Property and Casualty Insurance Practice Exam

What does unfair discrimination in insurance pricing refer to?

1. Charging different rates to insureds in identical circumstances.

2. Offering discounts based on customer loyalty.

3. Adjusting rates based on geographical location.

4. Providing lower premiums for high-risk individuals.

The correct answer is: Charging different rates to insureds in identical circumstances.

Unfair discrimination in insurance pricing refers to the practice of charging different rates to insureds who are in identical circumstances. This means that when two individuals have the same risk profile, coverage needs, and other relevant characteristics, they should ideally be offered the same insurance rates. This principle is important as it ensures fairness and transparency in the pricing of insurance. If individuals with similar risk profiles are subjected to varying rates without justifiable reasons, it can be deemed unfair because it may reflect biases or unwarranted assumptions rather than an accurate assessment of risk. Insurance regulations are typically designed to prevent such practices, promoting equitable treatment of policyholders. On the other hand, offering discounts based on customer loyalty, adjusting rates based on geographical location, and providing lower premiums for high-risk individuals can all be considered legitimate pricing strategies as they are often based on valid and relevant factors. For instance, offering discounts for loyalty rewards encourages long-term relationships with customers and can be justified as a way to promote retention. Adjusting rates based on geographical location takes into account the differing levels of risk presented by different areas, such as susceptibility to natural disasters or crime rates. Providing lower premiums for high-risk individuals may seem contrary to conventional practices, but it can be part of a specialized pricing strategy