Life & Health Insurance Practice Exam 2025 - Free Practice Questions and Study Guide

The primary goal of risk assessment for insurers is to avoid adverse selection. Adverse selection occurs when individuals with a higher risk of making a claim are more likely to purchase insurance, while those with lower risk opt out. This imbalance can lead to a situation where the insurer is left with a pool of higher-risk policyholders, ultimately increasing the likelihood of increased claim payouts and financial instability for the insurer.

By conducting thorough risk assessments, insurers can evaluate the likelihood of claims based on applicants' health, lifestyle, and other relevant factors. This allows them to make informed underwriting decisions, set appropriate premium rates, and ensure a balanced risk pool. Consequently, avoiding adverse selection helps maintain the insurer's profitability and sustainability in the long run.

The other options do not align with the fundamental objective of risk assessment in insurance. While minimizing payouts and maximizing commission rates may factor into an insurer's broader business strategy, they do not specifically target the issue of adverse selection. Additionally, exclusively approving applications would not consider the necessary level of risk evaluation, which is essential for safeguarding the insurance company’s financial health.