Washington State Insurance Practice Exam

What is the primary objective of insurance rating?

1. To determine claims payment procedure

2. To assess liability in an accident

3. To set the premium amount based on risk factors

4. To evaluate customer satisfaction

The correct answer is: To set the premium amount based on risk factors

The primary objective of insurance rating is to set the premium amount based on risk factors. This process involves evaluating various factors that can influence the likelihood and potential cost of a claim, such as the insured's age, health condition, driving history, location, and the type of coverage they are seeking. By accurately assessing these risks, insurance companies can establish premiums that are commensurate with the level of risk they are taking on. This approach helps insurers remain solvent by ensuring that the premiums collected are sufficient to cover future claims. It also enables fairness in pricing since individuals or entities deemed to pose a higher risk will pay higher premiums, while those with a lower risk profile will pay less. Overall, effective insurance rating practices help maintain a balanced insurance pool and protect the financial health of the insurer, while also providing policyholders with appropriate coverage options tailored to their specific needs.