Risk Factors

While Massachusetts is dithering over how much risk classification can be employed in setting auto insurance rates, the Canadians have a problem.  Some believe that age should not be considered in setting auto rates.  Lost of talk about fairness and equity.

Ron Brown (a recent visiting professor at GSU ) and some of his colleagues have come to the defense of risk based pricing and they use the same words.  It isn't fair and it it is equitable to subsidize high risk drivers.

Discrimination is the primary foundational concept upon which people challenge differentiation based on age. The language relating to discrimination is so value laden that society is quick—perhaps too quick—to assume that discrimination is automatically unjustified. But using age as a rating variable in automobile insurance is justified because of the principle of actuarial equity and the related concept of risk classification. Actuarial equity is based on fairness, and in order to be fair to the entire pool of insureds, those presenting statistically higher risk ought to pay their fair share of the burden.

This is such a simple idea but everyone seems to miss it.  I suppose the only way one can see it if it is included on an auto insurance bill.  This is what South Carolina insurers did in the 1990s to make people understand how much their subsidy system was costing the low risk drivers.  Perhaps insurers should routinely calculate subsidy benefits and costs and put them on consumer's bills to make the true cost of insurance transparent.