Is Actuarially Fair Insurance Pricing Actually Fair? A Case Study in Insuring Battered Women

In 1995, the public, the bar, and the legislators of several states began to respond to a 1988 survey of insurers that indicated that internal policy guidelines of approximately half of the nation's largest insurers instruct that health, life and disability coverage be denied to domestic abuse victims. The response: public outcry and legislative and industry action. Some of these insurers voluntarily modified their policies in an effort to stave off regulation. Nonetheless, laws have been enacted in sixteen states that limit the ability of insurers to use abuse victim status in underwriting and rating decisions-ten of these sixteen since February of 1996. Similar bills have been introduced in twelve other states and in both houses of Congress. While some industry representatives have adopted the viewpoint of their critics, others continue to defend this policy as a principled and fair response to the actuarially documented fact that victims of domestic abuse are more likely to be victimized in the future than are others with otherwise similar risk profiles, thus drawing disproportionately on health, life and disability insurance pools. Mean­while, critics of the practice decry what they see as a double victimiza­tion-first at the hands of the batterer, then at the pen of the insurer. This Article examines the claims of both the industry and its critics. In order to determine whether the proposed legislation is necessary to prevent unfair treatment of abuse victims by insurers, we need to ascertain whether the practice it forbids is fair. Insurers maintain that use of the "abuse victim" classification is no different from use of other classifications employed in insurance pricing. On that basis, insurers claim that use of this classification is both consistent with current practice and fair. Insurers routinely charge more for health insurance coverage, or even deny coverage, to potential insureds with poor medical histories and to potential insureds who work in jobs that are more hazardous than aver­age. Even where a potential insured's medical history does not warrant denial of coverage, that coverage is often limited by a policy that either denies coverage for a particular medical condition (an exclusionary waiver) or denies coverage for any unnamed condition present at the date of purchase (a preexisting condition clause). While these last two practices have recently come under attack in the political arena, the focus of such attacks has been the effect on job mobility rather than fundamental fair­ness. Insurers justify these underwriting and pricing practices on the basis of a principle known as "actuarial fairness." A pricing scheme is "actu­arially fair" if each insured pays a price for coverage that is equivalent to the risk she poses of drawing from the insurance pool, given available information. Those in poor health pay more for health insurance because they are more likely to draw from the pool created by premium payments than those in average health. Using this method of pricing, the private insurance industry is. unable to offer an economically viable insurance product to those in the worst health, termed "uninsurables" by the indus­try, because their likelihood of drawing large sums from the pool is so great that the price that would have to be charged for "actuarially fair" coverage is not affordable to those needing such coverage. Part I of this Article examines the question whether the use of the classification "abuse victim" by insurers in pricing insurance is similar to the use of other classifications such as "person with high blood pressure," which the legislation would not prohibit. It looks at arguments for and against the use of the abuse victim classification that are analytically independent of the justifiability of the underlying practice of risk rating. For example, I examine the claim that when a person is accountable for the condition that makes her a poor health insurance risk (the recreational bungee jumper, for example), she may justifiably be charged an actuarially fair rate. Although the above argument would not justify the use of risk rating in most cases of illness or disability, it may justify risk rating the abuse victim. If the abuse victim, like the bungee jumper, is accountable for the fact that she faces a higher than average risk of injury, then risk rating on the basis of abuse status may be justified. The key word here is "like." Part I of this Article examines the strength of this analogy. In order to do so, it is necessary to unpack the claim that it is fair to charge insureds more for those conditions for which they are accountable. By under­standing if, when, and in what circumstances one may justifiably be charged more for actions one takes that affect one's health, we are able to see if this defense of the abuse victim classification is successful. Alternatively, one can argue that when an insured is at great risk because she is a victim or likely future victim of a crime, it is not fair for her insurance rates to reflect this risk. This argument, like the argu­ment from accountability, examines the similarity between the abuse victim classification and classifications based on health status, such as high blood pressure, used by insurers in risk rating. If the abuse victim clas­sification is different from these others, the legislation can be supported or rejected without examining the justifiability of risk rating itself. How­ever, Part I begins the larger project by teasing out some basic princi­ples-the role of accountability for health, the importance of community responsibility for risk-that play important roles in determining when risk rating generally is ethically permissible. After looking at these arguments, I conclude that the differences between the abuse victim classification and others used by insurers provide a justification for the proposed legislation. Interestingly, supporters of the legislation go to great lengths to defend it as necessary to provide abuse victims with equal treatment rather than as necessary because of differences between the use of that classification and others. Insurers are depicted as singling out abuse vic­tims as if that in itself were unfair. But the practices of underwriting and risk rating operate by singling out traits of persons or classes of persons with selected traits and adjusting rates and coverage accordingly. Any defense of the legislation must provide a reason why the abuse victim in particular ought not to be singled out by insurers. One can also offer a more far-reaching argument for the proposed legislation. The discussion in Part I assumes the justifiability of risk rating. It asks whether differences between the abuse victim classification and other insurance classifications make its use more or less justifiable than use of these others. But perhaps the strong outcry against this insur­ance practice taps a deeper intuition about the fairness of health insurance underwriting itself. If so, the case of the abuse victim-which has a shock-the-conscience quality-helps us to see what is troubling about risk rating in health insurance more generally. The proposed legislation should thus be supported as an important first step toward a fairer system of health insurance pricing. Part II of the Article looks at this system of risk-rated health insur­ance pricing. Its goal is modest. Rather than provide an attack on or defense of the current actuarially based rating methods, Part II aims to uncover the moral commitments that ground prevailing views about health insurance pricing. Part III looks at the proposed federal and state legislation in light of the arguments advanced in Part I. The Article concludes by endorsing the stronger of the enacted and proposed laws as necessary for the fair treat­ment of abuse victims and as an important first step toward treating the misfortunes of poor health and disability as communal responsibilities.