the discrimination in risk underwriting? Francois Marais AGENDA - - PowerPoint PPT Presentation

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the discrimination in risk underwriting? Francois Marais AGENDA - - PowerPoint PPT Presentation

Feb 06, 2023 44 likes •315 views

Can life insurance ethically justify the discrimination in risk underwriting? Francois Marais AGENDA Explain the nature of the discrimination Review normative ethics theory of Moral Contractualism Apply the ethics theory to the

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Can life insurance ethically justify the discrimination in risk underwriting?

Francois Marais

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AGENDA

  • Explain the nature of the discrimination
  • Review normative ethics theory of Moral Contractualism
  • Apply the ethics theory to the insurance problem

ACTUARI AL SOCI ETY 2019 CONV ENTI ON | 22 - 23 OCTOBER 2019

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IS UNDERWRITING UNFAIR DISCRIMINATION?

ACTUARIAL JUSTIFICATION

  • Equity: each must pay for own mortality risk
  • Discrimination based on sound statistical evidence

ECONOMIC JUSTIFICATION

  • Essential for the profitability of the company
  • Essential for financial survival of the industry

ACTUARI AL SOCI ETY 2019 CONV ENTI ON | 22 - 23 OCTOBER 2019

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EXTENT OF THE DISCRIMINATION

A PREMIUM OF R100 pm BUYS COVER OF

  • R22 000

for an old, uneducated, low income, male smoker

  • R150 000

for a middle-aged, mid-income, male smoker

  • R1000 000

for a young, professional, female non-smoker

ACTUARI AL SOCI ETY 2019 CONV ENTI ON | 22 - 23 OCTOBER 2019

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SOME UNIQUE FEATURES OF LIFE INSURANCE

  • Risk pooling
  • Cross subsidies
  • Adverse selection
  • Information symmetry between buyer and seller
  • Insurance as social good

ACTUARI AL SOCI ETY 2019 CONV ENTI ON | 22 - 23 OCTOBER 2019

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SOLIDARITY VS MUTUALITY

SOLIDARITY FOR SOCIAL INSURANCE

  • No underwriting
  • Huge cross-subsidy
  • Compulsory participation
  • Same cover and contributions for all

FAIRNESS BASED ON EQUALITY MUTUALITY FOR COMMERCIAL INSURANCE

  • Voluntary participation
  • Discretionary cover – can be very high
  • Cross-subsidy cannot be afforded
  • Full underwriting essential

FAIRNESS BASED ON EQUITY

ACTUARI AL SOCI ETY 2019 CONV ENTI ON | 22 - 23 OCTOBER 2019

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UNDERWRITING CRITERIA

GENERAL CRITERIA

  • Used to determine the normal premium rate
  • Age, sex, smoking status, socio-economic class

INDIVIDUAL CRITERIA

  • Used to adjust the normal premium rate
  • Health, occupation, part-time activities

ACTUARI AL SOCI ETY 2019 CONV ENTI ON | 22 - 23 OCTOBER 2019

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HISTORY OF UNDERWRITING FACTORS

AGE

  • Only underwriting factor from 1800’s to 1950’s

SEX

  • By 1960 a 3-year age discount for females
  • By 1980 a 5-year age discount
  • By 2000 a 7-year age discount

ACTUARI AL SOCI ETY 2019 CONV ENTI ON | 22 - 23 OCTOBER 2019

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SOCIO-ECONOMIC CLASS SMOKING STATUS

  • Non-smoker discount of 20% introduced in 1980’s
  • Discount increased over time with statistical evidence
  • In 1980’s preferential rates gave 25% more cover than normal rates.
  • In 1990’s three-tier normal / preferential / super rates, with 40% more cover
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CURRENT EXTENT OF UNDERWRITING DISCRIMINATION

AGE Age 20 gets 500% more cover than age 60 SEX Female gets 50% more cover than male ( = 10 year age discount)

ACTUARI AL SOCI ETY 2019 CONV ENTI ON | 22 - 23 OCTOBER 2019

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SOCIO-ECONOMIC CLASS SMOKING STATUS Non-smoker gets 100% more cover than smoker. Class 1 no matric Class 2 matric 100% more cover than class 1 Class 3 3-year diploma 200% more cover than class 1 Class 4 4-year degree 300% more cover than class 1

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CURRENT EXTENT OF UNDERWRITING DISCRIMINATION

AGE Age 20 gets 500% more cover than age 60 SEX Female gets 50% more cover than male ( = 10 year age discount)

ACTUARI AL SOCI ETY 2019 CONV ENTI ON | 22 - 23 OCTOBER 2019

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SOCIO-ECONOMIC CLASS SMOKING STATUS Non-smoker gets 100% more cover than smoker. Class 1 no matric Class 2 matric 100% more cover than class 1 Class 3 3-year diploma 200% more cover than class 1 Class 4 4-year degree 300% more cover than class 1

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AGENDA

  • Explain the nature of the discrimination
  • Review normative ethics theory of Moral Contractualism
  • Apply the theory to the problem

ACTUARI AL SOCI ETY 2019 CONV ENTI ON | 22 - 23 OCTOBER 2019

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MORAL CONTRACTUALISM

DEVELOPED BY HARVARD PROF TOM SCANLON “What we owe to each other” (1998) Hailed as….

  • “one of the most important books on moral philosophy

in the twentieth century”

  • “a magisterial book that will influence the direction of ethics

for years to come”.

