Casualty Actuarial Society (CAS) Practice Exam

Why might an insurer encourage its insureds to improve risk control?

1. To increase the insureds' operational risks

2. To reduce errors and omissions claims

3. To decrease the premium volume

4. To collect more complaints

The correct answer is: To reduce errors and omissions claims

The correct answer highlights a critical aspect of risk management in the insurance industry. When insurers encourage their insureds to improve risk control, one of the primary motivations is to reduce errors and omissions claims. Effective risk control measures can significantly lower the likelihood of incidents that lead to claims. For example, enhancing safety protocols, implementing proper training, or upgrading facilities can minimize accidents and subsequent losses, which in turn reduces the frequency and severity of claims. When fewer claims are made, insurers not only preserve their loss ratios but can also pass on some benefits to their insureds, such as lower premiums or better coverage options. In contrast, the other options do not align with the primary goals of an insurer in promoting risk control. Increasing operational risks is counterproductive to an insurer's objectives, while decreasing premium volume does not inherently reflect a benefit from improved risk practices. Lastly, encouraging insureds to collect more complaints does not serve the purpose of risk control, as it may indicate failing practices rather than improvements. Therefore, the emphasis on reducing errors and omissions claims accurately represents the positive outcomes sought through enhanced risk management strategies.