As a former regulator who did review policies similar to what was discussed, it should be noted, as Mr. Actuary neglected to mention, that we never have liked the idea of rates being developed on a zip code basis, because it inherently does lead to the perceptions discussed above. We handled that aspect by having the companies split those heavy minority zip codes and move them so there was less of a discrepancy in rates. In such cases, it often lowered the benefits for the wealthier zip codes, but that was the fairest way to handle it to prevent such obvious discriminatory practice. While he is right that race or income aren’t the direct cause, they are related causes, because often it is the race or income of a particular area which creates the external factors that lead to more claims (and hence, greater risk) through lack of road maintenance or higher crime rates.
Interesting. I thought regulators were supposed to apply the laws and regulations of the state to the insurer’s rate filing. Are you really supposed to regulate based on what you “like?” It also sounds like you make assumptions about how things are because of race. You say that it is often the race of an area that creates external factors driving loss costs. Just, wow. Can’t believe you were a regulator.
So you discriminated against people with better driving habits in the wealthier zip codes to lower rates in the “heavy minority” zip codes. But that’s ok. As long as it’s those pesky successful (and likely white) people who are being screwed, all is good! *sigh*
No, we did not. If rates can be deemed unfairly discriminatory then we have a duty to the residents of our state to make sure that the insurance companies correct it. We did not force them to lump them in with the wealthier neighborhoods, because they could have just lowered the rates of certain neighborhoods, closing the gaps between them and what you’ve deemed as wealthier neighborhoods (we have no proof that in fact they are). However, the insurance companies chose that way to correct it, not us.
And yes, CL PM I did apply the laws and regulations of the state, but it doesn’t mean it has to be liked. I’m sure you’ve done at your job what you’re supposed to do whether you like it or not. It’s the same for us. I, as a personal consumer of insurance, don’t like the situation that could arise that the person across the street from me may be charged half as much as me, despite having the same exact risk with the sole difference being their location. That could be deemed as unfairly discriminatory. My job was to help protect the residents of the state as best as I could from unfair treatment by insurance companies (generally it was unintentional).
And I believe I did a good job at it, considering I rose to management level while I was there.
Sorry, but I must disagree with the actuary. The input from the actuary is one small part of the final rates and sales process. Most insurance companies are so enamored with algorithms in slicing and dicing their rates that low wage earners are unfairly impacted. Low wage earners usually have lower credit scores which increases premiums. The “art” of underwriting is on life support. The next thing that many companies want to do is get rid of those troublesome overpaid agents.
Have to disagree Retired. While not perfect, the “algorithms in slicing & dicing” are part of the protections against discrimination. Whether we agree or disagree on the pricing variables used, everyone is treated the same with respect to the variables used and rates offered. I would guess that the “art of underwriting” was much more discriminatory.
Here is an idea…Why don’t ProPublica and Consumer Reports start their own insurance companies and charge the (lower) rates that they think should be charged in the minority zip codes. They should be able to write auto coverage hand over fist! Then we can see how long they stay in business.
I guess the reporters were self-identifying as actuaries and thought they could figure out the reason for higher auto insurance costs. Actual results (facts) should have nothing to do with the outcome.
“ProPublica’s journalists claim that bias permeates the industry, all supposedly perpetrated under the nose of state regulators, who monitor and often approve in advance the rates insurers charge.”
Are you suggesting that state regulators currently have approval over insurers rates? That doesn’t sound right.
Erin – Depending on the laws in the state, regulators have varying degree of control. In states where companies must have prior approval from the regulator before using any rates, the regulator has complete control in what is being charged. For Personal Auto, I think this is about 1/3 of the states, maybe less. For other states, insurers can use rates without the explicit approval of the regulator, but in all states (I believe, someone check me) a regulator has the right to review an insurer’s filing and can tell the insurer to stop using rates if they violate a statute or regulation or if the regulator determines the rates to be overly adequate or unfairly discriminatory.
CL PM is correct. There are several different ways that states provide rate approval.
Some states are prior approval, which means that the state must approve the rate before it can be used.
