Question

b) Which of the following statements about underwriting standards is (are) true and explain why?

I. One purpose of underwriting standards is to reduce adverse selection against the insurer.

II. Equitable rates should be charged so that each group of policy owners pays its own way in terms of losses and expenses.

III. Insurance company must maintain sufficient investment income flows to cover the risk of negative insurance float.

Answer 1

Underwriting standards will be advocating reduction of adverse selection against the insurance and it will also advocate that equitable rates should be charged so that each group of policy owners will be paying its own way in terms of losses and expenses. These underwriting standard are more inclined towards promotion of high disclosure norms that will be reducing the risk of bad loans due to asymmetrical informations and elimination of adverse selection.

Correct answer will be-

(I)one purpose of underwriting standards is to reduce adverse selection against the insurer.

AND

(II) Equitable rates should be charged so that each group of policy owners pays its own way in terms of losses and expenses.