PSI Ohio Insurance Practice Exam

What term describes the financial risk that an insurer may have to pay out more than it receives in premiums?

1. Underwriting risk

2. Investment risk

3. Operational risk

4. Loss ratio

The correct answer is: Underwriting risk

The term that describes the financial risk an insurer may face when it has to pay out more in claims than it collects in premiums is underwriting risk. Underwriting risk arises from the insurer's assessment of expected losses based on the premiums charged for policies. If the claims exceed the projected amounts, the insurer could face financial instability, as it may have underestimated the risks associated with the policies it insured. This concept is fundamental in the insurance industry, as insurers must carefully evaluate the risks they take on to maintain profitability and solvency. While investment risk refers to the potential for loss in an insurer's investment portfolio, and operational risk involves risks stemming from internal processes or systems, these do not directly relate to the insurer's obligations to pay claims compared to premium income. Loss ratio, on the other hand, is a metric that expresses the relationship between claims paid and premiums earned, but it does not encompass the broader financial risk associated with underwriting. Thus, underwriting risk is the most appropriate term for the described situation.