May 16, 2024 3 min read

The Tectonic Plates of Insurance Have Just Moved

A US federal court has ruled on a long standing and hugely important case for property insurers. It pushed back insurers’ treasured ‘right to underwrite’ and the status of ‘objective actuarial data’. As I predicted 2 years ago, the tectonic plates for what is fair in insurance have just been moved.


Some background first. A sector lobby group, the Property Casualty Insurance Association of America (APCIA), had been seeking for more than 10 years to establish legally that…

"a rate is not unfairly discriminatory ... if it is based on actuarial data reflecting past losses that reveals differences in the risks posed by different insureds."

The APCIA argued (more here) that this was so fundamental to the business of insurance, that if it was not accepted, the way in which insurers operate would have to drastically change. They further argued…

"Rather than allow insurance decisions to be guided by objective actuarial data regarding risk — as contemplated by state law — the disparate impact rule would require insurers to attempt to determine whether their underwriting and pricing decisions have a disparate impact on customers falling within a protected class.”

These arguments failed to convince the judge, who ruled in favour of the Federal Department of Housing and Urban Development (HUD). It had been seeking to introduce a rule that would have meant that…

“…homeowner insurance providers could be sued for disparate-impact claims based on how they assess the risk of given policyholders, and how they adjust their pricing and underwriting to account for that risk.”

HUD is responsible for the Fair Housing Act, which outlaws most housing discrimination. What this ruling has effectively done is place obligations under the Fair Housing Act above those of professional actuarial practice. So even if a pricing decision was based upon objective actuarial data relating to risk and losses, it would still have to satisfy the requirements of the Fair Housing Act.

Two implications of this ruling are worth emphasising, and to all insurers, not just those in the US.

No Longer Number One

The ruling makes clear that fairness of merit does not have precedence over fairness of access. The situation is now switched around, putting access ahead of merit. Or to put it another way, the right to underwrite treasured by insurers now has limits attached to it.

This is part of the new ‘fairness landscape’ that is now emerging. The insurers’ views on fairness now have to accommodate other’s views on fairness. This is what I predicted in my 2013 paper for the Institute and Faculty of Actuaries called “Revolutionising Fairness to Enable Digital insurance’.

Bear the Cost

The APCIA argued that having the Fair Housing Act take precedence over objective actuarial data would result in increased costs for both insurers and consumers. The judge in her response effectively told insurers that ensuring more equitable house for US citizens was more important, and to just get on and bear the cost of the Fair Housing Act like others do, such as landlords and mortgage providers.

What This Ruling Means

The ruling exposes insurers to legal challenges around disparate impact, which in US refers to…

“…practices in employment, housing, and other areas that adversely affect one group of people of a protected characteristic more than another, even though rules applied by employers or landlords are formally neutral.”

It comes as a challenging time for US insurers. State Farm are facing a class action based on discrimination in its claims settlements and service (more here). And state legislators are seeking to strengthen laws around discrimination and the rating of auto policies (more here). Each of these three developments are taking place in the State of Illinois, but their ripples will reach out across the US and into other markets too.

Added together, it looks like the pressure is on US insurers to work harder to tackle outcomes judged to be unfairly discriminatory. And in laws like Colorado’s SB21-169, there is growing pressure to then evidence to the regulator how this is being delivered.

Could similar transparency rules emerge in relation to insurers in UK markets? Yes, although I anticipate it could be more of a pull version than Colorado’s push version.

Some Final Thoughts

The ‘right to underwrite’ may have been treasured by insurers, but it was always, to use the language of sociologists, a social and cultural construct adopted by the market. And it’s a construct that insurance and actuarial professionals have themselves evolved over time to reflect changing social and culture expectations. It hasn't always been a ‘them doing it to us’ thing.

Is that it then? Adapt to this in the hope of then being left alone? I doubt it. The tectonics plates around the right to underwrite will move further over the coming years, particularly in relation to questions around fairness and the digital transformation of insurance.

The challenge for the sector then becomes: do we engage with these tectonic shifts, or do we stand back and let them happen as and when? The sector hasn’t been strong on the former. Is that perhaps then the social and culture change that is most needed now?

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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