PSI Life Exam Practice Test

What is one of the main goals of an underwriter in the insurance industry?

1. Increase policy sales

2. Protect the insurer against adverse selection

3. Assist policyholders with claims

4. Reduce administrative costs

The correct answer is: Protect the insurer against adverse selection

One of the primary goals of an underwriter in the insurance industry is to protect the insurer against adverse selection. Adverse selection occurs when there is an imbalance in the risk profile of those seeking insurance; for example, individuals who are more likely to make claims are more motivated to purchase insurance. Underwriters assess the risk associated with applicants by evaluating their health, lifestyle, and other relevant factors before issuing a policy. This careful analysis aims to ensure that the insurer only takes on risks that align with their criteria for profitability and sustainability. By managing risk effectively, underwriters help prevent the insurer from being disproportionately exposed to high-risk individuals, which could lead to financial losses. While increasing policy sales, assisting policyholders with claims, and reducing administrative costs are important functions in the insurance arena, they do not directly tackle the critical issue of adverse selection. Underwriting is fundamentally about risk management, making it essential to safeguard the business against unforeseen liabilities.