Question

In order for an insurer to be able to justify a premium price difference between insureds, the company must demonstrate to the Director that

A: prior approval for such action has been granted by the Department of insurance
B: such actions have been accepted in at least one other jurisdiction.
C: the cost differences are based on sounds actuarial principles of risk assessment.
D: the company has a waiver from the US Department of Insurance Practices to do so

Answer 1

An insurer must base premium price differences on solid actuarial principles and risk assessment. This aligns with the law of insurance, which dictates that payouts cannot exceed collected premiums.

Step-by-step explanation:

In order to justify premium price differences among insured individuals, an insurer must demonstrate that the pricing is based on actuarial principles and risk assessment. This means that cost differences should not be arbitrary but should correlate directly to the statistical likelihood of a claim, in line with established actuarial standards. Insurers cannot set premiums that are not actuarially fair without the risk of another group - taxpayers or other insurance buyers - having to make up the shortfall.

This can result in adverse selection and could lead to an insurer exiting the market rather than sustaining losses over time. State insurance regulators also have limited abilities to enforce low premium costs, as insurance companies do have the option to withdraw from states that impose such restrictions.