State RegulationsPA specificDifficulty 3/5
An insurer charges two applicants with identical risk profiles different premium rates because one applicant is a personal friend of the producer. A different insurer charges smokers more than nonsmokers based on documented claims experience. Which statement is correct under Pennsylvania law?
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Answer & full 3-part explanation (select an option above, or peek)
Why B is correct
The friend-based rate difference gives two individuals of the same actuarial class different charges without any actuarial justification, which is unfair discrimination under 40 P.S. § 1171.5 and reinforced by 31 Pa. Code § 145.4. The smoker rating, by contrast, rests on documented, class-based claims experience, which is legitimate risk-based underwriting that Pennsylvania law expressly accommodates. The dividing line is actuarial justification: favoritism between identically rated risks is sanctionable by the Pennsylvania Insurance Department, while consistent rating factors supported by evidence are not.
Why the other options are wrong
- A) Lumping both together misses the actuarial-justification test; evidence-based class rating is lawful, so the two practices are not the same.
- C) The label is backwards: favoritism between identical risks is the discriminatory practice, while the documented smoker rating is sound underwriting.
- D) Pennsylvania's unfair practices framework squarely regulates rate discrimination between individuals of the same class; private contracting is no shield.
Memory hook
Actuarial reasons pass; friendship does not.