Question 38

An insurer can reduce its risk by lengthening the elimination period.

Lengthening the elimination period in disability income insurance allows the insurer to mitigate its risk by ensuring that benefits are not paid out until a longer duration of disability has elapsed. This approach reduces the number of claims the insurer must pay in the early stages of a disability.

A) Broadening the definition of covered disability

Broadening the definition of covered disability would likely increase the insurer's risk rather than reduce it. By expanding what qualifies as a disability, more claims may be filed, leading to higher payouts and increased financial exposure for the insurer.

B) Lengthening the benefit period

Lengthening the benefit period would increase the insurer's risk because it extends the duration for which benefits are paid. This move would likely lead to greater financial liability if a policyholder remains disabled for an extended time, contrary to reducing risk.

C) Lengthening the elimination period

Lengthening the elimination period effectively reduces the insurer's risk by delaying the start of benefit payments. This means that the insurer can avoid paying benefits for a longer time, which decreases the likelihood of claims being made during shorter-term disabilities.

D) Removing an exclusion rider

Removing an exclusion rider would increase the insurer's risk because it eliminates specific limitations on coverage. This could lead to more claims being filed, particularly for conditions that were previously excluded, thereby increasing the insurer's financial exposure.

Conclusion

The correct answer, lengthening the elimination period, directly reduces the insurer's risk by postponing the start of benefit payments, thereby minimizing the number of early claims. In contrast, the other options either maintain or exacerbate risk exposure, underscoring why they are not viable strategies for risk reduction in disability income insurance.