PSI Ohio Insurance Practice Exam

Which of the following statements is correct regarding underwriting decisions?

1. All applicants must be accepted.

2. Underwriters have total discretion based on personal judgment.

3. Underwriting decisions are based on objective data and analysis.

4. Underwriting is not necessary for small policies.

The correct answer is: Underwriting decisions are based on objective data and analysis.

Underwriting decisions are fundamentally based on objective data and analysis, which is essential for assessing risk and determining the terms of insurance coverage. Underwriters evaluate a range of factors, including the applicant's history, credit scores, health assessments, and other relevant information to make informed decisions. This process helps insurers establish appropriate premiums and coverage limits based on the perceived risk associated with insuring each applicant. The reliance on objective data ensures consistency and fairness in underwriting practices. While underwriters do have some level of discretion, their decisions are grounded in established guidelines and statistical analysis rather than purely personal judgment. This promotes a structured approach to risk assessment that is critical to maintaining the financial stability of the insurance provider. In contrast, the other statements suggest misconceptions about the underwriting process, such as the notion that all applicants must be accepted, which would undermine the insurer's risk management, or that underwriting isn't necessary for small policies, which overlooks the importance of assessing risk no matter the policy size.