Policyholders who pose lower risks to insurers generally benefit financially by paying lower premiums. Auto insurance is a perfect example, as drivers with a safe driving record are rewarded through lower prices.

That’s what incentivizes many policyholders to behave in a less risky manner. It’s also what some insurance experts call “internalizing the cost of risk for social good.”

The Future of American Risk & Insurance (FAIR) is bringing clarity to the subject of risk-based pricing in an ongoing educational video series. 

In this segment, Dr. Charles Nyce, Florida State University Associate Professor of Risk Management and Insurance, explains how restricting insurer use of either certain risk characteristics or rating variables when pricing policies carries the risk of reducing some of the social good that insurance provides.