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Home | Mises Library | Race-Based Premiums?

Race-Based Premiums?

  • Metlife_airship_texas_2013.jpg

Tags Media and CultureU.S. EconomyU.S. History

07/25/2001William L. Anderson

As trial lawyers continue to shake down U.S. businesses for conducting legitimate commercial practices, life insurers are now squarely in the crosshairs of the bar.  According to The Wall Street Journal, about seventy-five life insurance companies face government probes for having had "race-based" premiums for their policies.  The firm that is really twisting in the wind is Metropolitan Life, which is featured in a front-page WSJ story.1

According to the story, MetLife urged its agents to diversify their client base instead of concentrating on areas heavily dominated by blacks.  The latest "incriminating" document that has been dug up in a series of lawsuits filed against the country’s largest publicly held life insurance company was a 1964 MetLife letter that declared: "Non-whites present special insurance problems traceable to their generally less favorable living conditions and greater instability of the family among them."

Furthermore, a 1959 memo from an actuary said, "I am concerned about the likelihood that if we continue to write business extensively in certain portions of cities, such as Washington, Baltimore, Detroit, Chicago, and New York, where the proportion of the total population that is colored is increasing, we may, say in ten years time, wind up with a serious handicap" because of the prospect of paying higher rates of death claims.  Remember, this is the opinion of one actuary, not a statement of company policy.

According to the modern political zeitgeist, this constitutes a racist crime.  Not only is there a federal lawsuit from angry black policyholders against MetLife with these memos taking center stage, but the state of New York is also investigating the company to see if it has "systematically discriminated" against non-whites.  Look for Washington to jump in next.  With paint makers, firms that used asbestos, and the makers of Alar having been either driven into bankruptcy or facing financial troubles due to such lawsuits, it won’t be long before the "cash cow" life insurance firms are going to be looted as well.

Yet, in this entire "discrimination" hubbub, one is hard-pressed to find just where life insurance companies such as MetLife have committed any crimes.  Given the nature of the life insurance business, firms must use actuarial tables based on class probabilities if they are going to be able to meet their financial obligations to their clients.

As Gene Callahan and I explained in an upcoming article on racial profiling in Reason Magazine, there are times when it is appropriate to use class probabilities and times when it clearly is not.  When police have engaged in clear racial profiling in making traffic stops, for example, they often do so because they believe that blacks are more likely to be carrying drugs, which means their vehicles and other belongings can be impounded by the police under asset forfeiture laws.

That the majority of blacks are not carrying drugs and are therefore likely to be extremely resentful about being treated like criminals imposes a high cost on this type of policing.  Thus, one can say that using class probabilities in this situation creates numerous problems and should be abandoned immediately.

However, in the case of life insurance, using probabilities is absolutely necessary, since it is impossible to individualize premiums, given that all policies are sold in an atmosphere of uncertainty.  For example, being a healthy 47-year-old (48, for insurance purposes) white male who does not smoke places me in a certain category from which actuaries can estimate my life expectancy.  That does not mean that I will die at age 76.235, or live beyond that age, or even live beyond this afternoon.

Insurers have no way of knowing when I will actually die.  They can only make educated guesses given my race, occupation, age, and family history.  Since I own term life insurance, my life insurance premium this year is higher than what I paid last year, and my premium next year will be higher still.  Does that mean that Northwestern Mutual Life (my insurer) is engaging in age discrimination?  

As a matter of fact, Northwestern is doing just that.  It is a certainty that I am going to die.  The only question is when, and if I live to next year, I will be one year closer to death than I am now.

It is also an unfortunate fact that life expectancy for blacks, and especially black males, is lower than it is for white males.  As the MetLife memo accurately stated, blacks are generally more likely than whites to have broken or unstable families, live in poverty, and have unhealthy living habits.  That does not mean that all blacks are at the same risk that is carried by an inner-city child who has a crack-addicted mother, but blacks as a class do carry more risks.  

In other words, there is nothing inaccurate or even racist about the so-called incriminating memos.  There are no slurs against blacks or anyone else, simply an admission that selling policies to large numbers of high-risk clients could result in problems in the future.  

Furthermore, insurance companies hardly single out blacks for special discriminatory treatment.  Males under age 20 pay higher rates for auto insurance than like-aged females, since males as a class are likely to take more risks with an automobile (a category into which I fell at that age).  Individuals who are employed in risky occupations or who have chronic health problems also pay higher life insurance premiums than do healthy people or individuals employed in low-risk jobs.  Smokers pay higher premiums than non-smokers.  All of these examples fall into the category of class-based probabilities.  Yet, we don’t see the government (so far) descending en masse upon life insurers demanding that they reduce premiums paid by smokers or people who have had heart attacks.

This legal jihad against life insurers seems to be part of the continuing pattern of trial lawyers and their clients attempting to loot businesses for having practiced past policies that at the time were perfectly logical, given the knowledge and technology that existed then.  Perhaps a legitimate analogy would be for innocent clients found guilty of crimes before DNA technologies existed that would have proven their innocence suing the law firms that represented them for wrongful conviction.

If a legislator or judge were to suggest that wrongfully convicted pre-DNA defendants could sue law firms for not better defending them, lawyers as a class would howl and descend upon legislative offices demanding that they be exempted from such unjust policies.  Yet, that is precisely what lawyers and the politicians who cover for them are doing.

The MetLife suit, like so many other lawsuits, is nothing more than a travesty of justice.  One cannot take a practice that in the past was legal, and then suddenly hold people responsible for those actions who had nothing to do with what happened.  The present management and shareholders and policyholders of MetLife did not make the race-based policies, yet they are the ones bearing all of the risk and uncertainty as these unjustified legal attacks wind through the system.

Furthermore, given the nature of insurance, such policies were justified at the time.  Granted, they do not fit the current political climate, but one can generally say that if politicians support something, it makes no sense.  In the end, the MetLife suits and other similar legal atrocities are just another example of how the legal and political classes are attempting to loot productive people.

  • 1. Scot Paltrow, "Old Memos Show in Black and White MetLife’s Use of Race to Screen Clients."  Wall Street Journal, July 24, 2001, p. 1.
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