Each to Their Own Risk: Fairness and Individualisation in Insurance

Nathan Genicot has published the article “A chacun selon son risque : Équité et individualisation à partir du cas de l’assurance” in the journal Statistique et société. The article is available here.

Abstract

Insurance is a technique for managing uncertainty based on the pooling of risks. By aggregating the premiums paid by all policyholders, the insurer can compensate people who suffer a loss. Insurance approaches risk as a collective phenomenon, analysed at group level rather than individually, using statistics that, by their nature, deal with large numbers. In recent decades, however, particularly as digital technologies have advanced and new forms of data have proliferated, the prospect of individualising risk has gained popularity. This involves dividing the group of policyholders into the most homogeneous sub-classes possible and applying different pricing regimes to them. Insurers have accordingly coined the notion of actuarial fairness—the idea that each policyholder should bear their own risk—to promote these segmentation practices. Yet the idea that it is possible to determine each person’s “individual risk” is far from self-evident. This article identifies fundamental epistemological limits that call for caution in using this expression, and may even lead us to reject its validity.