CDPH Lead Inspector/Assessor California State Practice Exam

Which factor typically increases the cost of occurrence-based insurance?

1. The number of claims filed

2. The length of the policy term

3. The amount of coverage purchased

4. The risk classification of the insured

The correct answer is: The risk classification of the insured

The risk classification of the insured is a primary factor influencing the cost of occurrence-based insurance. Insurers assess the risk associated with an individual or entity before determining premiums. Higher-risk classifications typically correlate with a greater likelihood of claims, which prompts insurers to charge higher premiums to offset the potential losses. Insurers classify risks based on a variety of factors, including the insured's history of claims, their operational environment, and specific characteristics of the insured entity. A higher classification indicates an increased chance of experiencing loss, leading to elevated insurance costs. This systematic approach ensures that premiums correlate proportionally with the likelihood of claims being filed. Other factors like the number of claims filed, the length of the policy term, and the amount of coverage purchased also influence insurance costs but do so in different contexts. For instance, a high number of claims can certainly lead to increases over time, but it is the initial risk evaluation and classification that fundamentally shapes the baseline premium rates.