The primary purpose of insurance underwriting is to:
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Answer & full 3-part explanation (select an option above, or peek)
Why A is correct
Underwriting is the process of selecting and classifying risks so that the premiums charged accurately reflect the expected cost of insuring each risk class. By evaluating factors such as age, health, occupation, and habits, the underwriter separates preferred, standard, and substandard risks and prices them accordingly. Accurate risk selection prevents adverse selection, keeps each group relatively homogeneous, and allows the law of large numbers to make loss predictions reliable. In this way underwriting protects both the insurer's solvency and the fairness of rates charged to policyholders in each class.
Why the other options are wrong
- B) No underwriting process can guarantee that a policyholder will never file a claim; underwriting predicts group loss experience, not individual outcomes.
- C) Investment income is a component of pricing, but reducing it is not the purpose of underwriting.
- D) Reinsurance remains available for large or catastrophic exposures; underwriting does not eliminate its use.
Memory hook
Underwriting sorts risks into the right buckets so the price tag on each bucket is honest.