Why is some degree of discrimination necessary in life insurance?

In life insurance, some degree of discrimination is necessary to make informed assessments based on mortality rates. Insurance companies evaluate a variety of factors, such as age, health status, lifestyle choices, and occupation, to determine the likelihood of a policyholder filing a claim. This assessment, often referred to as underwriting, helps the insurer predict the risk associated with covering an individual.

By analyzing mortality rates and other risk factors, insurers can set premiums that reflect the actual risk of loss. This ensures that the insurance pool remains viable and that those who present a higher risk contribute appropriately to the costs of insuring others. Discrimination in this context is essential for creating a fair and sustainable model where premiums align with the risk incurred by the insurer. Without such assessments, insurers would struggle to cover the claims they receive, which could threaten their financial stability and the overall insurance market.

In the context of the other options, offering the same rates to everyone would undermine the concept of actuarial science, which relies on differentiated pricing based on risk. Ensuring profits for stockholders is a consequence of effective risk assessment rather than a justification for discrimination itself. Lastly, avoiding underwriting altogether would eliminate the crucial evaluations that inform the pricing and risk-sharing scheme of life insurance, leading to potential financial