Risk Classification Standards

The purpose of this paper is to examine insurance classifications in view of the statutory requirements that insurance rates not be unfairly discriminatory. More specifically, how does one decide what classification variables should be permissible and what definitions of classes are allowed? The paper asserts that classifications should possess certain necessary and sufficient qualities called standards. Seven such standards are developed, which can be summarized into three broad categories, described as homogeneous, well-defined, and practical. Homogeneity is the most controversial, and the subject of much current debate about whether or how to measure it quantitatively, and about its relative importance. Other qualities are discussed, none of which should be considered necessary conditions for example, causality, controllability, incentive value, separation, and social acceptability. The paper concludes with the perspective that sound classifications often conflict with the concept of affordability. Finally, classifications cannot and should not be used to try to solve all the problems of society.