Some states are file and use, which means that the insurer can file their rates and use them immediately, pending regulatory approval. The state still has the ability to reject the rate filing and require the insurer to rate their policies using corrected rates.
Some states are use and file, which means that the insurer can use their rates and file them later for the state to review. Again, the state can reject those rates and require that the insurer re-rate their policies.
The bottom line is that each state has a responsibility to review rates for adequacy, fairness, and affordability.
Just another example of how journalists refuse to accept that they do not or cannot understand something or are willing to justify their “opinions” without regard to the facts. Insurance premium calculations are not for amateurs, that is why we use highly educated actuaries to do the math. Under these circumstances, and given the error being promoted, it is “bad faith”journalism to make such an allegation so contrary to the facts.
As someone that is very familiar with insurance pricing and statistical review, I find this article disturbing and feel obligated to comment.
Pricing based on race is NOT part of the pricing models used to calculate the premium needed for risk exposures. Drawing inaccurate connections between price and race is irresponsible reporting by ProPublica and unnecessarily fans the flame of race tensions in our country.
The insurance rates that I calculate and file with state regulators are typically higher in metro and suburban areas SOLELY because those areas have a statistical track record of having greater risk of loss. Those areas are of greater risk because there are more cars on the road and thus greater chance for accidents.
Let me give you a real world apples-to-apples comparison from statistics that I have filed with state regulators…
Over the last 5 years, we have paid 88 cents per premium dollar on claims losses in the Minneapolis Metro Area. Over the same 5 years, we have paid 60 cents per premium dollar on claims losses in rural central counties of Minnesota. Our breakeven point to cover our expenses is about 75 cents. We are making money in the Rural Area and losing money in the Metro Area. Even though our premiums are about 80% higher in the Metro Area vs the Rural Area, we continue to lose money in the Metro Area. Why? The answer is greater exposure to risk of loss due to greater number of hazards present. The answer is not because we are trying to price gouge areas with higher concentrations of minorities.
The false correlation between higher premiums and higher concentrations of “minorities” is going to be drawn by those that do not understand insurance pricing. Unfortunately, false things like this get published and believed by others that do not understand the complexity of insurance pricing through risk sharing.
Insurance companies share risk between insureds on a large scale. In order for risk sharing to work, each insured HAS TO PAY A PREMIUM COMMENSURATE WITH HIS OR HER RISK without regard to their race. Insurance is not a social program based on social status.
Integrity matters’ comment is dead on, “Why don’t ProPublica and Consumer Reports start their own insurance companies and charge the (lower) rates that they think should be charged in the minority zip codes. They should be able to write auto coverage hand over fist! Then we can see how long they stay in business.”
I don’t disagree with DL, as I completely understand how insurance pricing works…however, as I indicated above, it’s more about perception than reality. While race is clearly not a direct factor in the pricing, there is a clear perception of it based upon how the rates work. I’m originally from Minnesota, although I don’t live there now, so I know the region well…and as a former regulator (in another state)I know how regulators view it. In your example, we as regulators don’t care as much about the differences in rates between a rural area and an urban area…it’s more about how the prices compare within the urban area or within the rural area. If there is a huge discrepancy between the North Minneapolis area (55411 zip code for example) and everywhere else in the urban area, the regulator is going to call the company out on it and ask it to be corrected because it can be perceived as being unfairly discriminatory. They have the duty to do that. How it is corrected is up to you, the actuary, to figure that out.
Swede700 “can be perceived” is where regulators (and others) make their mistakes. When you move from facts to perception, you throw your bias into the mix.
Great comments DL. Banks have same issue re loan approvals and interest rates. If folks don’t have income, they can’t afford payments on a house regardless of whatever characteristics you want to throw out there. However, gov’t still pressures banks to make the loans anyway, then punishes when the bank tries to collect their money.
Did anyone bother to actually read the article? ProPublica’s claim is not just that minority areas are charged more in absolute terms. It’s that minority areas are charge more than is warranted by their actual risk, compared to other areas.
III’s comments are partially valid, but they overstate their case and are unnecessarily tendentious and quite frankly dismissive. There are limits to any conclusions that can be drawn from the ProPublica analysis, but it can’t reasonably be summarily dismissed either.
