AD Banker Comprehensive Practice Exam

Gathering information about the applicant for the insurer to avoid adverse selection is known as:

1. Field underwriting

2. Principle of indemnity

3. Law of large numbers

4. Application process

The correct answer is: Field underwriting

In the context of insurance, gathering information about the applicant to prevent adverse selection is referred to as field underwriting. This process involves the insurer collecting pertinent details regarding the applicant’s health, financial status, previous insurance history, and other relevant factors before an insurance policy is issued. Field underwriting is critical because it helps the insurer assess the risk associated with insuring the individual. Adverse selection occurs when there is an imbalance in the types of individuals applying for insurance; typically, those who are likely to make a claim are more inclined to seek coverage. By thoroughly gathering and evaluating applicant information, insurers can make informed decisions, set appropriate premiums, and maintain a balanced risk pool. The other choices represent important concepts in insurance but do not specifically focus on the act of gathering information for underwriting purposes. The principle of indemnity refers to the idea that insurance should restore the insured to their financial position before a loss occurred. The law of large numbers relates to statistical methods that help predict outcomes in large samples over time. The application process is a step in the broader underwriting procedure but doesn’t capture the proactive efforts made in field underwriting to mitigate risks associated with adverse selection.