A New York regulator has reopened a longstanding debate: what kinds of data can actuaries use to price premiums?
According to the Wall Street Journal, the New York Department of Financial Services recently made a formal request of Allstate Corp., Geico, Liberty Mutual, and Progressive Corp. to explain why the practice of using occupation and education in pricing shouldn’t be prohibited. That question has reopened the debate about what kinds of data insurers should be able to use when pricing premiums, and what factors may result in discriminatory pricing structures.
The auto insurance industry has long considered occupation, age, gender, and education level when setting premium rates. In defense of this practice, actuaries argue that different professional fields correlate to certain personality traits (i.e. inclination to take risks) that in turn affect one’s driving ability. What’s more, they argue that income and education levels may impact the number of claims customers are likely to file.
So, are these arguments valid? And if pricing practices require reform, what is the best path forward for insurers?
Both Sides of the Story
“As long as state governments require drivers to buy insurance, they should require insurance companies to price their product based on how we drive, not who we are,” said J. Robert Hunter, the Consumer Federation of America’s Insurance Director.
Not everyone is in agreement with this egalitarian ideal, however. Alex Hageli, an official with the Trade Group Property Casualty Insurers Association of America, believes that insurers’ current pricing practices are legal and even beneficial to drivers, telling WSJ that a broad range of permissible factors “contributes to more availability of insurance for drivers” because insurers want to be able “to use accurate predictors of loss.”
Some firms have taken a middling stance on the issue in an effort to please parties on both sides of the debate. “Drivers less likely to incur losses should pay less for insurance than drivers more likely to incur losses,” a spokesman for Allstate told WSJ, and added that the firm uses education but not occupation when setting rates in New York.
An Alternative Path Forward
Some states, including Massachusetts, already limit the types of data that actuaries can utilize in pricing insurance. At this point, it’s unclear how far the Department of Financial Services will go in setting limitations on what data insurers are able to use in setting premiums in New York. But with the age-old debate back in the spotlight, insurance companies would do well to consider other ways to assess customer risk.
Auto insurers have already begun pouring major resources into the development of tools which precisely measure the driving behaviors of their policyholders. For example, both Allstate and Progressive have developed apps and other telematic devices that track how hard drivers hit the brakes.
The jury’s still out on whether consumers will gladly surrender such data and accept the premium rates that go with them. But as the industry continues to evolve and old practices are reconsidered, agile, forward-thinking insurers will find new ways to assess risk, set premiums, and satisfy customers across all demographics.
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