How Insurance Companies in California Use Discrimination in their Underwriting Guidelines
How do you deal with discrimination in your insurance company’s underwriting guidelines in California?
The method through which members of the insurance industry decide who they would insure is referred to as underwriting guidelines. Because insurance is based on risk, insurers develop a set of standards to determine when they will assume that risk and give insurance to a new customer, what rates to charge, and when potential consumers become too hazardous to insure.
Although it is illegal for firms to use race in their guidelines as a form of “unfair discrimination,” recommendations do require the use of specific information about people in order to measure risk factors and determine insurance rates. This implies that discrimination is both essential and legal.
Redlining, which has hindered non-Whites from gaining access to property ownership, relied on federal underwriting policies and has led to the country’s widening racial wealth inequality. Questions surrounding what constitutes unjust discrimination have gotten a lot of attention in recent years, notably after the death of George Floyd sparked demonstrations.
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Discrimination that already exists in underwriting guidelines
In response to the George Floyd demonstrations, the National Association of Insurance Commissioners (NAIC), the industry’s standard-setting body, conducted a special session on race to examine the relationship between insurance and racial prejudice.
Despite the fact that overt racial prejudice has decreased in recent years, participants noted that subtle kinds of discrimination still exist, particularly in the use of big data.
Furthermore, as detailed below, long-standing discriminatory practices such as redlining and racial premiums have allegedly continued to harm the sector into the twenty-first century, according to lawsuits and investigations. The categories listed here aren’t all-inclusive.
Health insurance, for example, has been a source of discrimination, especially after federal rules such as 2020’s Nondiscrimination in Health and Health Education Programs or Activities, Delegation of Authority have been implemented. This judgment has been criticized by California Insurance Commissioner Ricardo Lara, among others, as a barrier to people with disabilities, and anyone whose primary language is not English being able to obtain healthcare.
Discrimination in its various forms
The use of risk profiles in underwriting standards is a kind of discrimination. They’re designed to categorize people into high- and low-risk groups in order to determine how much an insurance company should charge for a premium and to encourage customers to lessen their risky habits.
Despite the fact that this is generally acceptable, the history of underwriting is littered with incidents of prejudice that are deemed improper, referred to as unjust discrimination. Unfair discrimination is prohibited in underwriting rules under American law. Unfair discrimination refers to rules that target protected groups like race, national origin, gender, or religious belief.
Discrimination can take many forms, ranging from providing worse insurance coverage to simply refusing to reply to insurance applicants based on their perceived traits.
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Unfair Discrimination vs. Disparate Impact
According to Susan T. Stead of Squire Patton Boggs, LLP, “unfair discrimination” and “disparate impact” are legally independent ideas in discussions concerning algorithmic modeling in insurance. According to Stead, disparate impact is a legal strategy for proving discrimination in the absence of “overt discrimination” against a protected class, and it dates back to a Supreme Court judgment from 1971.
Unfair discrimination, on the other hand, occurs when the same risks are addressed differently due to a factor that has nothing to do with risk; it is illegal in every jurisdiction. This is one of the challenges underwriters face in the United States.
Anti-discrimination regulations “range a great lot” by state and between insurance kinds, according to a legal study published by the University of Michigan Law School in 2013. It also stated that a “surprising” number of jurisdictions lack specific legislation prohibiting unfair racial discrimination, implying that the federal government may need to play a stronger role in regulating race-based insurance discrimination.