Illinois Life Producer State-designated Practice Exam

Which of the following actions may define unfair discrimination in the insurance industry?

1. Offering insurance to standardized risk groups

2. Setting different rates without actuarial justification

3. Providing identical coverage to all applicants

4. Adjusting fees based on customer loyalty

The correct answer is: Setting different rates without actuarial justification

In the insurance industry, unfair discrimination occurs when individuals in similar circumstances are treated differently without a justified basis. Setting different rates without actuarial justification exemplifies this concept, as it implies that insurers charge varying premiums to similar policyholders without relying on legitimate statistical analysis or risk assessment. Actuarial justification typically involves the use of data and methodology to establish rates based on risk factors relevant to those insured. If an insurer assigns higher rates to a class of individuals without a clear, risk-based reason, it constitutes unfair discrimination because it fails to recognize the equal risk profiles of those individuals. In contrast, offering insurance to standardized risk groups or providing identical coverage to all applicants indicates a fair treatment process based on uniform criteria. Adjusting fees based on customer loyalty can be considered a legitimate business practice, as it rewards long-term customers and reflects their value to the insurer, rather than arbitrarily varying rates among similar applicants.