Reasonable Restrictions on Underwriting

Abstract

Few issues in business ethics are as polarizing as the practice of risk classification and underwriting in the insurance industry. Theorists who approach the issue from a background in economics often start from the assumption that policy-holders should be charged a rate that reflects the expected loss that they bring to the insurance scheme. Yet theorists who approach the question from a background in philosophy or civil rights law often begin with a presumption against so-called “actuarially fair” premiums and in favor of “community rating,” in which everyone is charged the same price. This paper begins by examining and rejecting the three primary arguments that have been given to show that actuarially fair premiums are unjust. It then considers the two primary arguments that have been offered by those who wish to defend the practice of risk classification. These arguments overshoot their target, by requiring a “freedom to underwrite” that is much greater than the level of freedom enjoyed in most other commercial transactions. The paper concludes by presenting a defense of a more limited right to underwrite, one that grants the legitimacy of the central principle of risk classification, but permits specific deviations from that ideal when other important social goods are at stake.

Citation

Heath, J. (2007), "Reasonable Restrictions on Underwriting", Flanagan, P., Primeaux, P. and Ferguson, W. (Ed.) Insurance Ethics for a More Ethical World (Research in Ethical Issues in Organizations, Vol. 7), Emerald Group Publishing Limited, Leeds, pp. 127-159. https://doi.org/10.1016/S1529-2096(06)07007-6