A Discrimination-Free Premium Under a Causal Framework
26 Pages Posted: 20 Apr 2022 Last revised: 23 Apr 2022
Date Written: April 8, 2022
We examine the discrimination-free premium in Lindholm et al. (2021) within a theoretical causal inference framework, and we consider its societal context, to assess when the pricing formula should be used. We consider the insurance pricing problem through the use of directed acyclic graphs. This particular tool allows us to rigorously define an insurance risk factor in a causal framework. We then use this definition in assessing the appropriate application of the discrimination-free premium through three simplified pricing examples, including a health insurance policy and two personal automobile insurance policies with different coverages. From our findings, we suggest criteria for the application of the discrimination-free premium that is dependent on the risk factors and the social context.
Keywords: Risk and rating factors, directed acyclic graphs, insurance pricing, discrimination-free prices, actuarially fair pricing
JEL Classification: G22, C13
Suggested Citation: Suggested Citation