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The Efficiency of Categorical Discrimination in Insurance Markets
Author(s) -
Rothschild Casey
Publication year - 2011
Publication title -
journal of risk and insurance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.055
H-Index - 63
eISSN - 1539-6975
pISSN - 0022-4367
DOI - 10.1111/j.1539-6975.2010.01375.x
Subject(s) - categorization , categorical variable , pareto principle , government (linguistics) , actuarial science , business , welfare , insurance policy , contrast (vision) , economics , microeconomics , computer science , artificial intelligence , operations management , philosophy , market economy , linguistics , machine learning
Crocker and Snow (1986) show that banning categorization based on risk‐related characteristics such as gender or race in pricing insurance policies is inefficient whenever categorization is costless. Their analysis, by contrast, suggests ambiguous welfare effects of banning costly categorization. I show that this latter conclusion is incorrect: categorical pricing bans are inefficient even when categorization is costly. Whenever the ban‐imposing government can instead provide breakeven partial social insurance, it can remove its ban in such a way that the insurance market will choose to employ the categorizing technology only when doing so is Pareto improving.