General Insurance✓ Verified · outline & fact-checked · Sep 2026Difficulty 3/5
An insurer's book of business shows that applicants with hazardous avocations, such as skydiving, apply for life coverage at three times the rate of the general population. Which underwriting response most directly protects the insurer?
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Answer & full 3-part explanation (select an option above, or peek)
Why A is correct
Adverse selection occurs when high-risk individuals seek insurance more aggressively than low-risk individuals. The proper underwriting response is information gathering and risk classification: ask precise questions about health, habits, and avocations, then rate the risk — higher premium, exclusion, or decline — so the premium reflects the exposure. This is how the law of large numbers remains valid: the pool must stay reasonably homogeneous by risk class.
Why the other options are wrong
- B) The law of large numbers predicts accurately only for homogeneous groups of independently selected risks; ignoring a known concentration of hazards breaks that assumption and underprices risk.
- C) Identical premiums for all would force low-risk applicants to subsidize the hazardous minority, driving good risks away and worsening the pool.
- D) A blanket age restriction is arbitrary, does not target the actual hazard pattern, and substitutes an unresponsive rule for proper classification by risk.
Memory hook
Adverse selection knocks first; underwriting answers with questions and ratings, not blanket rules.