  • “rivalling theories such as utilitarianism and deontology”

ACTUARI AL SOCI ETY 2019 CONV ENTI ON | 22 - 23 OCTOBER 2019

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THE NATURE OF MORAL WRONGNESS

The most famous sentence in late 20th century moral philosophy “An act is wrong if its performance under the circumstances would be disallowed by any set of principles for the general regulation of behaviour, which no one could reasonably reject as a basis for informed, unforced general agreement”

ACTUARI AL SOCI ETY 2019 CONV ENTI ON | 22 - 23 OCTOBER 2019

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THE NATURE OF MORAL WRONGNESS

“LITE” definition

An act is wrong if it would be disallowed by any principle that no one could reasonably reject

ACTUARI AL SOCI ETY 2019 CONV ENTI ON | 22 - 23 OCTOBER 2019

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NOTIONS UNDERLYING REASONABLE REJECTION

JUSTIFIABILITY The essential motive for not doing wrong is that we want to be able to justify our action to others REASONS To justify an action is to offer reasons supporting it

ACTUARI AL SOCI ETY 2019 CONV ENTI ON | 22 - 23 OCTOBER 2019

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PRINCIPLES A principle is a general conclusion based on sufficient reasons to defeat any reasonable objections

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STRENGTH OF CONTRACTUALISM

CAN ACCOMMODATE A VARIETY OF MORAL NOTIONS

  • Overall well-being (of Utilitarianism)
  • Duty and responsibility (of Deontology)
  • Notions such as human rights, procedural fairness

ACTUARI AL SOCI ETY 2019 CONV ENTI ON | 22 - 23 OCTOBER 2019

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A SINGLE UNIFIED CONCEPT OF MORAL WRONGNESS An act is wrong if it would be disallowed by any principle that no one could reasonably reject

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CHALLENGE FOR THIS STUDY

To define principles of underwriting that can be justified

  • n grounds that no-one can reasonably reject

ACTUARI AL SOCI ETY 2019 CONV ENTI ON | 22 - 23 OCTOBER 2019

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AGENDA

  • Explain the nature of the discrimination
  • Review normative ethics theory of Moral Contractualism
  • Apply the theory to the problem

ACTUARI AL SOCI ETY 2019 CONV ENTI ON | 22 - 23 OCTOBER 2019

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IS ACTUARIAL EQUITY FAIR?

THE FAIR LOTTERY PRINCIPLE

In a lottery where each ticket has an equal chance to win, all tickets should cost the same. It would be unfair to charge different prices for tickets. This justifies the general principle of discrimination as fair

  • assuming that we accurately know the risk of each applicant

ACTUARI AL SOCI ETY 2019 CONV ENTI ON | 22 - 23 OCTOBER 2019

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ADDING UNDERWRITING FACTORS

Actuarial risk assessment is not an exact science: We have strong evidence of significant mortality differences but cannot accurately quantify the risk of each person Each additional underwriting factor improves actuarial equity How can we justify each additional underwriting factor ?

ACTUARI AL SOCI ETY 2019 CONV ENTI ON | 22 - 23 OCTOBER 2019

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JUSTIFICATION FOR EACH UNDERWRITING FACTOR

THE FAIR DISCRMINATION PRINCIPLE

An underwriting factor is justifiable if it has:

  • Strong and reliable statistical evidence
  • Reasonable causal explanation.
  • Unambiguous allocation to risk groups

ACTUARI AL SOCI ETY 2019 CONV ENTI ON | 22 - 23 OCTOBER 2019

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STRONG AND RELIABLE STATISTICAL EVIDENCE

AGE Regular CMI investigations; 15 million policy years and 80 000 deaths SEX 40% female, male mortality about 50% higher

ACTUARI AL SOCI ETY 2019 CONV ENTI ON | 22 - 23 OCTOBER 2019

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SOCIO-ECONOMIC CLASS SMOKING STATUS 30% male / 15% female smokers, mortality 50% to 80% higher 2nd best class = 50% higher; 3rd best = 100% higher; Worst = 300% higher

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REASONABLE CAUSAL EXPLANATION

AGE Obvious! SEX

  • Genetic female advantage is clear from birth
  • Social factors affect males : work stress, danger, alcohol, road accidents

ACTUARI AL SOCI ETY 2019 CONV ENTI ON | 22 - 23 OCTOBER 2019

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SOCIO-ECONOMIC CLASS SMOKING STATUS Overwhelming evidence

  • The educated choose healthier lifestyles; the wealthy can afford it
  • Better diet, medical care, more exercise, safer environment,

better jobs, less hazards, less alcohol

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UNAMBIGIOUS ALLOCATION TO RISK GROUP

AGE and SEX Clear from ID book

ACTUARI AL SOCI ETY 2019 CONV ENTI ON | 22 - 23 OCTOBER 2019

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SOCIO-ECONOMIC CLASS SMOKING STATUS

  • Declaration by applicant – good faith
  • Cotinine test
  • Smokers can quit
  • No common objective standard - each insurer has own definitions
  • Subjective, arbitrary combination of income and education
  • Income levels change regularly for inflation
  • Difficult to justify cut-off levels
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MEETING THE FAIR DISCRIMINATION PRINCIPLE?

AGE, SEX and SMOKING Discrimination is fair and justifiable

ACTUARI AL SOCI ETY 2019 CONV ENTI ON | 22 - 23 OCTOBER 2019

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SOCIO-ECONOMIC CLASS

  • Strong evidence of difference, but less reliable data
  • Reasonable causal explanation
  • Questionable allocation to risk group
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CONCLUSIONS

  • Difficult to justify socio-economic underwriting ethically
  • Industry is unlikely to initiate change
  • Alternative product design could reduce the problem
  • Contractualism is strong tool for analyzing business ethics

ACTUARI AL SOCI ETY 2019 CONV ENTI ON | 22 - 23 OCTOBER 2019

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AT LAST

Thank you!

ACTUARI AL SOCI ETY 2019 CONV ENTI ON | 22 - 23 OCTOBER 2019

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