What term describes the practice when an insurance company charges higher premiums based on an individual's poor driving record?

What term describes the practice when an insurance company charges higher premiums based on an individual's poor driving record?

• A. Risk avoidance
• B. Risk retention
• C. Risk transfer
• D. Risk selection

Answer: (D)

The term that describes the practice of charging higher premiums based on an individual's poor driving record is risk selection. This concept involves the insurance company assessing the risk posed by an individual and adjusting premiums according to that risk. When an individual has a poor driving record, they are considered a higher risk for potential claims, prompting the insurer to increase their premiums as a way to mitigate the financial exposure associated with insuring that individual. Risk selection is a critical function of insurers as it allows them to differentiate between low-risk and high-risk clients. This enables them to set premiums that accurately reflect the likelihood of a claim being made, which is essential for maintaining the financial health of the insurance company. Understanding this is important for insurance representatives, as it highlights how underwriting principles work in practice and the relationship between client behavior and insurance costs.

The term that describes the practice of charging higher premiums based on an individual's poor driving record is risk selection. This concept involves the insurance company assessing the risk posed by an individual and adjusting premiums according to that risk. When an individual has a poor driving record, they are considered a higher risk for potential claims, prompting the insurer to increase their premiums as a way to mitigate the financial exposure associated with insuring that individual.

Risk selection is a critical function of insurers as it allows them to differentiate between low-risk and high-risk clients. This enables them to set premiums that accurately reflect the likelihood of a claim being made, which is essential for maintaining the financial health of the insurance company.

Understanding this is important for insurance representatives, as it highlights how underwriting principles work in practice and the relationship between client behavior and insurance costs.