Insurance and the Limits of Rational Discrimination

Abstract

In recent years, the insurance industry has come under attack for engaging in "discriminatory" practices against minorities. Critics assert that black applicants for insurance are often charged higher rates than white applicants, or are even denied certain kinds of insurance altogether. In response, insurance companies offer the following defense: any difference in rates between racial groups simply reflects the underlying riskiness of the average white and black applicant in society. In other words, insurance companies suggest that they have a perfectly rational reason to discriminate against minorities. On average, minorities are more expensive to insure.