The primary purpose of insurance underwriting is to:
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Answer & full 3-part explanation (select an option above, or peek)
Why D is correct
Underwriting is the process of selecting and classifying risks so the insurer charges a premium that matches the level of risk presented. By grouping applicants into classes such as preferred, standard, and substandard, the insurer keeps rates fair for each group and avoids charging good risks for the losses of bad risks. This selection process is also the insurer's main defense against adverse selection, because it detects applicants who present a higher-than-average chance of loss before coverage is issued. Sound underwriting protects both the insurer's solvency and the fairness of rates.
Why the other options are wrong
- A) Underwriting exists to select risks, and some applicants are declined or rated up. Approving everyone would destroy pricing fairness and invite adverse selection. Underwriters regularly decline or rate-up applicants, and approving everyone would make rates unfair and the pool unstable.
- B) Insurers aim to price risks accurately so claims and expenses are covered. Maximizing claim payments would be financially destructive and is never a goal. The insurer prices risk so claims and expenses are funded; maximizing payouts would quickly destroy solvency.
- C) Insurable interest is a legal requirement set by statute. Underwriting cannot remove or eliminate a legal requirement of the contract. Insurable interest is imposed by statute and underwriting can neither create nor eliminate a legal requirement.
Memory hook
Underwriting = sorting socks. Same risk, same price; risky applicants pay more or walk.