Washington Life Producer Practice Exam

What is the primary responsibility of an underwriter to an insurer?

1. Increase the company’s profit margin

2. Protect against adverse selection

3. Ensure customer satisfaction

4. Manage insurance claims

The correct answer is: Protect against adverse selection

The primary responsibility of an underwriter to an insurer is to protect against adverse selection. Adverse selection occurs when individuals with a higher risk of loss are more likely to seek insurance compared to those with lower risk. This imbalance can lead to higher than expected claims, which negatively impacts the insurer's profitability. Underwriters assess the risk associated with each application for insurance coverage, evaluating factors such as health history, occupation, and lifestyle to determine the likelihood of a claim being filed. By carefully selecting which risks to insure and at what rates, underwriters help ensure that the insurer maintains a balanced portfolio of policyholders. This process is crucial for the financial stability of the insurance company, as it helps to mitigate losses and manage overall risk exposure. While increasing the company's profit margin, ensuring customer satisfaction, and managing insurance claims are important aspects of an insurance operation, they stem from the foundational work of underwriters in evaluating and managing risk. Without effective underwriting practices to guard against adverse selection, an insurer’s profitability and viability could be jeopardized.