May 5, 2016 2 min read

Equal Treatment: pt2 : on a collision course with price optimisation?

The draft EU directive on equal treatment relies on ‘actuarial principles’ for establishing whether proportionate differences in treatment by insurers on the grounds on age and disability are discriminatory. It’s a move with more consequences than might first meet the eye.

In many ways, it’s a natural route to take and with strengths too, for actuarial principles have been worked up over many years and are widely adopted. And actuaries have professional bodies that maintain a watch on standards.

So why am I hovering a question mark over the draft directive’s reliance on actuarial principles?

For two reasons. Firstly, questions about equal treatment on the grounds of age or disability are often framed in terms of fairness and while actuaries recognise the importance of fairness, they all too often see it only in terms of the fairness of merit. Other dimensions of fairness, such as fairness of access and fairness of need, are less often discussed in the actuarial community, yet those two dimensions lie at the heart of how the directive is most likely to be framed. So there’s a tension here that will need to be resolved, by both sides to the equal treatment debate learning and respecting the fairness language of the other.

The second reason involves the obvious conflict of interest that many actuaries find themselves in. On the one hand, many of them work at the heart of insurance firms, without whom the profession would be unsustainable. On the other hand, each and every professional actuary in the UK has, as their first and foremost obligation, to uphold the public interest. The two things can often sit comfortably together, yet there are times when tensions can arise, between what’s good for the insurer and what’s good for the public. It would be good for the profession to be more forthright in how it expects its members to manage this conflict of interest. Remember that the ethics of conflicts of interest lie not in being in one, but in how you handle them.

The chief actuary for an insurer should of course be applying actuarial principles in her everyday work and this would then seem to automatically satisfy the draft directive’s requirement. Yet this all seems too neat. The fault line that lies hidden underneath is the one that separates the actuarial principles from their application. After all, principles are just principles: putting them into practice is an altogether more human activity and actuaries, for all their professional training, are no more infallable than say an accountant, lawyer or doctor. So the actuarial profession needs to pay careful attention to two things:

  1. how can the public be satisfied that actuaries are fulfilling what is perhaps their most important obligation: to uphold the public interest?
  2. how can the public be satisfied that actuaries have a full and representative understanding of fairness?

Let’s quickly point this discussion at two particular developments underway in insurance at the moment. If the draft directive is to rely on actuarial principles for assessing proportionate differences in treatment of age and disability, then:

  1. how will price optimisation fare? The recent regulatory challenge to the use of price optimisation in the US personal lines market illustrates the growing complicatedness of insurance pricing. How will the chief actuary isolate and control the proportionate treatment of age in risk based factors, given a ban on the treatment of age in non-risk based factors, all within a predictive underwriting black box? Is it even possible?
  2. how will digital marketing fare? Proportionate treatment of age may be allowed in underwriting, but it wouldn’t be allowed in an insurer’s marketing. Would it be possible to separate the two?

The draft directive would certainly complicate the development of these two initiatives, perhaps even stall them. Could this be a significant, underlying reason for insurers’ opposition to the draft directive?

In my next post on the draft equal treatment directive, I’ll be considering the impact of another of its key requirements: that of transparency and proof.

Duncan Minty
Duncan Minty
Duncan has been researching and writing about ethics in insurance for over 20 years. As a Chartered Insurance Practitioner, he combines market knowledge with a strong and independent radar on ethics.
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