2020 Perspective on “Demographic Factors and Price Distortions in Insurance”

Chuck Nyce and Kathleen McCullogh share their 2020 perspective on their paper “Demographic Factors and Price Distortions in Insurance” published in 2015 alongside Ron Cheung, Cassandra Cole and David Macpherson. Take a look at their updated perspective below:

The Law of Unintended Consequences.  We often worry about the pricing of insurance if it gets to be too expensive, what if it is not “affordable”?  Political and regulatory pressures start to affect the ratemaking process.  What you usually end up with is some policyholders subsidizing others.  In Florida, property insurance is expensive, we have seen political and regulatory pressures to keep rates low.  So what happened?  In this paper we examine how price distortions negatively impacted some subsections of the population in Florida.  When regulatory and political pressures altered ratemaking, some people ended up paying more for insurance (relative to their expected loss) than others.  It turns out, lower income households, Hispanics and some specific age groups ended up paying relatively more for insurance.

This is not discrimination; it is the unintended consequences of market disruptions.  “Let’s keep it affordable” ended up costing some people more.  The state-run insurer in Florida did not intend to discriminate, in fact, they do not collect the demographic data to even understand this unintended consequence.  Therefore, we promote other methods of “affordability”.  Let insurers charge the actuarially indicated rates, if some people cannot afford it, create a different program (insurance stamps) to address the issue.  That way the distortions are minimized, the method of addressing affordability is transparent and hopefully, most of the consequences are intended.