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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 in life insurance underwriting. Voluntary private insurance 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 normal justification for this ‘right to underwrite’ is the concepts of actuarial equity and economic necessity. The purpose of this study was to consider the ethical justification of the risk discrimination in underwriting. 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. Unlike utilitarianism, with its one central moral value of well-being, contractualism can accommodate a plurality of moral notions within its unified normative domain of justifiability.
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. The Fair Lottery Principle provides justification for the need for discrimination in underwriting and for actuarial equity in private insurance. The Fair Discrimination Principle provides 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.
The paper makes a plea to government to create a compulsory social funeral insurance scheme for everybody, with no underwriting requirement and no discrimination.