What is the primary purpose of conducting a risk assessment in underwriting?

• A. To determine the maximum coverage limit
• B. To evaluate the likelihood of a claim based on applicant information
• C. To set premium rates for insurance policies
• D. To assess the company’s financial stability

Answer: (B)

The primary purpose of conducting a risk assessment in underwriting revolves around evaluating the likelihood of a claim based on the information provided by an applicant. Underwriters analyze various factors such as the individual's health, occupation, lifestyle, and past claims history to determine the potential risk they present to the insurance company. By accurately assessing this risk, underwriters can make informed decisions on whether to accept the application and under what terms. This process helps ensure that policies are issued to those who meet certain risk criteria, ultimately protecting the company from excessive claims.

Setting premium rates and determining coverage limits are certainly influenced by the risk assessment, but they are secondary to the initial evaluation of the applicant's potential for claiming. Similarly, while assessing a company's financial stability is crucial for its overall operation, it is not the direct aim of the underwriting risk assessment process. Instead, the assessment focuses on the individual policyholder's risk profile to maintain the insurer's financial health in the long term.