Alabama Insurance Adjuster Practice Exam

When an insurer evaluates a risk and sets a premium accordingly, which concept are they applying?

1. Risk assessment

2. Insurance underwriting

3. Risk avoidance

4. Risk transfer

The correct answer is: Insurance underwriting

Insurance underwriting is the process through which an insurer evaluates the risk associated with a policyholder and determines the appropriate premium for coverage. The underwriter examines various factors about the individual or entity seeking insurance, such as their health, occupation, lifestyle, and claims history. This helps assess the potential likelihood of a claim being made. When underwriting, the insurer aims to balance risk and profitability. By accurately evaluating risk, the insurer can set premiums that are sufficient to cover any potential claims while also remaining competitive in the market. This process ensures that the insurer can provide financial protection to policyholders while maintaining its financial stability. The other concepts mentioned do not directly relate to how premiums are set. Risk assessment refers to evaluating the potential risks involved but does not encompass the full process of determining premiums. Risk avoidance involves taking steps to prevent risks from occurring, while risk transfer refers to shifting the risk from one party to another, typically through insurance contracts. These concepts, while related to risk management, do not capture the essence of how insurers set premiums based on their evaluation processes.