Washington State Insurance Practice Exam

What is the significance of "underwriting"?

1. To pay claims on time

2. To maximize profits

3. To evaluate risk and determine eligibility

4. To negotiate terms with policyholders

The correct answer is: To evaluate risk and determine eligibility

Underwriting plays a crucial role in the insurance process as it involves evaluating the risk associated with insuring a potential policyholder and determining their eligibility for coverage. This process ensures that the insurer can assess the likelihood of a claim being made and how that claim might affect the overall risk pool. When underwriters review applications, they analyze various factors such as the applicant's health history, lifestyle, occupation, and financial stability. This assessment allows insurance companies to set appropriate premiums that accurately reflect the risk involved. Through underwriting, insurers can also decide whether or not to accept or decline an application for coverage, which helps maintain the financial stability of the insurance company by avoiding high-risk candidates that may lead to significant losses. While underwriting indirectly contributes to maximizing profits and ensuring timely claims payments by balancing risk and premium income, its primary significance lies in evaluating risk and determining eligibility. It is also not primarily focused on negotiating terms with policyholders; those discussions typically happen after the underwriting process is completed.