California Life and Health Insurance Practice Exam

What type of risk might an underwriter assess when evaluating a new applicant for a policy?

1. Lifestyle risk

2. Dividend risk

3. Coverage risk

4. Legal risk

The correct answer is: Lifestyle risk

An underwriter assesses lifestyle risk when evaluating a new applicant for a policy because it encompasses various factors related to the applicant's day-to-day activities, habits, and overall health. This includes considerations of smoking status, alcohol consumption, exercise habits, and occupation, among other aspects. By understanding the lifestyle choices of the applicant, an underwriter can better gauge the level of risk posed to the insurer. High-risk lifestyles could lead to a higher likelihood of illness or injury, resulting in an increased likelihood of a claim being made against the insurance policy. The other types of risks mentioned do not specifically pertain to the personal health and habits of the applicant in the direct way that lifestyle risk does. Dividend risk involves the variability of dividends that can be paid to policyholders, coverage risk relates to whether the coverage provided meets the need of the insured, and legal risk pertains to potential legal liabilities or issues that an insurer may face. While these risks may be factors in the broader context of insurance underwriting or company operation, they do not focus on the applicant's risk profile in the same manner as lifestyle risk does.