Property & Casualty Insurance Exam (National Portion)Producers and AdjustersHard
A state insurance department is conducting a market conduct examination of an insurer. During this examination, the department discovers that the insurer has consistently used an unapproved rating algorithm, resulting in higher premiums for a specific demographic group without any actuarial justification. Which type of unfair trade practice is the insurer committing?
- AUnfair discrimination.
- BMisrepresentation.
- CTwisting.
- DFalse advertising.
Show answer & explanationAnswer & explanation
Correct answer: A. Unfair discrimination.
Charging different premiums to individuals within the same class or risk group, without any actuarial justification, is a clear example of unfair discrimination. Approved rating algorithms are designed to ensure fair and non-discriminatory pricing.
Why the other options are wrong
- B. Misrepresentation involves false statements about policy benefits or terms, not pricing practices.
- C. Twisting involves inducing policyholders to change policies to their detriment.
- D. False advertising involves misleading public statements, not internal rating practices.
Unfair Discrimination
The illegal practice of treating individuals differently in terms of rates, coverage, or benefits based on characteristics like race, religion, or national origin, without actuarial justification.
- Different treatment without justification
- Same class/risk group
- Illegal in underwriting and rating
Memory trick: Discriminatory rates are an unfair, unapproved divide.