FAIRNESS AND EQUALITY IN INSURANCE CLASSIFICATION

CHAPTER ONE

INTRODUCTION

1.1. BACKGROUND OF THE STUDY

Insurance is to a large extent based on risk selection and classification. Legislators however are inclined to impose restrictions to these differentiations by banning those that are considered to be ‘‘discriminatory’’. Risk selection and risk classification are not disallowed by law, but each such decision requires a well-funded, that is, fair justification. The conditions for reaching a fair insurance-differentiation scheme could be clarified by bridging the apparent conflict between an ‘‘individualistic’’ human rights approach and an insurance ‘‘group’’ approach to equality. Therefore, a number of considerations concerning the notion of subsidy-aversion should be taken into account in the legal justification of unequal treatment. These considerations concern the notion of controllability of risks, the (im)possibility of establishing a causal relation between risk variables and the risk itself, scepticism of adverse selection in case where price-inelastic markets are concerned and the influence of tracing costs on the choice of risk variables. The concept of fairness and equity is one that is frequently encountered in actuarial terminology. Indeed, one possible definition of an actuary is an individual concerned with maintaining adequacy and equity in insurance schemes and similar financial programs. There is a problem, however, of deciding on a reasonable definition of equity. How do we justify our decisions when we say that one course of action is more equitable than another? In an age where there is increasing concern for human rights, the insurance industry is often required to justify actions which appear to discriminate on the basis of such characteristics as age, sex, and race. The defence of equity is frequently invoked. Suppose we have two groups of individuals, group A and group B, such that the expected cost per individual of providing a certain insurance benefit is higher for those in group B. The standard and familiar argument is that it must be more equitable to charge a higher premium to those individuals in group B. If the groups consist of relatively homogeneous risks, this proposition seems quite valid. However it does not seem as obvious in the case where there is a great deal of variation in risk within the groups. From an actuarial and economic point of view, it is important to point out that many of the regulations that prohibit discriminatory practices in the access to and supply of insurance services still allow the insurer to justify their classification system and the unequal treatment resulting from it as fair. In this paper, it is argued that the reason why insurers still vehemently oppose these regulations is that lawyers and legislators on the one hand, and insurers on the other, have profoundly different views on the concept of fairness in insurance classification. These different views on fairness boil down to a different approach to equality: an ‘‘individualistic’’ human rights approach and insurance ‘‘group’’ approach. Those different approaches and their different impact on the concrete insurance premium of an insured are described in the next two sections. In view of a better understanding of the insurance ‘‘group’’ approach, the following section briefly summarizes some basic characteristics of insurance and clarifies why insurers use the subsidy-aversion argument as a justification of reducing subsidizing solidarity and accordingly as a justification to strive for equality between stereotype groups rather than between individuals. The main criticisms of this subsidy-aversion argument as related to risk-factors, mainly developed in economic literature, are analysed in the section entitled ‘‘Criticism of the Subsidy-Aversion Argument’’. The hypothesis is made that these apparently different approaches to equality are reconcilable when the legislation banning discrimination, based on an open-ended system of justification (in the next section), enables the insurer to objectively and reasonably justify unequal treatment. The legal possibility of justification offers a reference frame for categorizing insurance classification schemes as discriminatory or not.

1.2. STATEMENT OF THE PROBLEM

The insurance industry over the years has been going through a lot of problems, which hinders their effectiveness and efficient rendering of services. These problems have affected the fairness and equality in insurance classification in Nigeria which has had its negative influence on the economy of the country.

1.3. AIMD AND OBJECTIVES OF THE STUDY

The major aim of the study is to examine fairness and equality in insurance classification in Nigeria. Other specific objectives of the study include;

1. To assess the level of fairness and equity in the Nigerian insurance industry.
2. To examine the major challenges to fairness and equality in insurance classification.
3. To determine the importance of insurance classification on national development.
4. To assess the major implications of lack of fairness and equality in insurance classification.
5. To recommend ways of improving fairness and equality in insurance classification in Nigeria

1.4. RESEARCH QUESTIONS

1. What is the level of fairness and equity in the Nigerian insurance industry?
2. What are the major challenges to fairness and equality in insurance classification?
3. What is the importance of insurance classification on national development?
4. What are the major implications of lack of fairness and equality in insurance classification?
5. What are the ways of improving fairness and equality in insurance classification in Nigeria?

1.5. RESEARCH HYPOTHESIS

H0: There is no significant impact of fairness and equality in insurance classification.

H1: There is significant impact of fairness and equality in insurance classification.

1.6. SIGNIFICANCE OF THE STUDY

The study would be of immense benefit towards the development of insurance in Nigeria as it would help in boosting the economy of Nigeria by creating more jobs for unemployed/under employed. The study would also be of immense benefit to students, researchers and scholars who are interested in developing further study on the subject matter.

1.7. SCOPE AND LIMITATION OF THE STUDY

The study is restricted to fairness and equality in insurance classification using NICON insurance Lagos as a case study.

LIMITATION OF THE STUDY

Financial constraint- Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).

Time constraint- The researcher will simultaneously engage in this study with other academic work. This consequently will cut down on the time devoted for the research work.