Welfare Implications of Fair and Accountable Insurance Pricing

Abstract

This paper introduces an empirical framework for evaluating the welfare implications of fair and accountable insurance pricing policies. Building on the literature that primarily emphasizes cost modeling, our approach extends the analysis to the full pricing process, allowing for a systematic investigation of the trade-offs between fairness and welfare. We study five different pricing regulations that reflect existing or proposed policies: unconstrained pricing (P0), accountable pricing (PA), pricing with a price optimization ban (POB), pricing with demographic parity (PDP), and pricing with actuarial group fairness (PAF). Using a French auto insurance dataset and demand assumptions drawn from prior studies, we illustrate the practical implementation of the framework. Our empirical findings reveal that: (1) there is a fundamental tension between fairness in prices and fairness in markups; (2) fair and accountable pricing policies may entail significant welfare losses for both firms and consumers in voluntary insurance markets with monopolistic structures; (3) in contrast, for compulsory insurance in competitive markets, banning price optimization and enforcing accountable pricing can lead to welfare gains; and (4) as market competition intensifies, consumer welfare improves, firm profits decline, and the effects of pricing regulations become less pronounced.

JEL Classification: G22, J16