and incentivize risk reduction. However, there are limits to the types of discrimination that are permissible for insurers. While insurance companies are prohibited from discriminating based on factors like race, guidelines use particular facts about people to measure risk and set rates. This means that some form of discrimination is both necessary and legal.
The Civil Rights Act of 1964 made many forms of racial discrimination illegal. Under U.S. law, underwriting guidelines cannot use unfair discrimination, which targets protected classes such as race, national origin, sex, or religion. Unfair discrimination can take various forms, including higher prices, weaker policies, or denying coverage. Anti-discrimination laws vary across states and insurance types, and some consumer advocates argue that companies should determine rates using factors that people can control.
While overt racial discrimination in insurance underwriting has decreased, the insurance industry's historical use of race-based premiums and redlining has had persistent effects on real estate values and generational wealth. These practices have contributed to systemic racism and inequality, and ongoing scrutiny and efforts are necessary to ensure that all forms of racial discrimination are eliminated from the industry.
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Use of big data
The use of big data in insurance underwriting has transformed insurance practices. Big data and AI analytics tools are generally used in pricing and underwriting, claims management, and sales and distribution. However, the unchecked use of big data can unintentionally harm marginalised communities.
In 2021, Colorado passed a bill to protect several classes, including race, sexual orientation, and gender identity, from discrimination in insurance underwriting. The law requires insurance companies to demonstrate that their use of external data and algorithms does not discriminate based on these protected characteristics. This has been supported by Insurance Commissioner Ricardo Lara, who has taken action to stop bias and discriminatory use of consumer data by insurance companies in California.
Despite progress in eliminating overt forms of discrimination, the insurance industry's reliance on proxies and big data perpetuates racial inequalities. This includes practices such as redlining, restrictive covenants, and race-based insurance premiums. With the growing use of algorithms and machine learning, legislative and regulatory reforms are crucial to ensuring fairness in the industry.
Research reveals that insurers can use fairness criteria alongside AI to minimise bias and discrimination risks. Dr Huang's study examines different anti-discrimination regulations and implements them into anti-discrimination insurance pricing models. While direct discrimination is prohibited, indirect discrimination using proxies or complex algorithms remains a concern. As the use of AI proliferates, insurers will need to address these risks to ensure fair and ethical outcomes in underwriting and pricing.
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Health insurance discrimination
Several studies have found evidence of health insurance discrimination, particularly for individuals with public insurance or no insurance. For example, a study in Minnesota found that reports of insurance-based discrimination were higher among uninsured (25%) and publicly insured (21%) adults compared to privately insured adults (3%). Similarly, a 2007 study in Florida indicated that 14% of Medicaid beneficiaries experienced discrimination due to their insurance coverage. Such discrimination can create barriers to accessing necessary healthcare, impacting individuals' confidence in obtaining care and leading to foregone treatment.
The Affordable Care Act (ACA) of 2010 included provisions to address health insurance discrimination. Section 1557 of the ACA prohibits discrimination on the grounds of race, colour, national origin, sex, age, or disability in health programs and activities receiving funding from the Department of Health and Human Services (HHS). This includes hospitals accepting Medicare, doctors receiving Medicaid payments, and health insurance marketplaces.
Despite these legal protections, health insurance discrimination persists, and lawsuits have alleged that discriminatory practices continue to affect the industry. For example, the final rule of the Nondiscrimination in Health and Health Education Programs or Activities ruling was criticised as a barrier to healthcare access for LGBTQ+ individuals, people with disabilities, and those with limited English proficiency.
Overall, while there are legal restrictions on health insurance discrimination, the practice continues to be a concern, particularly for vulnerable and underserved populations.
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Gender discrimination
Insurance companies discriminate based on certain factors to segregate insured individuals into separate risk pools. This allows them to charge different premiums to different groups and incentivize risk reduction by the insured. While insurance companies are prohibited from discriminating based on factors like race, they use specific facts about people to measure risk and set rates. This means that some form of discrimination is both necessary and legal.
To address gender discrimination in insurance, California Insurance Commissioner Dave Jones issued regulations prohibiting the use of gender in private passenger automobile insurance rating in California. These regulations, known as the "Gender Non-Discrimination in Automobile Insurance Rating Regulation," became effective on January 1, 2019. The goal was to ensure that auto insurance rates are based on factors within a driver's control rather than personal characteristics.
Additionally, in 2012, the California Insurance Commissioner promulgated regulations prohibiting the denial of coverage or claims for medical services based on an individual's actual or perceived gender identity. This built upon Assembly Bill 119 from 2009, which was authored by then-Assemblymember Jones to prohibit gender-based discrimination in health insurance pricing. As a result, California eliminated gender-based pricing in health insurance before it became a national standard under the Affordable Care Act.
While progress has been made in California and at the national level with the Affordable Care Act, gender discrimination in insurance underwriting remains a complex issue. It is essential to strike a balance between allowing insurers to assess risk and ensuring that discrimination against protected classes is prohibited.
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Actuarial principles
Actuaries create risk categories or "buckets" that insurance companies utilise to classify their customers. Each category represents a distinct level of potential risk. For instance, in the context of life insurance, an actuary might establish four risk buckets, with individuals in Bucket 1 being the least likely to pass away during the policy term, making them the cheapest to insure.
Actuarial practices serve as the foundation for underwriting guidelines. Underwriters apply the actuarial tables and models to individual cases, considering specific customer information and life factors to place them within the appropriate risk category. Underwriters act as the link between actuaries and customers, translating actuarial assessments into practical insurance coverage decisions.
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Frequently asked questions
Yes, but not unfairly. Insurance underwriters are allowed to discriminate in favour of good risks and not poor risks. However, they cannot discriminate unfairly by using factors such as race, national origin, gender, religion, or political affiliation.
Unfair discrimination targets protected classes, such as race, national origin, sex, or religion. It can take the form of higher prices, weaker policies, or denial of coverage. It is banned by laws in every state.
Historical examples of unfair discrimination include redlining, restrictive covenants, and race-based insurance premiums. More recently, the use of big data and algorithms has been criticised as a form of discrimination, particularly in health insurance, which can affect access for LGBTQ+ people, people with disabilities, and those whose primary language is not English.