The ProPublica claim lumps all cost differences into the territory factor. They don’t recognize that average limits differ, drive-to-work differs, age of drivers differs, etc. All of these characteristics affect the claims costs that they’re looking at. Just adjusting for the limits actually purchased in each neighborhood should drastically alter their conclusions. I assume that poor neighborhoods purchase lower limits than higher income neighborhoods.
Milner, I don’t think you fully grasp the methodology. Irrespective of driver characteristics, policy limit, etc, shouldn’t premiums reflect the level of risk as predicted by all of those things? ProPublica claims that minority consumers are charged in excess of risk compared to other drivers. For example:
Expected Loss of Group A is $100 per insured auto, while that of Group B is $200. If both groups were charged in a way the equally reflected their actual risk, premiums might be $50 – Group A, $100 Group B. But if group A is charged $50 and Group B charged $150, then Group A is being charged more per unit if risk than Group B ($50/100 vs. $150/200). This is true irrespective of policy limits or any other factor. Unless you are suggesting the lower policy limits justifies charging more than indicated by the risk.
There are other problems with the ProPublica analysis which I won’t get into here.
No. If Group A buys 15/30 limits and Group B buys 500/1000, then the average loss for Group A is held down by low limits. If you then compare identical rating examples for Group A and Group B, the rating example will produce a high premium compared to the losses in Group A and a low premium to losses in Group B. The losses weren’t produced by identical rating examples so creating loss ratios to identical examples produces meaningless results.
Is it possible that insurers develop auto rates that are functionally discriminatory to significant populations of minority and marginalized peoples by utilizing data (zip codes, etc.) that correlate closely and strongly with race and socio-economic data? It might be pretty easy to do without collecting data that would look obviously discriminatory in the eyes of the court, data like race/ethnicity/sexual preference.
Who paid for the CR/ProPublica’s report? Did CR find a cheap way to fill their pages?
CR should review refrigerators, lawn mowers, and cars. They should not get into social-political issues which they are not experts on and have to rely on only one outside source to support their position. CR has clearly been bought out by the racial grievance industry. I am going to cancel my subscription as my only means of protest.
More Fake Real News?
As a former regulator who did review policies similar to what was discussed, it should be noted, as Mr. Actuary neglected to mention, that we never have liked the idea of rates being developed on a zip code basis, because it inherently does lead to the perceptions discussed above. We handled that aspect by having the companies split those heavy minority zip codes and move them so there was less of a discrepancy in rates. In such cases, it often lowered the benefits for the wealthier zip codes, but that was the fairest way to handle it to prevent such obvious discriminatory practice. While he is right that race or income aren’t the direct cause, they are related causes, because often it is the race or income of a particular area which creates the external factors that lead to more claims (and hence, greater risk) through lack of road maintenance or higher crime rates.
Interesting. I thought regulators were supposed to apply the laws and regulations of the state to the insurer’s rate filing. Are you really supposed to regulate based on what you “like?” It also sounds like you make assumptions about how things are because of race. You say that it is often the race of an area that creates external factors driving loss costs. Just, wow. Can’t believe you were a regulator.
So you discriminated against people with better driving habits in the wealthier zip codes to lower rates in the “heavy minority” zip codes. But that’s ok. As long as it’s those pesky successful (and likely white) people who are being screwed, all is good! *sigh*
No, we did not. If rates can be deemed unfairly discriminatory then we have a duty to the residents of our state to make sure that the insurance companies correct it. We did not force them to lump them in with the wealthier neighborhoods, because they could have just lowered the rates of certain neighborhoods, closing the gaps between them and what you’ve deemed as wealthier neighborhoods (we have no proof that in fact they are). However, the insurance companies chose that way to correct it, not us.
And yes, CL PM I did apply the laws and regulations of the state, but it doesn’t mean it has to be liked. I’m sure you’ve done at your job what you’re supposed to do whether you like it or not. It’s the same for us. I, as a personal consumer of insurance, don’t like the situation that could arise that the person across the street from me may be charged half as much as me, despite having the same exact risk with the sole difference being their location. That could be deemed as unfairly discriminatory. My job was to help protect the residents of the state as best as I could from unfair treatment by insurance companies (generally it was unintentional).
