California Property & Casualty Broker-AgentCalifornia LawEasy
An insurance company in California is developing a new rating plan for its commercial liability policies. According to the California Insurance Code, which of the following is NOT a permissible rating factor for determining premiums?
- AType of business operation.
- BGeographic location of the insured's primary business.
- CLoss history of the insured.
- DRace or ethnicity of the business owner.
Show answer & explanationAnswer & explanation
Correct answer: D. Race or ethnicity of the business owner.
The California Insurance Code explicitly prohibits unfair discrimination in rating based on characteristics such as race, ethnicity, religion, or national origin. Permissible factors relate to risk exposure.
Why the other options are wrong
- A. The type of business operation (e.g., manufacturing vs. retail) directly impacts the inherent risks and is a permissible rating factor.
- B. Geographic location can influence risk (e.g., crime rates, natural disaster exposure) and is a permissible rating factor.
- C. Loss history is a legitimate underwriting and rating factor, directly reflecting the risk of future claims.
Prohibited Rating Factors
In California, insurance rates and premiums cannot be unfairly discriminatory based on protected characteristics such as race, ethnicity, religion, national origin, or sexual orientation. Rating factors must be actuarially sound and related to risk.
- No unfair discrimination
- Prohibits race, ethnicity, etc.
- Factors must be risk-related
Memory trick: Rates should be based on 'R.I.S.K.' (Risk, Insured's history, Statistics, Knowledge), not bias.