Life risk selection at a fair price: reinforcing the actuarial basis
Over the past three decades, the private life and health insurance industry has come under increasing pressure from regulators and government to demonstrate that its risk selection process is fair, and to prove that the price charged to the consumer of insurance products is actuarially sound. This publication in Swiss Re’s Technical publishing series discusses the background to the regulatory challenges in this area and outlines a range of techniques which can be used by insurers to ensure the objectivity and relevance of risk factors. The existence of these techniques should provide assurance to regulators that the industry undertakes the risk selection process fairly and responsibly.
Increasingly, with the best of intentions, the law seeks to protect people from discrimination and help them to participate equally in all areas of life. Some countries have achieved this by making it unlawful to treat differently those people with disabilities or with characteristics that indicate a propensity to disease or early death. However, unless private insurers are afforded exemptions from such laws, or are able to secure favourable amendments in the legislative drafting stages, this approach may run counter to the basic principles under which the industry operates – which is a commercial, voluntary undertaking with shareholders’ capital at risk to provide financial security for members of an insured pool of risks.
The commercial freedom to price and underwrite according to the risk presented represents one of the fundamental bases of a private insurance contract and offers the fairest way to provide coverage for the maximum number of people at an affordable cost. Private insurance operates at its most efficient when differences between the risks in the pool can be taken into account in a way that is fair to both parties.
For private insurers, the freedom to quantify and to group similar risks together, based on selection criteria that are actuarially justifiable, is fundamental in establishing a homogeneous risk distribution within the pool. This approach may not produce equal prices between members of the pool, but it is equitable and guarantees that the consumer pays fair and competitive premiums based on the risk he or she brings to the pool. The fewer differentials the insurance industry is allowed to apply, the less equitable the pricing and rating structure becomes to consumers of insurance – both as individuals and as an insured population as a whole. Higher prices make insurance less accessible for all.
In the ongoing debate on the ‘right to underwrite’, Swiss Re anticipates that the publication will provide a useful contribution in helping the life and health insurance industry demonstrate to regulators and government that its risk-selection process is fair.
