Less-Discriminatory Alternative

A less-discriminatory alternative is a different model, variable, or business practice that achieves the same legitimate purpose while producing a smaller adverse effect on a protected class. The concept comes out of employment and fair-lending law, and it is Step 3 of the assessment NYDFS Circular Letter No. 7 expects insurers to run.

In the New York sequence it is the last step, not the second: first ask whether the use produces a disproportionate adverse effect; then, if it does, whether a legitimate, lawful, and fair explanation accounts for that effect; and only then conduct and document a search for a less discriminatory alternative that would reasonably meet the insurer’s legitimate business needs.

What happens next is where the letter differs from how the step is usually described. Finding an alternative does not condemn the original variable. The carrier modifies the model and returns to Step 1. Finding none does not close the file either: the use continues under ongoing model risk management, with the search repeated at least annually.

The search has to be documented as it is conducted. It does not oblige the carrier to go out and gather new data about individuals, since for the quantitative side protected-class membership can come from what the insurer already holds or from an inference drawn with accepted statistical methods. A carrier that reports finding no alternative needs the search behind that answer on file. See our guides to the proxy test and NYDFS Circular Letter No. 7.