Chartered Life Underwriter Practice Exam 2025 - Free CLU Practice Questions and Study Guide

The primary role of an underwriter is to protect against adverse selection, which refers to the tendency of individuals with higher risks to seek out insurance coverage more than those with lower risks. This phenomenon occurs when an insurance company attracts a disproportionate number of high-risk policyholders because the lower-risk individuals opt out of purchasing insurance, believing they will not need it.

By employing various underwriting techniques, such as risk assessment, the underwriter can evaluate the risk profile of applicants and set premiums accordingly. This helps ensure that the insurance pool remains balanced with a mix of low, medium, and high-risk policyholders, which is essential for the financial viability of the insurance company. The underwriter's ability to identify and mitigate adverse selection directly contributes to the stability and profitability of the insurance operations.

Other factors mentioned, such as fraud, market volatility, and business risk, are also important considerations within the insurance industry, but they are not the primary focus of underwriting. Fraud pertains to deception for financial gain, and while underwriters need to be vigilant against fraudulent applications, their main task centers on assessing risk rather than investigating fraud. Market volatility relates to fluctuations in the financial markets affecting the insurance company's investments, and business risk refers to the overall economic risks an insurance company may