Final answer:
Underwriters assess risks based on factors like c) loss potential, risk classification, financial stability, and policy terms. Moral hazard and adverse selection are challenges they face in categorizing individuals and determining insurance premiums.
Step-by-step explanation:
Underwriting Parameters for Risk Decision
When underwriters make decisions on particular risks, they evaluate several parameters.
Although the student's question provides multiple-choice options, four critical parameters for this context include: c) loss potential, risk classification, financial stability, and policy terms.
These factors are considered to evaluate if the risk is insurable and at what cost.
Loss potential refers to the possible financial cost in the event of a claim. Risk classification attempts to categorize individuals based on the likelihood of a claim, as described with the example of drivers with different accident histories.
The financial stability of the insured can demonstrate their ability to pay premiums, while policy terms such as deductibles and limits play a role in determining risk-sharing between the insurer and the insured.
The challenges of moral hazard and adverse selection arise within these decisions.
Moral hazard is when insured parties might engage in riskier behavior because they have coverage, while adverse selection occurs when insurance is more likely to be purchased by those who will need it most, potentially leading to losses for the insurer.
These factors complicate the risk classification process and ultimately affect the underwriting decision and insurance premiums.