Question

An insurer decides to discontinue writing a class of workers compensation insureds because losses on the business have exceeded expectations. Instead, in an effort to maximize its return on equity, the insurer plans to use its resources to increase the volume of accounts in an area that offers more promising returns. This need to redirect the focus for desired business is an example of an underwriting constraint due to?

1) Risk management
2) Market conditions
3) Regulatory requirements
4) Financial considerations

Answer 1

The insurer's decision to stop writing a particular class of workers compensation insurance due to unexpected losses and reallocate resources is due to financial considerations. It's a strategy for risk management, aimed at maximizing return on equity by avoiding adverse selection and unsustainable market conditions.

Step-by-step explanation:

The insurer's need to redirect the focus for desired business due to losses on a class of workers compensation insureds exceeds expectations is an example of an underwriting constraint due to financial considerations. In order to maximize return on equity, the insurer opts to reallocate resources to areas with more promising returns. This decision is influenced by the need for risk management, which includes classifying buyers into risk groups to mitigate the problem of adverse selection and adjusting premiums to balance the insurer's risk exposure. If premiums are raised too high to cover high-risk individuals, people with lower risk may be discouraged from buying insurance, leading to an unsustainable insurance market. As such, the insurer may decide to discontinue offering insurance to high-risk groups or charge them higher premiums to avoid financial losses.