Do insurers discriminate unfairly?

FOR PEOPLE buying life insurance, discrimination based on their level of risk can be ethically justified. However, on one of the underwriting criteria, socio-economic class, South African insurers may be open to the accusation of unfair discrimination on the way they allocate applicants to the different premium levels.

This is the conclusion of retired actuary Francois Marais, in his thesis for the degree of Master of Philosophy in Applied Ethics, “A critical evaluation of discrimination in risk underwriting in the life insurance industry in South Africa”, which he presented at the recent Colloquium 2019 of the International Actuarial Association in Cape Town.

Marais bases his argument on the ethical theory of “moral contractualism”, advanced by the American philosopher, Thomas M Scanlon. In his influential work What We Owe to Each Other (1998), Scanlon states that an act may be regarded as wrong “if it is disallowed by any principle for the general regulation of behaviour that no one could reasonably reject”.

Marais writes: “Scanlon’s theory … provides an appealing lens for considering the reasons and the justification of premium discrimination in life insurance. At the core of Scanlon’s theory is his definition of moral wrongness, based on the concepts of reason and justifiability. Unlike utilitarianism, with its one central moral value of well-being, moral contractualism can accommodate a plurality of ethical notions within its unified normative domain of justifiability.”

The four factors that South African insurers use to determine what risks you pose – and thus what size premium you pay – on a retail life policy are: age, sex, smoking status, and socio-economic class (see table). Standard mortality rates for the four factors are published regularly by the Actuarial Society of South Africa and are used across the industry.

Apart from the normal premium based on the four general factors, you may also be charged an individual premium loading, based on your medical history, occupation, and leisure pursuits.

Marais says the differences in premiums depending on where you fall within each of the four general groups can be considerable. A young non-smoking professional woman will get about R1 million life cover for a premium of R100 a month. An old, uneducated, poorly paid male smoker will get only R22 000 cover for the same premium. In other words, people at the extreme low-risk end of the underwriting spectrum will receive almost 50 times more cover than people at the extreme high-risk end. In determining whether this discrimination is justified, Marais defines two contractualist principles that apply to underwriting, which he argues that nobody could reasonably reject. He then applies these principles to the underwriting practices, to see whether they can be ethically justified.

1. THE FAIR LOTTERY PRINCIPLE

In a lottery, where each ticket has an equal chance to win, all tickets should cost the same. It would be unfair to charge different prices for the tickets.

In a fair lottery, your chances of winning are determined by how many tickets you buy, and thus how much you pay in total. If you bought 10 tickets, your chance of winning would be 10 times that of someone buying a single ticket. While the person who bought only one ticket may still walk off with the winning prize, he presents one tenth of the risk to the lottery company than you do with your 10 tickets. Marais argues that this principle would pass Scanlon’s test that it cannot be reasonably rejected.

If the principle is applied to insurance, it shows that the premium you pay should be proportionate to the probability of you receiving a payout. “We can justify the general

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