Algorithmic predictions are promising for insurance companies to develop personalized risk models for determining premiums. In this context, issues of fairness, discrimination, and social injustice might arise: Algorithms for estimating the risk based on personal data may be biased towards specific social groups, leading to systematic disadvantages for those groups. Personalized premiums may thus lead to discrimination and social injustice. It is well known from many application fields that such biases occur frequently and naturally when prediction models are applied to (...) people unless special efforts are made to avoid them. Insurance is no exception. In this paper, we provide a thorough analysis of algorithmic fairness in the case of insurance premiums. We ask what “fairness” might mean in this context and how the fairness of a premium system can be measured. For this, we apply the established fairness frameworks of the fair machine learning literature to the case of insurance premiums and show which of the existing fairness criteria can be applied to assess the fairness of insurance premiums. We argue that two of the often-discussed group fairness criteria, independence (also called statistical parity or demographic parity) and separation (also known as equalized odds), are not normatively appropriate for insurance premiums. Instead, we propose the sufficiency criterion (also known as well-calibration) as a morally defensible alternative that allows us to test for systematic biases in premiums towards certain groups based on the risk they bring to the pool. In addition, we clarify the connection between group fairness and different degrees of personalization. Our findings enable insurers to assess the fairness properties of their risk models, helping them avoid reputation damage resulting from potentially unfair and discriminatory premium systems. (shrink)

An implicit ambiguity in the field of prediction-based decision-making concerns the relation between the concepts of prediction and decision. Much of the literature in the field tends to blur the boundaries between the two concepts and often simply refers to ‘fair prediction’. In this paper, we point out that a differentiation of these concepts is helpful when trying to implement algorithmic fairness. Even if fairness properties are related to the features of the used prediction model, what is more properly called (...) ‘fair’ or ‘unfair’ is a decision system, not a prediction model. This is because fairness is about the consequences on human lives, created by a decision, not by a prediction. In this paper, we clarify the distinction between the concepts of prediction and decision and show the different ways in which these two elements influence the final fairness properties of a prediction-based decision system. As well as discussing this relationship both from a conceptual and a practical point of view, we propose a framework that enables a better understanding and reasoning of the conceptual logic of creating fairness in prediction-based decision-making. In our framework, we specify different roles, namely the ‘prediction-modeler’ and the ‘decision-maker,’ and the information required from each of them for being able to implement fairness of the system. Our framework allows for deriving distinct responsibilities for both roles and discussing some insights related to ethical and legal requirements. Our contribution is twofold. First, we offer a new perspective shifting the focus from an abstract concept of algorithmic fairness to the concrete context-dependent nature of algorithmic decision-making, where different actors exist, can have different goals, and may act independently. In addition, we provide a conceptual framework that can help structure prediction-based decision problems with respect to fairness issues, identify responsibilities, and implement fairness governance mechanisms in real-world scenarios. (shrink)

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