Unfair Discrimination

Two applicants are the same age, in the same health class, and applying for the same product. Aldeburgh Life charges one of them a higher premium solely because of his ethnicity. A third applicant, with a documented and objectively measured heart condition, is charged more because that condition genuinely raises his expected mortality. Which statement is correct?

1. A.Both are unfair discrimination, because any difference in premium between two applicants is prohibited.If every difference were prohibited, underwriting itself would be illegal. The statutes forbid unjustified distinctions, not risk-based ones.
2. B.The ethnicity-based charge is UNFAIR DISCRIMINATION; distinctions based on actual differences in expected mortality or hazard are permitted and are the basis of underwriting.Correct. Ethnicity bears no demonstrable relationship to mortality within a class, while a documented cardiac condition does, and only the former is prohibited.
3. C.Neither is unfair discrimination, because an insurer is free to price its products however it wishes.Rating freedom is bounded. The unfair trade practices statutes expressly forbid distinctions among individuals of the same class and hazard that are not justified by the risk.
4. D.Only the health-based charge is unfair discrimination, since medical conditions are a protected characteristic.This inverts the rule. Objectively measured medical impairment is exactly the kind of mortality difference insurers are permitted, and expected, to price for.

Why: UNFAIR DISCRIMINATION is charging different rates or offering different terms to individuals of the SAME class and essentially the same hazard, or making distinctions on grounds unrelated to expected mortality such as race, ethnicity, national origin or religion. Distinctions grounded in actual, demonstrable differences in mortality or hazard are not unfair discrimination at all; they are the foundation of underwriting and of an equitable rate structure.

An applicant is legally blind. Underwriting data show the condition has no measurable effect on his mortality. The insurer declines the application solely because of the blindness. The insurer has committed:

1. A.Unfair discrimination, because risk classification must rest on sound actuarial grounds or actual experienceCorrect. Without a mortality basis, the distinction is not a permitted risk classification.
2. B.CoercionCoercion means using force or pressure to compel someone to buy insurance, which did not happen here.
3. C.No violation, since an insurer may underwrite any condition it choosesUnderwriting freedom is real but bounded. It must be tied to expected loss, not to the condition alone.
4. D.MisrepresentationMisrepresentation involves a false statement about a policy or an insurer. The insurer made no false statement.

Why: Insurers may absolutely charge different premiums to different risks, but only when the distinction is supported by sound actuarial principles or actual experience. Declining a risk for a condition unrelated to mortality is unfair discrimination. The clue is the phrase 'no measurable effect on his mortality.' Review: unfair discrimination.