Auto and home insurance play a critical role in the economy by providing a source of recovery for losses and financial security for households. Competition in auto and home insurance markets helps to ensure fair prices and broad availability of coverage. Further, insurance is closely regulated in the U.S. and this regulation provides additional safeguards for consumers. Reputable stakeholders in the business of insurance agree that the regulation of insurance should include vigorous protection of consumers as well as viable and efficient insurance markets. Indeed, competition and regulation should work hand in hand in serving the interests of consumers. However, neither competition nor regulation can guaranty that insurance will be inexpensive or widely available for all consumers. Premiums will necessarily be higher for consumers with greater risk and the supply of coverage will be constrained for people who strain or fail to meet the conditions for insurability.

Problems with the availability and cost of auto and home insurance in certain communities and allegations of industry “redlining” have received considerable political attention and generated many contentious policy debates since the 1950s.1 Consumer groups allege that insurance companies engage in unfair discrimination in their pricing and underwriting activities for auto and home insurance that have disproportionately negative effects on certain groups of consumers or areas, e.g., low income households, minorities, older urban neighborhoods, etc. Concerns about unfair discrimination are linked with issues regarding the availability and affordability of insurance. Consumers groups contend that minority and low-income consumers tend to have greater difficulty in obtaining insurance and/or pay more for it because of unfair discrimination.

Is there unfair discrimination by insurers that contributes to the availability and affordability problems of certain consumers? To address this question, we need to define what constitutes “unfair discrimination.” What constitutes unfair discrimination depends on the standard one uses to distinguish between what is fair and unfair. Insurance economists prefer to use an actuarial standard by which pricing and underwriting is only unfair if it is not commensurate with an insured’s risk. Others may use different standards of fairness that hold that insurance prices should be the same for all insureds or based on an insured’s ability to pay.

Resource Details

Publish Date

February 2, 2021

Topics

  • Auto Insurance
  • Risk-Based Pricing