An insurer that pays a high number of fraudulent claims will have to raise its premiums. What is a potential consequence?

An insurer that pays a high number of fraudulent claims will have to raise its premiums. What is a potential consequence?

• A. Lower profits.
• B. Raise premiums.
• C. Pay more claims.
• D. Tighten underwriting.

Answer: (B)

When fraud drives up the number of claims, the insurer’s actual losses rise and profitability suffers. The typical response to offset these higher costs is to raise premiums, so the price charged for coverage reflects the greater expected claims expense and helps restore profitability. Paying more claims is the cause of the issue, not the corrective action, and tightening underwriting is a related risk-control measure rather than the direct consequence described.

When fraud drives up the number of claims, the insurer’s actual losses rise and profitability suffers. The typical response to offset these higher costs is to raise premiums, so the price charged for coverage reflects the greater expected claims expense and helps restore profitability. Paying more claims is the cause of the issue, not the corrective action, and tightening underwriting is a related risk-control measure rather than the direct consequence described.