Risk vs Discrimination in Life Insurance
From time to time, I find myself explaining how insurers allow for risk in insurance pricing, product design and underwriting, particularly as this can be seen as a form of direct or indirect discrimination.
Indeed, there are already exemptions in anti-discrimination legislation that allow insurers to discriminate in insurance pricing, product design and underwriting in limited circumstances.
This is an especially hot topic now given the ongoing discussions around the use of genetic test results in life insurance underwriting and the Australian Government announcement in September 2024 that they “will end the ability to discriminate based on adverse predictive genetic test results by banning their use in life insurance underwriting”.
The Council of Australian Life Insurers (CALI) has acknowledged the importance of this announcement stating,
“the Life Insurance Code of Practice sets out how insurers will use genetic tests and ensures Australians can access a suitable level of life insurance without being asked about the result of a previously taken genetic test. It has never been the life insurance industry’s intention to deter people from taking genetic tests or participating in scientific research.”
Allowance for risk in life insurance
I believe, based on my actuarial knowledge and training, that in life insurance it is reasonable to charge premiums that reflect the risk of the policyholder (e.g., by increasing premiums by age) and put limits on the risks accepted via product design and underwriting (e.g., by excluding or charging for conditions that exist prior to the policy commencement date where there is a material increased risk of claim).
The whole concept of insurance depends upon managing the pool of all policyholder risks and charging individual customers an appropriate price for participating in that pool. The appropriate price is a balance between the interests of any individual customer and of all customers in the pool.
Being able to allow for individual risk profiles using a reasonable approach is important in the interests of finding that balance between fairness and cost.
Even so, discrimination is a complex topic and there are several resources that may be helpful to actuaries in performing their roles.
Practical suggestions for actuaries
In 2019, the Actuaries Institute established an Anti-Discrimination Working Group (ADWG) to develop advice for actuaries – specifically around applying legislation to insurance contexts. This led to the 2020 publication, The Australian Anti-Discrimination Acts: Information and Practical Suggestions for Actuaries.
This Paper was prepared to assist actuaries in understanding the practical implications of the Australian Anti-Discrimination legislation for their work. The Paper starts by summarising the Australian Anti-Discrimination legislation as it applies to insurance (there are both federal and state anti-discrimination laws that insurers need to comply with) and then goes on to discuss considerations for actuaries working in insurance.
It also touches on why discrimination in life insurance in certain circumstances is reasonable. I’ve found the Paper helpful in responding to suggestions for the removal or alterations to insurance exemptions to Australian Anti-Discrimination legislation. The Actuaries Institute sometimes responds to these suggestions on behalf of its members.
For example, the Actuaries Institute provided a submission outlining concerns in response to the Draft National Stigma and Discrimination Reduction Strategy proposal for “removing the ‘other relevant factors’ and ‘unjustifiable hardship’ tests from insurance exemption under s46 of the Disability Discrimination Act 1992 (Cth)”. You might find this response, outlining concerns if ‘other relevant factors’ is removed, helpful the next time you need to respond to questions about discrimination in insurance.
The ADWG paper finishes off with links to legislation as well as references and notes.
Whilst my focus is on life insurance, discrimination is also an issue for health and general insurers. The Actuaries Institute’s Working Group for Professional Support for Actuaries involved in General Insurance Pricing produced Protecting the Public Interest in Insurance Pricing which is relevant for multiple disciplines and also discusses anti-discrimination and fairness and provides some case studies in relation to mental health and genetic testing.
Australian Human Rights Commission
The Australian Human Rights Commission (AHRC) has issued several papers which are also useful for actuaries to refer to.
One really helpful resource is the AHRC Guidelines for providers of insurance and superannuation under the Disability Discrimination Act (2016). These guidelines cover:
- What actuarial or statistical data is reasonable to rely upon?
- What “other relevant factors” may contribute to a decision that discrimination is reasonable?
- When will it be “reasonable” to discriminate?
- Practical tips to avoid unlawful discrimination
- The defence of unjustifiable hardship
Since the publication of the ADWG paper, in 2022, the Actuaries Institute and the AHRC jointly published Guidance Resource: Artificial intelligence and discrimination in insurance pricing and underwriting.
This resource is intended to provide guidance to professionals and businesses on complying with federal anti-discrimination legislation in relation to the use of artificial intelligence (AI) in insurance pricing and underwriting decisions.
Looking forward
I think that the recent intervention of the Australian government in regard to genetic testing may see increased pressure to change insurance pricing, product design and underwriting practices in relation to other health conditions.
I hope this article has provided you with some links to useful resources to respond to these challenges appropriately.
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