Is there such a thing as fair discrimination? Insurance companies regularly practice discrimination, and it's quite necessary. But, before going further, let's make an important distinction. Insurance companies must practice fair discrimination. Discrimination refers to making choices, and the practice makes sense if the choices are fair.

Unfair Discrimination

Unfair discrimination occurs when a choice revolves around a distinction irrelevant to offering insurance coverage. An example is denying coverage based upon an arbitrary difference such as race or religion.

Fair Discrimination

Insurers are constantly involved in discriminating. They continuously evaluate situations to see if they are in a position to offer insurance coverage. Companies note differences and make choices among their insurance applicants. This process is important because insurance programs are designed using justifiable distinctions regarding the type of persons, property, and situations they wish to cover.

Market Selection and Pricing

When an insurance company does business, it has to make decisions about the market it wants to serve. For example, in the auto market, does it wish to insure only regular cars and drivers with pristine records or expensive sports cars and drivers with a few blemishes? In the homeowner's market, does the company wish to target higher-value homes, such as those with a value over $300,000, or might it decide to write mobile homes exclusively?

Once their market niche is selected, a company has to create matching prices. What components must a company consider? Well, an insurer must charge premiums that reflect the:

  • the dollar amount of losses paid to all parties filing valid claims
  • company's costs to investigate and settle claims
  • insurer's operating expenses (including compensation to employees and agents)
  • premiums charged by their competitors
  • the legal requirements of applicable state insurance regulators

Underwriting

Underwriting comes after market selection and pricing. A company has to create and follow rules for selecting and keeping the type of business that matches its premiums. Through underwriting, an insurer must properly select (fairly discriminate) among persons and kinds of property that fit its insurance program. If a company doesn't apply its selection standards consistently, it will eventually lose the ability to do business. An easy way to determine a company's selection practices is to look at its applications. If the information is important for underwriting, it should appear on the application. This is true regardless of the insurance type or market the insurer targets.

Discriminating Conclusion

Remember, the decisions made by an insurer in writing and renewing coverage must validly affect their market and prices. When the decisions are not based on these factors, unfair discrimination occurs. If you have further questions about discrimination and the insurer’s decision, contact the experts at Williams Insurance today and we’ll be happy to provide more information.


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