Florida 2-20 General Lines Agent (Property, Casualty, Commercial Lines and Florida Law)General InsuranceHard
An insurance company's underwriting department is reviewing an application for a new homeowner's policy. They discover that the applicant has a history of frequent, small claims for water damage. How might this information typically influence the underwriting decision?
- AThe insurer will likely offer a policy with a reduced premium due to the applicant's prior experience with claims.
- BThe insurer will likely ignore the small claims history as it does not indicate a significant risk.
- CThe insurer may require a higher deductible or exclude water damage coverage due to the increased risk.
- DThe insurer is legally obligated to accept the application as long as the premium is paid.
Show answer & explanationAnswer & explanation
Correct answer: C. The insurer may require a higher deductible or exclude water damage coverage due to the increased risk.
Underwriting involves evaluating risk. A history of frequent small claims, especially for a specific peril like water damage, indicates a higher probability of future claims. Underwriters would likely respond by imposing stricter terms, such as a higher deductible or specific exclusions, to mitigate this increased risk.
Why the other options are wrong
- A. Frequent claims indicate higher risk, leading to higher premiums or stricter terms, not reduced premiums.
- B. Claims history is a critical factor in underwriting; it would not be ignored, especially if frequent.
- D. Insurers are generally not legally obligated to accept all applications; they can decline or offer modified terms.
Underwriting
The process by which an insurance company evaluates, classifies, and ultimately decides whether to accept or reject applications for insurance and at what price.
- Determines insurability and appropriate premium.
- Aims to select risks that meet the insurer's criteria.
- Uses various sources of information, including claims history.
Memory trick: Underwriting is like a risk detective, finding clues to set the premium correctly.