Disparate Impact and Unfairly Discriminatory Insurance Rates

Historic actuarial literature, general insurance literature, and legislative histories reveal “unfairly discriminatory rates” to be a cost-based concept. A rate structure is unfairly discriminatory if the insurance premium differences between insureds do not reasonably correspond to differences in expected insurance costs. More recently a new rate concept has arisen in some court cases which is referred to as “disparate impact” (or “adverse impact”). Disparate impact has nothing to do with underlying insurance costs and is solely based on the disproportionate impact of the insurance rate structure on the insurance premiums paid by protected minority classes defined by race, color, religion, sex, or national origin. It would likely be a rare instance where the rate standard of unfairly discriminatory and the concept of disparate impact could be applied simultaneously to a risk classification plan without conflict. It is the author’s opinion that if the standard of disparate impact eventually prevails over the historical rate standard of unfairly discriminatory, then accurate risk assessment will be destroyed, adverse selection will be widespread in the insurance marketplace, and coverage availability will suffer.

Keywords. Risk classification plans; risk assessment; credit scoring; insurance law; rate regulation; adverse selection; disparate impact; adverse impact.