Property and Casualty Insurance Practice Exam

What is the primary function of underwriting in insurance?

1. To establish financial reserves for future claims.

2. To select certain types of risks and reject others.

3. To manage customer relations and service.

4. To determine regulatory compliance of policies sold.

The correct answer is: To select certain types of risks and reject others.

The primary function of underwriting in insurance is to select certain types of risks and reject others. Underwriters assess applications for insurance coverage to evaluate the risk involved in insuring a person or property. This process includes analyzing various factors such as the applicant's history, the type of coverage requested, and potential hazards associated with the risk. By effectively selecting risks, underwriters help ensure that the insurance company maintains a profitable portfolio. This process prevents the insurer from accepting excessively risky applicants whose likelihood of making claims could negatively impact the company's financial stability. Thus, underwriting plays a crucial role in balancing the insurer's risk exposure and in determining the terms and pricing of the insurance policy offered to the applicant. The other options, while relevant to the insurance process, do not capture the core function of underwriting as accurately. Establishing financial reserves, managing customer relations, and ensuring regulatory compliance are all important aspects of insurance operations but they do not specifically involve the risk assessment and selection process that defines underwriting.