Which action is least likely to improve an insurer's underwriting results in the near term?

Which action is least likely to improve an insurer's underwriting results in the near term?

• A. Increasing reserves for future claims
• B. Improving loss control measures
• C. Raising premiums gradually
• D. Relying on policyholders' surplus to absorb losses

Answer: (D)

The main idea is that near-term underwriting results improve when premiums rise or losses and expenses fall. Using policyholders’ surplus to absorb losses doesn’t change any of those operating factors; it simply borrows from existing capital to cushion a shortfall. In other words, it doesn’t alter pricing, risk control, or the recognition of losses, so it won’t actively improve the underwriting result in the near term. Increasing reserves for future claims, while important for long-term solvency and accuracy of estimates, reduces current period earnings by recognizing more anticipated losses now. Improving loss control lowers actual losses, directly improving the underwriting result in the near term. Raising premiums gradually increases expected premium income, which can improve profitability if the market tolerates the higher prices.

The main idea is that near-term underwriting results improve when premiums rise or losses and expenses fall. Using policyholders’ surplus to absorb losses doesn’t change any of those operating factors; it simply borrows from existing capital to cushion a shortfall. In other words, it doesn’t alter pricing, risk control, or the recognition of losses, so it won’t actively improve the underwriting result in the near term.

Increasing reserves for future claims, while important for long-term solvency and accuracy of estimates, reduces current period earnings by recognizing more anticipated losses now. Improving loss control lowers actual losses, directly improving the underwriting result in the near term. Raising premiums gradually increases expected premium income, which can improve profitability if the market tolerates the higher prices.