88. In disability income insurance, an insurer can reduce its risk by
Answer: C
In disability income insurance, an insurer can reduce its risk by lengthening the elimination period.
Lengthening the elimination period in disability income insurance allows insurers to reduce their risk by decreasing the number of claims they pay out. This is because a longer elimination period means that the insured must wait longer before benefits begin, which can filter out short-term disabilities that do not require extensive coverage.
A) broadening the definition of covered disability
Broadening the definition of covered disability would actually increase the insurer's risk rather than reduce it. By including more conditions and situations under which a claim can be made, the insurer would likely face more claims and higher payouts, counteracting efforts to manage risk.
B) lengthening the benefit period
Lengthening the benefit period would expose the insurer to greater risk, as it extends the time frame during which benefits are paid. This can lead to increased costs for the insurer if more individuals remain disabled for longer periods, making it a less effective strategy for risk reduction.
C) lengthening the elimination period
Lengthening the elimination period is an effective method for insurers to manage risk. By requiring insured individuals to wait longer before receiving benefits, insurers can limit the number of claims made for shorter-term disabilities, thereby decreasing their overall payout obligations and enhancing their financial stability.
D) removing an exclusion rider
Removing an exclusion rider would increase the insurer's risk exposure. Exclusion riders are typically used to limit coverage for certain high-risk conditions or activities. By eliminating these exclusions, the insurer would be liable for a broader range of claims, which could lead to higher losses.
Conclusion
Lengthening the elimination period is the most effective option for an insurer to reduce its risk in disability income insurance. This approach minimizes the likelihood of short-term claims that could otherwise lead to increased payouts. In contrast, the other options either increase risk or have no beneficial effect on the insurer's financial exposure.