Actuarial Group Examines Racial Bias In P/C Pricing

The issue of race in corporate America has been amplified in the last few years and must be researched, according to the Casualty Actuarial Society, which published a series of reports on race and property/casualty insurance pricing.

CAS published a series of guides to identify, measure, address and solve racial bias in insurance pricing.  The four research reports, two of which were released this week, tackle different aspects of race and insurance pricing as viewed through the lens of P/C insurance.

The reports will be available on the CAS website, casact.org and are authored by actuarial experts on predictive analytics, and diversity, equity and inclusion. They include:

• Methods for Quantifying Discriminatory Effects on Protected Classes in Insurance.
• Approaches to Address Racial Bias in Financial Services: Lessons for the Insurance Industry.
• Defining Discrimination in Insurance.
• Understanding Potential Influences of Racial Bias on P/C Insurance: Four Rating Factors Explored.

“This research helps lay the groundwork for CAS members and other stakeholders to become aware of the discussions taking place around this topic and the potential impact on the work that actuaries do,” said Roosevelt Mosley, CAS president-elect and co-author of one of the papers. “Actuaries' expertise in insurance pricing and our extensive training, from analytical skills to deep industry knowledge, allow us to contribute in quantifying and explaining the issues moving forward.”

Calls Getting Louder

Mosley said in his report that calls for social justice in the U.S. have been louder than ever since the events of 2020, and initially were focused on police reform.

“They quickly expanded to address systemic racism in our society,” he wrote. “These calls resulted in increased education on the impacts of systemic racism on minorities, demands for increased equity, and the eradication of racism once and for all. The reach of these calls has been wide, and has resulted in corporations, government entities, educational institutions and even religious institutions beginning to examine their businesses and processes to determine how to address racism and social injustice.”

Mosley noted that the issue of bias in insurance pricing is not new, and some progress in identifying it and correcting abuses has been made. But he said, it is only recently that the steps taken to address racial bias have been more “pervasive and significant.” He pointed to a new Colorado regulation that will require insurance companies to demonstrate that their pricing and processes are not unfairly discriminatory to protected classes.

“All of this is adding up to fundamental changes in the considerations for developing rates and justifying rates,” he said. “And if actuaries and analytic professionals are not part of the discussion as these proposals are being developed, we may ultimately not like the results.”

Mallika Bender,  a CAS fellow and the organization's diversity, equity and inclusion actuary, said her research looked at other financial services industries that have implemented a variety of solutions to address racial bias. She and her co-authors looked at mortgage lending, personal lending, commercial lending and credit scoring systems. All of these have long histories of biased practices, particularly redlining, the illegal practice of refusing to provide financial services to consumers based on where they live.

“All of the sectors that we looked at had some connections or impacts due to redlining and other discriminatory practices,” she said during a press briefing. “The practice of redlining, in fact, was explicitly codified and made legal through the 1934 Federal Housing Act.”

Several Attempts

Since then, she said, there have been several government attempts to address racially biased practices, such as the adoption of the Fair Housing Act and the Equal Credit Opportunity Act in the 1960s and ‘70s.

“But despite all of those actions, we still see large gaps in homeownership rates, and large gaps in family wealth between black and white households that still exist to this day, and in many cases haven't really decreased over the last 30 years,” she said. “Knowing that, we looked to see what other methods or approaches are being taken in those financial services sectors to continue to address racial bias or address it from other angles.”

Bender said her research suggests that government prohibition of specific practices may not be a silver-bullet solution.

“Actuaries can play a key role as the insurance industry develops approaches to test for, measure, and address potential racial bias, and ensure fairness in insurance while still maintaining risk-based pricing, company competitiveness and solvency,” she said.

Doug Bailey is a journalist and freelance writer who lives outside of Boston. He can be reached at [email protected].

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Doug Bailey is a journalist and freelance writer who lives outside of Boston. He can be reached at [email protected].