Actuarial Notes

The Discriminating (Pricing) Actuary

By Edward W. (Jed) Frees and Fei Huang · SSRN · 2021

Study guide: Exam 6I

A paper reviewing the social and economic principles that can be used to assess the appropriateness of insurance discrimination. Because discrimination issues vary by line of business and by country and legal jurisdiction, it examines those principles from the vantage of specific lines and jurisdictions, describes the considerations for prohibitions based on a diagnosis of COVID-19, and discusses privacy and algorithmic proxies as insurers' use of Big Data grows. The copy is the draft of March 16, 2021, with its online supplement.

On the syllabus

  • Exam 6I — objective A3; the whole paper (March 2021).

1 Introduction

  • 1.1 How Insurers Discriminate
  • 1.2 Insurance Prohibitions

2 Social Justice Considerations

  • 2.1 What is Actuarial Fairness?
    • 2.1.1 Pooling and Solidarity
    • 2.1.2 Responsibility and Actuarial Fairness
    • 2.1.3 Insurance as a Social Good
  • 2.2 Characteristics of Sensitive Variables
  • 2.3 Indirect Discrimination

3 Economic Considerations

  • 3.1 Adverse Selection, Moral Hazard, and Incentives
  • 3.2 Economic Efficiencies
  • 3.3 Price Discrimination

4 Actuarial Aspects of Rate Regulation

  • 4.1 Pricing
  • 4.2 Extent of Regulation

5 Prohibitions by Line of Business

  • 5.1 Unisex Risk Classification
  • 5.2 General Insurance and Credit-Based Scoring
  • 5.3 General Insurance and Price Optimization
  • 5.4 Life Insurance and Genetic Testing
  • 5.5 Big Data
  • 5.6 COVID-19

6 Proxy Discrimination

  • 6.1 Strategies for Mitigating Proxy Discrimination
  • 6.2 Linear Model Strategies
  • 6.3 Empirical Example
  • 6.4 Machine Learning Approaches

7 Conclusions

References

Online Supplement

  • Extended Abstract
  • 1 Regulation by Jurisdiction
    • 1.1 U.S. Insurance Discrimination Legal Environment
      • 1.1.1 U.S. Federal Laws and Regulations
      • 1.1.2 U.S. State Laws and Regulations
    • 1.2 European Union
      • 1.2.1 EU Directives
      • 1.2.2 EU Member Countries Laws and Regulations
    • 1.3 China
    • 1.4 Japan
    • 1.5 Australia
      • 1.5.1 Australian Federal Laws and Regulations
      • 1.5.2 Australian State Laws and Regulations
  • 2 Appendices
    • 2.1 Appendix: A Proxy for Being Female
    • 2.2 Appendix: Australian Regulations
    • 2.3 Appendix: Chinese Regulations
    • 2.4 R Code
  • Annotated Bibliography

Sources