XYZ Insurance has its home office in a state with a population that consists predominantly of people of a particular ethnic origin. XYZ wanted to encourage state residents to buy insurance policies, so it filed rates with the state insurance regulators that extended a flat 70 percent discount to all applicants of the predominant ethnic origin, after considering other rating factors.
Explain why the state regulators might not approve these rates based on each of the following rating objectives.
a. Rates must be adequate to pay all claims and expenses.
b. Rates must not be unfairly discriminatory