Risk III

Two Canadian risk management professors (Mary Kelly at Willfred Laurier and Norma Nielson at Calgary) have written an interesting survey of the rating factors commonly used in automobile insurance. The focus of the paper is age based pricing. (Here is a link to $$ copy of a published and peer reviewed paper   Here  is a copy of the research report the paper is based upon.)

The paper is quite interesting in its own right.  However what is interesting is the rationale for the study.

The Law Commission of Canada, in their discussion paper “Does Age Matter?” raises the following questions :

Is it appropriate to use age in our legislation, public polices and programs?

Are age-based distinctions in Canadian law just? …

Could other concepts better reflect the diversity of life choices among Canadians?

My first response is that I, like Peter Pan, choose not to age.  Since I made that life choice it is unfair that I am penalized for aging.

It turns out that after a serious review of the actuarial and economic literature, age does the best job of predicting (it is the most important determinant) loss severity and frequency.  This is true for younger as well as elderly drivers.

It is "unfair" that people age and lose the ability to react to certain driving situations and it is "unfair" that young drivers are inexperienced.  However, if we make it easier (lower prices for all!) for younger and older drivers, we increase social losses.  I suppose as a society we could say that discrimination based on age is so unjust that we must bear the costs of increased road and highway accidents.  As we know, this is never how the question is framed.  The frame is about justice and trying to properly reflect the diversity of life choices.  It seems like though the real life choices are increased death, morbidity, and auto body work.