Which of the following best describes what a guaranteed renewable provision allows in the context of accounting for insurance contracts?

• A. The policyholder to renew the insurance policy without the insurer being able to cancel it, although premiums may be increased for an entire class of policyholders.
• B. The policyholder to renew the policy at the same premium rate regardless of changes in risk.
• C. The insurer to increase premiums for individual policyholders based on their claims history.
• D. The insurer to cancel the policy at any time for any reason.

Answer: (A)

Verified step by step guidance

1. Understand the concept of a guaranteed renewable provision: This provision in insurance contracts allows the policyholder to renew their policy without the insurer being able to cancel it, ensuring continuity of coverage.
2. Clarify the implications of the provision: While the insurer cannot cancel the policy, they are allowed to increase premiums for an entire class of policyholders, typically based on factors like age or risk class, but not for individual policyholders based on their claims history.
3. Eliminate incorrect options: Review the provided options and rule out those that contradict the guaranteed renewable provision. For example, options suggesting cancellation by the insurer or fixed premium rates regardless of risk changes are inconsistent with the provision.
4. Focus on the correct description: The correct answer aligns with the principle that the policyholder can renew the policy without cancellation by the insurer, but premiums may be adjusted for a group of policyholders rather than individuals.
5. Summarize the reasoning: The guaranteed renewable provision ensures policyholder protection against cancellation while allowing insurers to manage risk by adjusting premiums for a class of policyholders, not based on individual claims history.