What does "underwriting risk" refer to in life insurance?

Underwriting risk in life insurance specifically addresses the uncertainty that an insurance company encounters when evaluating an applicant's likelihood of making a claim. This involves assessing various risk factors such as the applicant's age, health status, lifestyle choices, and medical history. Insurers use this assessment to determine not only the eligibility for coverage but also the appropriate pricing of the policy.

If an insurance company fails to accurately assess these risks, it might either underprice the policy, resulting in financial losses when claims exceed expectations, or overprice it, which could lead to a lack of competitiveness in the market. Understanding underwriting risk is crucial for insurers to build a sustainable business model and maintain profitability while providing the necessary coverage to policyholders.

The other options describe different aspects of risk within the insurance context but do not encapsulate the meaning of underwriting risk in the same way. For example, pricing risk pertains more to economic factors influencing policy costs, while the risk of misrepresentation focuses on the honesty of the policyholder's disclosure. Similarly, market fluctuation risk refers to external economic conditions affecting investment returns, rather than the intrinsic evaluation of individual applicants inherent in underwriting.