Washington State Insurance Practice Exam

What does it mean when an insurance premium is based on coverage limits?

1. The premium is fixed regardless of risk

2. The premium varies based on the amount of risk assumed

3. The premium covers both property and liability

4. The premium increases with claims history only

The correct answer is: The premium varies based on the amount of risk assumed

When an insurance premium is based on coverage limits, it means that the premium amount is adjusted according to the level of risk that the insurer is willing to assume. Higher coverage limits typically indicate a larger potential payout for claims, which often results in a higher premium. Therefore, as the coverage limit increases, the insurer is taking on more risk, and thus, the premium must reflect that heightened exposure. This relationship ensures that premium pricing is commensurate with the potential financial responsibility the insurer could face if a claim is made. In contrast, a fixed premium, regardless of risk or claims history, does not accurately reflect this correlation and would not be viable in risk management. Similarly, while premiums can cover both property and liability, that aspect does not directly relate to how premiums are influenced by the coverage limits themselves. Lastly, although a claims history might influence premium pricing, a premium being strictly based on such a history alone does not capture the broader concept of coverage limits affecting risk assessment and premium calculation.