California Life and Health Insurance Practice Exam

An insurer using higher rates based on race, religion, or ethnicity is engaging in what?

1. Risk assessment

2. Fair classification

3. Unfair discrimination

4. Legal discrimination

The correct answer is: Unfair discrimination

The correct answer highlights the concept of unfair discrimination, which is a critical principle in insurance practices. Unfair discrimination occurs when an insurer makes decisions based on characteristics such as race, religion, or ethnicity rather than objective risk factors. Insurance regulations mandate that rates should be determined based on relevant criteria, such as an individual's health status, driving record, or other quantifiable risks, rather than immutable personal characteristics. Using higher rates based on race, religion, or ethnicity indicates a failure to adhere to the principles of fairness and equity in underwriting and pricing policies. This practice not only violates ethical standards but is often prohibited by law, reflecting the commitment to equitable treatment of all individuals in the insurance market. Understanding this concept is essential for recognizing the legal and ethical frameworks governing insurance practices that ensure fairness for all consumers.