Does The Insurance Industry Discriminate?
First, let’s admit that this article title and question is tricky; but the answer is yes. Not only is discrimination practiced by every insurance company; discrimination is absolutely critical to the industry. The practice is also quite legal and rightfully so! Before going further, let’s remember that discrimination can have more than one meaning. How may discrimination be defined? Let’s use a very large dictionary, say Webster’s Encyclopedic Unabridged Dictionary Of The English Language (Deluxe Edition):
1. The act or an instance of discriminating.(differentiating or noting differences)
2. Not applicable
3. Treatment or consideration of, or making a distinction in favor of or against, a person or thing based on the group class or category to which that person or thing belongs rather than on individual merit.
The confusion over the desirability or legality of discrimination arises out of unfair discrimination. Unfair discrimination stems from the latter definition mentioned earlier. A choice that is based on a group, class or category. Choices that revolve around a distinction that is irrelevant to offering insurance coverage is unfair discrimination. The best (or worse) example of this is to deny coverage based upon an arbitrary difference such as race or religion.
Insurers are constantly involved in discriminating because they are always studying persons and situations to see if they are in a position to offer insurance coverage. In other words; they note differences and make choices among the requests they constantly receive for coverage. The distinctions made among their insurance applicants are important. Insurers design their insurance programs based on assumptions on 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 type of 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 very expensive 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 implement 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
A company’s premiums also consider their ability to invest their income and, of course, they must also consider what rates, particularly changes in rates, are approved by state insurance regulators.
In the next step after market selection and pricing, a company has to create and follow rules on selecting and keeping the type of business that matches its market and which is supported by their premiums. The rules and practices that a company follows in selecting and rejecting business is called underwriting. In other words, via underwriting, an insurer must discriminate or choose 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. What is a quick method to learn what a company considers to be valid factors to do business? The company’s application(s). 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.
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 takes place.