Final answer:
An insurance company can minimize loss exposure by preventing fraud, monitoring behaviors, and most effectively, by reinsuring risks. Reinsurance involves sharing risks with other entities to soften the impact of large claims, while behavioral monitoring and adjusting premiums aim to handle adverse selection and encourage responsible practices. Option B is correct.
Step-by-step explanation:
An insurance company can minimize exposure to loss by engaging in practices such as investigations to prevent insurance fraud and monitoring certain behaviors.
For instance, they might offer a lower rate on property insurance if the insured installs high-standard security and fire sprinkler systems, providing incentives for better risk management.
However, the best option among the choices given would be B. Reinsuring risks. This is because reinsurance is a financial management strategy that transfers part of the insurance company's risk portfolio to other parties to reduce the likelihood of paying a large obligation resulting from an insurance claim.
Insurance companies also try to categorize clients into different risk groups and adjust premiums accordingly, but this can lead to adverse selection. The companies may end up charging higher premiums to cover losses, which could discourage low-risk clients from buying insurance.
Adverse selection is another significant concern that insurance companies must contend with, leading to strategies that ensure both high and low-risk individuals are covered while maintaining profitability.