South Carolina Personal Lines Practice Exam

Why might an insurer decide to nonrenew a policy?

1. To reward long-term customers

2. Changes in risk assessment or claims history

3. To offer lower premiums

4. For regulatory compliances only

The correct answer is: Changes in risk assessment or claims history

An insurer may decide to nonrenew a policy primarily due to changes in risk assessment or claims history. This is a crucial factor because insurers continuously evaluate the risks associated with each policyholder. If the insured's risk profile has changed—perhaps due to an increase in claims, higher severity of losses, or changes in underwriting guidelines—the insurer may determine that the risk is no longer acceptable. For instance, if a homeowner has had multiple claims for water damage or theft in a short period, the insurer may view this pattern as an indication of a higher likelihood of future claims. Such an assessment could lead the insurer to nonrenew the policy as a way to mitigate potential losses. Nonrenewal in this context is not punitive but rather a business decision based on evolving risk factors. While long-term customer loyalty and lower premiums are desirable aspects of an insurance relationship, they typically do not drive the decision to nonrenew a policy. Regulatory compliance is also significant; however, it is primarily about adhering to external standards rather than the insurer's internal assessment of risk. Hence, the focus on changes in risk assessment and claims history is pivotal to understanding nonrenewal decisions.