Fair Vs. Unfair Discrimination

Discrimination is regularly practiced by insurance companies and it's quite necessary. 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 as long as the choices are not unfair.

Unfair Discrimination

Unfair discrimination takes place whenever a choice revolves around a distinction that is irrelevant to offering insurance coverage. An example of this is to deny 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 car 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 exclusively write mobile homes?

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:

• 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 their 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 their applications. If the information is important for underwriting, it should show up on the application. This is true no matter the type of insurance or market targeted by the insurer.

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, then unfair discrimination takes place.

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