Connecticut Life Producer Practice exam

What is the process by which an insurance company evaluates and classifies risk?

1. Risk pricing

2. Underwriting

3. Policy issuance

4. Claim processing

The correct answer is: Underwriting

The process by which an insurance company evaluates and classifies risk is known as underwriting. Underwriting is a crucial part of the insurance industry as it involves assessing the potential risks associated with insuring a specific individual or entity. Underwriters analyze applications for insurance policies to determine whether the risk is acceptable and to set appropriate premium rates that reflect the level of risk involved. During the underwriting process, various factors are considered, such as the applicant's health history, lifestyle choices, occupation, and even geographical location. This evaluation helps the insurer ensure that they can provide coverage in a sustainable manner while safeguarding their financial stability. The decision made during underwriting will ultimately dictate whether an insurance policy is issued and under what terms. In contrast, risk pricing refers to determining the rates charged for insurance based on the level of risk identified during underwriting and does not encompass the broader classification and evaluation process. Policy issuance relates to the final step where an insurance policy is formally issued to the applicant after underwriting is complete. Claim processing refers to how claims are handled once a loss occurs and is not related to the initial evaluation of risks prior to underwriting.