Fairness of Ratemaking for Catastrophe Insurance: Lessons from Machine Learning

Abstract

Catastrophe insurance is an important element of disaster management. Yet the historical presence of inequalities in insurance, from redlining to pricing disparity, has had a devastating impact on minority communities. Whereas the fairness of insurance ratemaking is studied in general, we identify a unique challenge for catastrophe insurance that sets it apart from other lines of insurance. Drawing upon the recent advances in machine learning for fair data valuation, we reveal striking connections between the two seemingly unrelated problems and lean on insights from machine learning to mathematically and empirically study the fairness of ratemaking methods for catastrophe insurance. Our results indicate the potential existence of disparate impact against minorities across existing methods and point to a unique mathematical solution that can satisfy a few commonly assumed properties of fair ratemaking for catastrophe insurance. History: This article was accepted for the Special Issue—Unleashing the Power of Information Technology for Strategic Management of Disasters. Special Issue Editors Abbasi/Dillon-Merrill/Rao/Sheng, Senior Editors; Guodong (Gordon) Gao, Associate Editor. Funding: This work was supported in part by the National Science Foundation Division of Information and Intelligent Systems [Grant 2040807] and Amazon Science. Supplemental Material: The online appendix is available at https://doi.org/10.1287/isre.2022.1195.