Insurance Information Institute: Risk-Based Pricing Results in Competitive Markets
Risk-based pricing - a method insurers use to set prices based on the risk they assume - allows insurers to offer the lowest premiums to policyholders with the most favorable risk factors, while at the same time offering higher premiums for less favorable risks, according to an Issues Brief released today by the
"Risk-based pricing has many benefits," said
The risk-based pricing concept also incorporates actuarially sound rating factors such as credit-based insurance scores, geography, home ownership and motor vehicle records. These variables improve the accuracy of insurance prices for auto and homeowners insurance,
"Confusion around insurance pricing is understandable, given the government-regulated models used to assess risk," added Porfilio. "To navigate this complexity, teams of actuaries and data scientists are hired by insurers to quantify and differentiate among a range of risk variables while avoiding unfair discrimination."
The Brief also addressed concerns regarding the use of gender as a rating factor. Six states currently ban insurers from using gender as a factor when pricing personal auto insurance. Gender and age have long been reliable predictors of the likelihood a prospective policyholder will file an auto insurance claim. Denying insurers access to actuarially sound rating tools would force them to price risk less precisely, causing lower-risk drivers to subsidize the riskiest ones, the
"There is no place in today's insurance market for unfair discrimination," Porfilio stated. "In addition to being illegal, discrimination based on any factor that doesn't directly affect the insured risk would be bad business in today's diverse society."
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Report link: https://www.iii.org/sites/default/files/docs/pdf/triple-i_trends_and_insights_risk_based_pricing_brief_09062022.pdf
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Original text here: https://www.iii.org/press-release/triple-i-risk-based-pricing-results-in-competitive-markets-091322
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