When a Fraternal Insurer Began Operations, It Asked Each Member

question 30

Multiple Choice

When a fraternal insurer began operations, it asked each member, regardless of age, to pay $20 per month to the fraternal's group life insurance plan. In exchange, each member received the same amount of life insurance. Soon younger members of the group began to drop out when they realized their premiums were subsidizing a group with a higher chance of loss. Which important underwriting principle was violated in this case?

• A) An underwriting profit should be attained.
• B) Moral hazard should be avoided.
• C) Insureds should be selected according to underwriting standards.
• D) There should be equity among policyholders.

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Definitions:

ROE

Return on Equity, a measure of financial performance calculated by dividing net income by shareholder's equity.

ROA

Return on assets (ROA) is a financial ratio that shows the percentage of profit a company earns in relation to its overall resources.

Liabilities

Measurable obligations resulting from a past transaction; they are expected to be settled in the future by transferring assets or providing services.