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

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 insurance problem • 2 ACTUARI AL SOCI ETY 2019 CONV ENTI ON | 22 - 23 OCTOBER 2019

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

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

SOME UNIQUE FEATURES OF LIFE INSURANCE Risk pooling • Cross subsidies • Adverse selection • Information symmetry between buyer and seller • Insurance as social good • 5 ACTUARI AL SOCI ETY 2019 CONV ENTI ON | 22 - 23 OCTOBER 2019

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

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

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 • SMOKING STATUS Non- smoker discount of 20% introduced in 1980’s • Discount increased over time with statistical evidence • SOCIO-ECONOMIC CLASS 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 • 8 ACTUARI AL SOCI ETY 2019 CONV ENTI ON | 22 - 23 OCTOBER 2019

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) SMOKING STATUS Non-smoker gets 100% more cover than smoker . SOCIO-ECONOMIC CLASS 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 9 ACTUARI AL SOCI ETY 2019 CONV ENTI ON | 22 - 23 OCTOBER 2019

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) SMOKING STATUS Non-smoker gets 100% more cover than smoker . SOCIO-ECONOMIC CLASS 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 10 ACTUARI AL SOCI ETY 2019 CONV ENTI ON | 22 - 23 OCTOBER 2019

AGENDA Explain the nature of the discrimination • Review normative ethics theory of Moral Contractualism • Apply the theory to the problem • 11 ACTUARI AL SOCI ETY 2019 CONV ENTI ON | 22 - 23 OCTOBER 2019

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

THE NATURE OF MORAL WRONGNESS The most famous sentence in late 20 th 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” 13 ACTUARI AL SOCI ETY 2019 CONV ENTI ON | 22 - 23 OCTOBER 2019

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

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 PRINCIPLES A principle is a general conclusion based on sufficient reasons to defeat any reasonable objections 15 ACTUARI AL SOCI ETY 2019 CONV ENTI ON | 22 - 23 OCTOBER 2019

STRENGTH OF CONTRACTUALISM 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 CAN ACCOMMODATE A VARIETY OF MORAL NOTIONS Overall well-being (of Utilitarianism) • Duty and responsibility (of Deontology) • Notions such as human rights, procedural fairness • 16 ACTUARI AL SOCI ETY 2019 CONV ENTI ON | 22 - 23 OCTOBER 2019

CHALLENGE FOR THIS STUDY To define principles of underwriting that can be justified on grounds that no-one can reasonably reject 17 ACTUARI AL SOCI ETY 2019 CONV ENTI ON | 22 - 23 OCTOBER 2019

AGENDA Explain the nature of the discrimination • Review normative ethics theory of Moral Contractualism • Apply the theory to the problem • 18 ACTUARI AL SOCI ETY 2019 CONV ENTI ON | 22 - 23 OCTOBER 2019

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

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

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

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 SMOKING STATUS 30% male / 15% female smokers, mortality 50% to 80% higher SOCIO-ECONOMIC CLASS 2 nd best class = 50% higher; 3 rd best = 100% higher; Worst = 300% higher 22 ACTUARI AL SOCI ETY 2019 CONV ENTI ON | 22 - 23 OCTOBER 2019

REASONABLE CAUSAL EXPLANATION AGE Obvious! SEX Genetic female advantage is clear from birth • Social factors affect males : work stress, danger, alcohol, road accidents • SMOKING STATUS Overwhelming evidence SOCIO-ECONOMIC CLASS The educated choose healthier lifestyles; the wealthy can afford it • Better diet, medical care, more exercise, safer environment, • better jobs, less hazards, less alcohol 23 ACTUARI AL SOCI ETY 2019 CONV ENTI ON | 22 - 23 OCTOBER 2019

UNAMBIGIOUS ALLOCATION TO RISK GROUP AGE and SEX Clear from ID book SMOKING STATUS Declaration by applicant – good faith • Cotinine test • Smokers can quit • SOCIO-ECONOMIC CLASS 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 • 24 ACTUARI AL SOCI ETY 2019 CONV ENTI ON | 22 - 23 OCTOBER 2019

MEETING THE FAIR DISCRIMINATION PRINCIPLE? AGE, SEX and SMOKING Discrimination is fair and justifiable SOCIO-ECONOMIC CLASS Strong evidence of difference, but less reliable data • Reasonable causal explanation • Questionable allocation to risk group • 25 ACTUARI AL SOCI ETY 2019 CONV ENTI ON | 22 - 23 OCTOBER 2019

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

AT LAST Thank you! 27 ACTUARI AL SOCI ETY 2019 CONV ENTI ON | 22 - 23 OCTOBER 2019