When a fraternal insurer began operations, it asked each member, regardless of age, to pay $20 per month to the fraternal's group life insurance plan. In exchange, each member received the same amount of life insurance. Soon younger members of the group began to drop out when they realized their premiums were subsidizing a group with a higher chance of loss. Which important underwriting principle was violated in this case?
A) An underwriting profit should be attained.
B) Moral hazard should be avoided.
C) Insureds should be selected according to underwriting standards.
D) There should be equity among policyholders.

Question

Quizplus · Accepted Answer

The important underwriting principle that was violated in this case is the principle of equity among policyholders. The premium rate charged to all members of the group was the same regardless of their age or risk profile. This meant that younger members were paying more than what was fair to subsidize the higher risk group. This violates the principle of equity, which requires that premiums charged to policyholders should be commensurate with their risk profile.

When a Fraternal Insurer Began Operations, It Asked Each Member