86. To ensure there is sufficient premium to pay policyholder losses, what relationship should exist between the cost of insurance and the risk?
Answer: B
Higher premiums should be paid for risks that are more likely to experience a loss.
To ensure sufficient premium to cover policyholder losses, there must be a direct correlation between the likelihood of a risk and the cost of insurance. Thus, risks that are more likely to result in a loss should be charged higher premiums.
A) Higher rates should be paid for risks that purchase higher coverage limits.
While it is true that higher coverage limits can lead to higher rates, this option does not address the fundamental relationship between risk and premium. The primary factor should be the likelihood of loss rather than the amount of coverage, making this option less relevant to the question.
B) Higher premiums should be paid for risks that are more likely to experience a loss.
This option accurately reflects the principle of risk-based pricing in insurance. Insurers assess the likelihood of loss and set premiums accordingly, ensuring that those who pose a higher risk contribute more to the pool that covers losses.
C) All risks should be subject to the same premium, regardless of the likelihood of loss.
This option is incorrect as it ignores the critical factor of risk assessment. Charging the same premium for all risks would not be financially viable, as it would not adequately fund losses incurred by higher-risk policyholders.
D) All risks should be subject to the same rate, regardless of the type of coverage purchased.
Similar to option C, this statement fails to consider the importance of risk differentiation. A uniform rate that disregards the type of coverage and associated risks would lead to imbalances and insufficient funds to cover losses.
Conclusion
Option B is definitively correct because it aligns with the fundamental principle of insurance: that premiums must reflect the risk of loss. Higher likelihood of loss necessitates higher premiums to ensure adequate funding for policyholder claims, while the other options fail to appropriately consider the relationship between risk and insurance costs.