rate adequacy, equity, and not unfairly discriminatory

Almost every insurance-rate law in the world boils down to one sentence: rates must not be inadequate, not excessive, and not unfairly discriminatory. These three words are the legal goalposts every ratemaking technique is ultimately trying to satisfy. They sound simple but pull against each other, and balancing them is much of what a pricing actuary actually does.

Adequate means the price collects enough, over time, to pay the claims and expenses and earn a fair return — too low and the insurer's solvency is threatened and it may eventually fail to pay. Not excessive means the price is not unreasonably high relative to the risk, often interpreted as 'not yielding an unreasonable profit' — this protects consumers. Not unfairly discriminatory is the subtle one: it does not mean every customer pays the same. It means that price differences between customers must be justified by genuine, measurable differences in expected cost or risk. Charging a high-risk driver more is fair discrimination (it reflects real cost); charging more based on race, or on a factor that is merely a proxy for a protected characteristic, is unfair discrimination and is prohibited.

These standards are why pricing is never a purely mathematical exercise. An actuary can compute a perfectly accurate, cost-based relativity and still be forbidden to use it because society has judged the underlying variable unfair. The tension is real: a rate can be simultaneously actuarially adequate and legally challenged as discriminatory, and recent debates over credit scores, gender, and algorithmic pricing all live here. The mature view is that cost-based does not automatically equal fair — fairness is a social and legal judgment layered on top of the actuarial one.