Washington State Insurance Practice Exam

What factor is critical in determining insurance premiums?

1. The insured's income level

2. The type of insurance purchased

3. The insured's past claim history

4. The risk factors associated with the insured

The correct answer is: The risk factors associated with the insured

The determination of insurance premiums primarily hinges on the risk factors associated with the insured. Insurers assess a range of factors to evaluate the likelihood of a claim being made, which influences how much a policyholder will pay for coverage. These risk factors can include personal characteristics such as age, health, and driving record, as well as specific details related to the property or assets insured. Understanding risk allows insurance companies to set premiums that correspond to the likelihood of a loss occurring. For example, a driver with a history of accidents is deemed a higher risk than one with a clean driving record, resulting in higher premiums for the former. Consequently, the focus on risk factors ensures that the premiums reflect the potential financial exposure the insurer faces by covering that individual or asset.