Maryland Life and Health Insurance License Practice Exam

What does the Group Life underwriting risk selection process help protect against?

1. Underinsurance

2. Adverse selection

3. Overinsurance

4. Premium escalation

The correct answer is: Adverse selection

The Group Life underwriting risk selection process is designed to mitigate adverse selection, which occurs when individuals with a higher likelihood of claiming insurance tend to enroll in the insurance plan more than those with a lower likelihood. This phenomenon can lead to an unbalanced risk pool where the number of high-risk individuals exceeds low-risk individuals, resulting in increased claims and potential financial instability for the insurer. By implementing a thorough underwriting risk selection process, insurance companies can evaluate the health and demographics of the group as a whole rather than solely assessing individual applicants. This collective assessment allows insurers to set premiums based on the overall risk profile of the group while maintaining a diverse mix of risk. Ultimately, this process helps keep premiums stable and the insurance product viable for the entire group, reducing the chances of adverse selection impacting the insurer's financial health. While the other options relate to aspects of insurance practices, they do not directly address the protection against the specific risks posed by adverse selection. Underinsurance pertains to insufficient coverage levels, overinsurance refers to excessive coverage leading to unnecessary costs, and premium escalation involves increasing premiums over time regardless of the group’s risk characteristics, none of which are the primary focus of the underwriting risk selection process in group life insurance.