Final answer:
Field underwriting by a producer is a legal practice used to assess risks and separate insurance buyers into different risk groups to reduce costs for the insurer and address issues like adverse selection. It helps insurers decide appropriate premiums and ensure a stable insurance market.
Step-by-step explanation:
The question is regarding field underwriting by a producer in the context of the insurance industry. Field underwriting serves several purposes, such as helping to reduce costs to the insurer by initial risk assessment of the insurance applicants. It generally does not involve conducting a physical examination, which is commonly done later in the underwriting process. What it does involve is gathering preliminary information that can disclose whether the applicant engages in any hazardous activities that would increase their risk profile. Importantly, field underwriting is legal and it is a common practice used across many states to help insurers manage risks and set appropriate premiums for insurance policies.
One of the main issues in the insurance market is adverse selection, where individuals with higher risks are more likely to purchase insurance, leading to an imbalanced and potentially unprofitable insurance pool. By assessing risks early on through field underwriting, insurers can categorize applicants into different risk groups. They may also take additional measures, such as requiring cosigners or collateral in some financial instruments, to safeguard against potential losses. These activities help stabilize insurance markets by ensuring that not only high-risk individuals purchase insurance, but that there is also participation from those who present lower risks.