South Carolina Life Insurance Practice Exam

Are insurance company underwriters allowed to discriminate when assessing applications?

1. Yes, but only based on age and sex

2. Yes, but not unfairly

3. No, discrimination is entirely prohibited

4. Only for certain types of insurance

The correct answer is: Yes, but not unfairly

The correct response indicates that insurance company underwriters are allowed to use certain factors when assessing applications, but they must do so in a manner that is not considered unfair. This involves evaluating the applicant's risk based on relevant underwriting criteria, which may include age, sex, health status, and other relevant factors that are deemed actuarially sound. It is crucial that this discrimination is based on statistical and actuarial evidence rather than arbitrary or biased decisions. Underwriting processes must align with regulatory standards ensuring that discrimination is conducted fairly. This means that while underwriters can take differential factors into account to evaluate risk, they cannot implement these distinctions in a way that leads to practices deemed unjust or discriminatory outside the context of risk assessment. Such regulations are in place to protect consumers and ensure that the underwriting process remains equitable. In this context, while some might assume complete prohibition of discrimination could be the approach, it is essential to acknowledge risk-based discrimination as a legitimate aspect of insurance underwriting. The necessity for fairness emphasizes that the distinctions made must be relevant to the insurance product and supported with data rather than personal bias.