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Insurance Justice with Two-Dimensional Underwriting

Seth J. Chandler
Organization: Unversity of Houston Law Center

Wolfram Technology Conference 2011
Conference location

Champaign, Illinois, USA

Insurers cluster. They generally group insurance applicants with similar perceived risk levels together and offer each group different contracts. This practice, particularly where fine-grained, reduces adverse selection that otherwise prevents desirable trade in risk. The practice also tends, however, to replicate inequalities in original endowments of risk that may be no fault of the insured. Coarse classification, by contrast, may reduce inequalities resulting from factors that are no fault of the insured, but may also result in incomplete risk transfer due to adverse selection.

Hitherto, most scholarship involving regulation of these insurance underwriting practices has considered clustering based on only one dimension—perceived risk—and has correlatively involved offers that vary in only one feature—price. This simplification is due in substantial part to the difficulties in modeling more complex clustering and contracting.

This talk looks at how the symbolic and numeric capabilities of Mathematica can collaborate to permit more realistic models of insurance underwriting and thus more realistic appraisals of justice in the regulation of insurance underwriting. It considers "two-dimensional underwriting" in which insurers cluster based not only on the perceived level of risk the insured might pose without undertaking risk avoidance, but also on the effective price the insured faces to reduce risk. It correlatively considers contracts that vary in two ways: the price charged and the level of care demanded. Particular emphasis is placed on the statistical capabilities advanced in Version 8. The ambition of the project is to generate models that produce results in "real time".

*Mathematica Technology
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InsuranceJusticeWithTwoDimensionalUnderwriting.cdf (1.4 MB) - CDF Document
InsuranceJusticeWithTwoDimensionalUnderwriting.nb (1.4 MB) - Mathematica Notebook