A critical evaluation of the justification of discrimination in risk underwriting in the life insurance industry in South Africa
Thesis (MPhil)--Stellenbosch University, 2019.
ENGLISH ABSTRACT: Although discrimination based on factors such as age, sex, socio-economic class and health status is normally prohibited by law, such discrimination is an accepted practice in the risk assessment of life insurance underwriting. Social insurance schemes can survive with no risk assessment because participation is compulsory and universal. Voluntary private insurance, however, can only function if cross-subsidies between participants are reduced to a minimum, by stratifying the risk pool into homogeneous risk groups based on the underwriting factors. The insurance industry normally justifies its ‘right to underwrite’ using the arguments of actuarial equity and economic necessity. The purpose of this study is to consider the ethical justification of risk discrimination in underwriting. Unique features of life insurance, like risk pooling, mutuality, cross subsidies, adverse selection and uberrima fides must be understood in the process. Private insurance is a non-primary social good and not a mere commodity, and as such most people should have reasonable access. Premium discrimination based on socio-economic differences is prominent in the South African life insurance industry and is difficult to defend ethically. Scanlon’s theory of moral contractualism provides an appealing lens for considering the reasons for and the justification of premium discrimination in life insurance. At the core of Scanlon’s theory is his definition of moral wrongness, based on the concepts of reasons and justifiability. Unlike utilitarianism, with its one central moral value of well-being, moral contractualism can accommodate a plurality of ethical notions within its unified normative domain of justifiability. A tool based on the concept of common good, to combine conflicting modes of justification from different worlds, was utilised in this analysis. These worlds include the industrial world, the marketplace, the civic world and the world of opinion. The challenge of the study was to define contractualist principles for premium discrimination which can be justified on grounds that no one can reasonably reject. The Insurance Solidarity Principle provides justification for the lack of risk discrimination in social insurance. For private insurance, the Fair Lottery Principle provides justification for the need for discrimination in underwriting and the fairness of actuarial equity. Building on this, the Fair Discrimination Principle is used to consider justification for the contribution of each specific underwriting factor towards improving actuarial equity. The principle requires reliability in the statistical evidence, unambiguity in the risk allocation and reasonableness of the causal explanation of each risk factor. On this basis, the underwriting factors of age, sex and smoking status can be justified as fair discrimination. Socio-economic underwriting, however, does not meet the principle criteria of unambiguity, even though it contributes significantly to actuarial equity. No change in underwriting practice can be expected without legislative pressure. The thesis concludes with a plea to government, based on the Insurance Solidarity Principle, to create a compulsory social funeral insurance scheme for everybody, with no underwriting requirement and no discrimination.