What is the impact of risk on insurance costs?

The correct choice reflects the fundamental principle of insurance underwriting: higher risk typically leads to higher premiums. This principle is grounded in the basic function of insurance, which is to pool risk among many individuals. When a policyholder presents a higher risk—whether due to health, lifestyle, occupation, or location—insurers anticipate a higher likelihood of claims. Consequently, in order to cover potential losses, insurers need to charge higher premiums.

In essence, when risk increases, so does the potential financial exposure for the insurance company. To mitigate this exposure and ensure financial viability, insurers adjust premiums accordingly. This process is also influenced by actuarial analyses, which assess the likelihood of various risks resulting in claims based on historical data.

Understanding this dynamic is crucial for both insurance providers and consumers, as it highlights the relationship between risk assessment and premium pricing in the insurance industry.