New Framework Balances Actuarial and Solidarity Fairness in Insurance Pricing

The challenge of achieving fairness in insurance pricing is a long-standing debate, balancing the insurer's need for profitability through actuarial fairness (differentiating premiums by individual risk) with the societal function of insurance to pool risks and promote solidarity fairness (cross-subsidization). Modern data capabilities exacerbate this tension by allowing for increasingly granular risk differentiation. To navigate this complex landscape, a new framework called the α-Fair Individual Solvent Premium (α-FISP) has been introduced. This framework explicitly models the trade-off between actuarial and solidarity fairness, while crucially guaranteeing the solvency of insurance operations. It formulates the pricing problem as a constrained optimization task. Within this framework, actuarially fair premiums are adjusted subject to budget constraints on cross-subsidization within each risk class. The parameter 'α' creates a continuum of solutions, allowing decision-makers to choose a specific operating point along the fairness spectrum, ranging from purely actuarial to purely solidarity-based pricing. The framework is computationally tractable and aligns with diverse regulatory requirements, offering theoretical guarantees and practical applicability.