In the rapidly evolving landscape of the insurance industry, algorithms play a pivotal role in determining premiums and policies for individuals and businesses alike. These algorithms are complex mathematical models that analyze a myriad of factors to calculate prices. While they can bring efficiency to the pricing process, they can entail some risks. In this article, we will delve into how algorithms work in the decision-making process of generating insurance prices, and critically examine the biases that can emerge from these systems. 

Data Collection and Input 

The foundation of any algorithm is data. In the insurance industry, this data can include a wide array of variables such as age, gender, location, claims history, and even lifestyle habits. Insurers rely on historical data to predict future risks and losses, which forms the basis of their pricing decisions. 

Once the data is collected, algorithms use a process known as feature selection to determine which variables are relevant for pricing. Some factors may be assigned more weight than others based on their perceived impact on risk. For example, a person living in an area prone to natural disasters may face higher premiums. 

Mathematical Modeling 

The selected features and their respective weights are then plugged into a mathematical model. This model, which could be anything from linear regression to more complex machine learning techniques, churns through the data to generate a predicted price for the insurance policy. 

But algorithms are not static; they continuously learn and adapt. As new data becomes available, the model adjusts its calculations to ensure that pricing remains relevant and reflective of current risk profiles. 

Historical Data Biases 

The historical data algorithms rely on to predict future risks data reflects systemic biases or discriminatory practices of the past and perpetuates those biases into the future. For instance, if certain demographics have historically been charged higher premiums, the algorithm will continue to do so. 

Sometimes, algorithms use proxy variables that are correlated with sensitive attributes like race or ethnicity. For example, using zip code as a factor in pricing can indirectly lead to racial disparities, as explained in this article by ProPublica.  

Many insurers guard their algorithms as proprietary information, making it difficult for third parties to scrutinize them for potential biases. This lack of transparency raises concerns about fairness and accountability. 

Limited Human Oversight 

While algorithms are powerful tools, they should not operate in a vacuum. Human oversight is crucial to ensure that pricing decisions align with ethical and legal standards. 


Insurance companies are heavily reliant on algorithms, streamlining the pricing process and allowing for more efficient underwriting. However, it is crucial to acknowledge and address the potential biases that can emerge from these systems. Transparency, accountability, and continuous scrutiny are essential in ensuring that algorithms operate fairly and ethically, providing equal access to insurance for all.