Should your premiums help fund your neighbours accidents?

Motor insurers have recently been criticised for allowing policyholders’ premiums to be influenced by their neighbours’ accidents. Policyholders are being warned that a couple of crashes by someone in their immediate postcode area could trigger a premium increase for their own policy, even when they’ve been claims free during that time.

Hold on a minute!? Call me a bit crusty at times, but hasn’t that been happening since postcodes were first invented? It’s no different from my wife complaining that her premiums have gone up due to other GPs having accidents; or me complaining that my premiums have gone up because other drivers of my particular model of Honda car have been having accidents.

It’s called pooling and differentiating of risk. In other words, insurance.

An underwriter should of course think critically about the way in which they construct their rating models and remember to reflect upon the ethics of how they differentiate and pool risk. How to balance between differentiation and pooling is one of the key questions that an underwriter with a respect for ethics has to face.