The primary purpose of underwriting in insurance is to:
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Answer & full 3-part explanation (select an option above, or peek)
Why A is correct
The primary purpose of underwriting is to select and classify risks. Underwriters evaluate each applicant's characteristics — age, health, occupation, habits — and place them into risk classes such as preferred, standard, and substandard, so that the premium charged reflects the expected loss experience of that class. Accurate classification also guards against adverse selection, the tendency of high-risk individuals to seek coverage disproportionately. Without underwriting, the risk pool would become unbalanced and premiums would be unfairly high for low-risk insureds, which would eventually drive good risks out of the market entirely.
Why the other options are wrong
- B) No insurer can guarantee that a loss will not occur; insurance only pays covered losses, and underwriting manages and prices risk rather than eliminating the possibility of loss.
- C) Issuing as many policies as possible regardless of health would unbalance the risk pool and invite adverse selection — the exact opposite of sound underwriting.
- D) Charging one uniform premium would ignore legitimate differences in risk and misclassify applicants, which is not the purpose of underwriting but rather a failure of it.
Memory hook
Underwriting sorts the pool: preferred, standard, substandard. Classify right, and the premiums come out right.