Final answer:
An Insurance Surcharge is applied to a policyholder's premium when they have been convicted of certain traffic offenses or are at fault in an accident, which signals higher risk to the insurance company. These surcharges are used to compensate for increased risks but can discourage lower-risk individuals from buying insurance.
Step-by-step explanation:
Convictions that result in an Insurance Surcharge typically include traffic violations such as speeding, DUI/DWI, and at-fault accidents. An insurance surcharge is an additional fee added to an insurance premium after a policyholder has been convicted of a traffic violation or has been at fault in an accident. This fee serves as a penalty for high-risk behavior, which increases the chance of filing a future claim.
When an individual is convicted of a traffic offense, it signals to the insurance company that the driver is more likely to be involved in an accident, which is deemed a potential loss for the insurer. One role of insurance surcharges is to compensate for this increased risk. However, a consequence of insurance companies raising premiums to manage high-risk policyholders is the discouragement of low or medium-risk individuals from purchasing insurance, as they may perceive the insurance as too costly relative to their risk. This market reaction is important for insurance companies to consider when determining their pricing strategies.