The Smidlap Insurance Co made sure its underwriting guidelin

The Smidlap Insurance Co. made sure its underwriting guidelines prevented customers from obtaining insurance from Smidlap immediately before they were highly likely to sustain a covered loss. Smidlap’s underwriting guidelines were directed at achieving which of the following purposes?

Select one:

a. Classifying and pricing accounts

b. Review and revise pricing plans

c. Evaluate loss experience

d. Prevent adverse selection

Solution

d. Prevent adverse selection.

Adverse selection occurred because of asymmetric information. Buyer has more information than seller.

This can be avoided by insurance companies by charging higher premium.