And I believe I did a good job at it, considering I rose to management level while I was there.
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Have to disagree Retired. While not perfect, the “algorithms in slicing & dicing” are part of the protections against discrimination. Whether we agree or disagree on the pricing variables used, everyone is treated the same with respect to the variables used and rates offered. I would guess that the “art of underwriting” was much more discriminatory.
Here is an idea…Why don’t ProPublica and Consumer Reports start their own insurance companies and charge the (lower) rates that they think should be charged in the minority zip codes. They should be able to write auto coverage hand over fist! Then we can see how long they stay in business.
I guess the reporters were self-identifying as actuaries and thought they could figure out the reason for higher auto insurance costs. Actual results (facts) should have nothing to do with the outcome.
“ProPublica’s journalists claim that bias permeates the industry, all supposedly perpetrated under the nose of state regulators, who monitor and often approve in advance the rates insurers charge.”
Are you suggesting that state regulators currently have approval over insurers rates? That doesn’t sound right.
Erin – Depending on the laws in the state, regulators have varying degree of control. In states where companies must have prior approval from the regulator before using any rates, the regulator has complete control in what is being charged. For Personal Auto, I think this is about 1/3 of the states, maybe less. For other states, insurers can use rates without the explicit approval of the regulator, but in all states (I believe, someone check me) a regulator has the right to review an insurer’s filing and can tell the insurer to stop using rates if they violate a statute or regulation or if the regulator determines the rates to be overly adequate or unfairly discriminatory.
CL PM is correct. There are several different ways that states provide rate approval.
Some states are prior approval, which means that the state must approve the rate before it can be used.
Some states are file and use, which means that the insurer can file their rates and use them immediately, pending regulatory approval. The state still has the ability to reject the rate filing and require the insurer to rate their policies using corrected rates.
Some states are use and file, which means that the insurer can use their rates and file them later for the state to review. Again, the state can reject those rates and require that the insurer re-rate their policies.
The bottom line is that each state has a responsibility to review rates for adequacy, fairness, and affordability.
Just another example of how journalists refuse to accept that they do not or cannot understand something or are willing to justify their “opinions” without regard to the facts. Insurance premium calculations are not for amateurs, that is why we use highly educated actuaries to do the math. Under these circumstances, and given the error being promoted, it is “bad faith”journalism to make such an allegation so contrary to the facts.
As someone that is very familiar with insurance pricing and statistical review, I find this article disturbing and feel obligated to comment.
Pricing based on race is NOT part of the pricing models used to calculate the premium needed for risk exposures. Drawing inaccurate connections between price and race is irresponsible reporting by ProPublica and unnecessarily fans the flame of race tensions in our country.
The insurance rates that I calculate and file with state regulators are typically higher in metro and suburban areas SOLELY because those areas have a statistical track record of having greater risk of loss. Those areas are of greater risk because there are more cars on the road and thus greater chance for accidents.
Let me give you a real world apples-to-apples comparison from statistics that I have filed with state regulators…
Over the last 5 years, we have paid 88 cents per premium dollar on claims losses in the Minneapolis Metro Area. Over the same 5 years, we have paid 60 cents per premium dollar on claims losses in rural central counties of Minnesota. Our breakeven point to cover our expenses is about 75 cents. We are making money in the Rural Area and losing money in the Metro Area. Even though our premiums are about 80% higher in the Metro Area vs the Rural Area, we continue to lose money in the Metro Area. Why? The answer is greater exposure to risk of loss due to greater number of hazards present. The answer is not because we are trying to price gouge areas with higher concentrations of minorities.
The false correlation between higher premiums and higher concentrations of “minorities” is going to be drawn by those that do not understand insurance pricing. Unfortunately, false things like this get published and believed by others that do not understand the complexity of insurance pricing through risk sharing.
Insurance companies share risk between insureds on a large scale. In order for risk sharing to work, each insured HAS TO PAY A PREMIUM COMMENSURATE WITH HIS OR HER RISK without regard to their race. Insurance is not a social program based on social status.
