Acts of God and Man by Michael R. Powers

Author:Michael R. Powers
Language: eng
Format: epub
Tags: Business and Economics/General
Publisher: Columbia University Press
Published: 2011-11-27T16:00:00+00:00

9

The Good, the Bad, …

The Role of Risk Classification

* * *

Even the Wicked prosper for a while, and it is not out of place for even them to insure.

–JAMES T. PHELPS (LIFE INSURANCE SAYINGS, 1895)1

* * *

Although not as universal as solvency regulation, rate (or price) regulation is used extensively by many nations of the world and often relied on for market stability by developing countries. In the United States, the purpose of rate regulation is twofold: (1) to protect insurance consumers from excessive premiums or unfairly discriminatory premiums (i.e., premium differences that cannot be justified by differences in risk characteristics among policyholders); and (2) to protect insurance companies (and therefore insurance consumers) from inadequate premiums that may threaten company solvency.

In the present chapter, I will offer a brief summary of the objectives and methods of rate regulation, and then probe one of the most controversial aspects of insurance: the risk classification used in underwriting and rating.

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