Question

Why do insurance companies differentiate between standard and sub-standard risks?

a.

To ensure fair treatment of policyholders

b.

To avoid losses from adverse selection

c.

To charge higher premiums for sub-standard risks

d.

To limit the number of individuals with sub-standard risks who get insured

Posted under IC22 Life Insurance Underwriting

Answer: (b).To avoid losses from adverse selection Explanation:If insurance companies do not differentiate between "standard" and "sub-standard"' risks, there will be a case of adverse selection, where more individuals with sub-standard risks will get insured, as a result of which insurance companies would have to suffer losses.

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Q. Why do insurance companies differentiate between standard and sub-standard risks?
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