Casualty Actuarial Society (CAS) Practice Exam

What is a potential outcome if an insurer broadens their underwriting selection criteria?

1. Improved profitability

2. Higher risk of losses

3. Fewer claims

4. Increased premiums

The correct answer is: Higher risk of losses

When an insurer broadens their underwriting selection criteria, they may begin to accept a wider range of applicants, including those who may represent a higher risk. This change typically results in a greater exposure to potential claims and losses since the insurer is not exclusively selecting lower-risk individuals or businesses. By accepting more applicants, especially those that are considered riskier, the insurer could face a higher frequency of claims being made. This increase in claims is the primary concern, as broader underwriting can lead to less predictability in loss experiences and ultimately compromise the insurer's financial stability. In contrast, while improved profitability, fewer claims, or increased premiums could be desired outcomes in some scenarios, they are less likely to occur as a direct result of broadening underwriting criteria. Therefore, the most plausible outcome is a higher risk of losses due to the inclusion of riskier policyholders.