Integrity matters’ comment is dead on, “Why don’t ProPublica and Consumer Reports start their own insurance companies and charge the (lower) rates that they think should be charged in the minority zip codes. They should be able to write auto coverage hand over fist! Then we can see how long they stay in business.”
Good comments DL. I would also guess that attorney rep’d files are greater in Metro area.
I don’t disagree with DL, as I completely understand how insurance pricing works…however, as I indicated above, it’s more about perception than reality. While race is clearly not a direct factor in the pricing, there is a clear perception of it based upon how the rates work. I’m originally from Minnesota, although I don’t live there now, so I know the region well…and as a former regulator (in another state)I know how regulators view it. In your example, we as regulators don’t care as much about the differences in rates between a rural area and an urban area…it’s more about how the prices compare within the urban area or within the rural area. If there is a huge discrepancy between the North Minneapolis area (55411 zip code for example) and everywhere else in the urban area, the regulator is going to call the company out on it and ask it to be corrected because it can be perceived as being unfairly discriminatory. They have the duty to do that. How it is corrected is up to you, the actuary, to figure that out.
Swede700 “can be perceived” is where regulators (and others) make their mistakes. When you move from facts to perception, you throw your bias into the mix.
Great comments DL. Banks have same issue re loan approvals and interest rates. If folks don’t have income, they can’t afford payments on a house regardless of whatever characteristics you want to throw out there. However, gov’t still pressures banks to make the loans anyway, then punishes when the bank tries to collect their money.
Did anyone bother to actually read the article? ProPublica’s claim is not just that minority areas are charged more in absolute terms. It’s that minority areas are charge more than is warranted by their actual risk, compared to other areas.
III’s comments are partially valid, but they overstate their case and are unnecessarily tendentious and quite frankly dismissive. There are limits to any conclusions that can be drawn from the ProPublica analysis, but it can’t reasonably be summarily dismissed either.
The ProPublica claim lumps all cost differences into the territory factor. They don’t recognize that average limits differ, drive-to-work differs, age of drivers differs, etc. All of these characteristics affect the claims costs that they’re looking at. Just adjusting for the limits actually purchased in each neighborhood should drastically alter their conclusions. I assume that poor neighborhoods purchase lower limits than higher income neighborhoods.
Milner, I don’t think you fully grasp the methodology. Irrespective of driver characteristics, policy limit, etc, shouldn’t premiums reflect the level of risk as predicted by all of those things? ProPublica claims that minority consumers are charged in excess of risk compared to other drivers. For example:
Expected Loss of Group A is $100 per insured auto, while that of Group B is $200. If both groups were charged in a way the equally reflected their actual risk, premiums might be $50 – Group A, $100 Group B. But if group A is charged $50 and Group B charged $150, then Group A is being charged more per unit if risk than Group B ($50/100 vs. $150/200). This is true irrespective of policy limits or any other factor. Unless you are suggesting the lower policy limits justifies charging more than indicated by the risk.
There are other problems with the ProPublica analysis which I won’t get into here.
Correction -Group B is charged more (at $150/$200) and Group A (at $50/100).
No. If Group A buys 15/30 limits and Group B buys 500/1000, then the average loss for Group A is held down by low limits. If you then compare identical rating examples for Group A and Group B, the rating example will produce a high premium compared to the losses in Group A and a low premium to losses in Group B. The losses weren’t produced by identical rating examples so creating loss ratios to identical examples produces meaningless results.
Is it possible that insurers develop auto rates that are functionally discriminatory to significant populations of minority and marginalized peoples by utilizing data (zip codes, etc.) that correlate closely and strongly with race and socio-economic data? It might be pretty easy to do without collecting data that would look obviously discriminatory in the eyes of the court, data like race/ethnicity/sexual preference.
Who paid for the CR/ProPublica’s report? Did CR find a cheap way to fill their pages?
CR should review refrigerators, lawn mowers, and cars. They should not get into social-political issues which they are not experts on and have to rely on only one outside source to support their position. CR has clearly been bought out by the racial grievance industry. I am going to cancel my subscription as my only means of protest.