Insurance companies determine risk exposure by which of the following methods?

• A. Setting premiums based solely on customer preferences
• B. Analyzing statistical data and probability models
• C. Randomly selecting risk categories for clients
• D. Using government mandates to assign risk levels

Answer: (B)

Verified step by step guidance

1. Understand that insurance companies assess risk exposure to set appropriate premiums and manage potential losses.
2. Recognize that setting premiums based solely on customer preferences does not accurately reflect the actual risk involved.
3. Know that randomly selecting risk categories would lead to inconsistent and unfair pricing, which is not practical.
4. Identify that government mandates may influence regulations but do not directly determine individual risk levels for clients.
5. Conclude that insurance companies primarily rely on analyzing statistical data and probability models to estimate the likelihood and cost of claims, which allows them to categorize risk accurately and set premiums accordingly.