Question

65. To achieve the profitable distribution of exposures,

(Choose from the following options)
1. The most coverage goes to average risks and preferred risks, while less goes to poor risks.
2. Poor risks and average risks make up the majority of coverage.
3. A majority of coverage goes to preferred risks.
4. Preferred risks and poor risks are balanced, with average risks in the middle.

Answer 1

To achieve profitable distribution of exposures in insurance, the most coverage should be given to average and preferred risks, with less to poor risks, ensuring that premiums cover claims, operational costs, and profits.

Step-by-step explanation:

To achieve the profitable distribution of exposures, the correct answer is: 1. The most coverage goes to average risks and preferred risks, while less goes to poor risks. This approach aligns with the fundamental law of insurance, which stipulates that the average person's payments into insurance over time must adequately cover the average person's claims, the costs of running the company, and provide a margin for the firm's profits.

When managing risk groups, it's important for an insurance company to differentiate between those with lower risks (preferred risks) and those with higher risks (poor risks). Actuarially fair insurance policies aim to match the premiums paid to the expected benefits received, thus distributing coverage more heavily on those less likely to make claims and conservatively on high-risk groups.