How does an insurance company assess the risk of an applicant?

An insurance company assesses the risk of an applicant primarily through underwriting, which involves a thorough analysis of the applicant's history and various relevant factors. Underwriting requires a comprehensive evaluation of information such as the applicant's medical history, lifestyle choices, occupation, and any previous insurance claims. This process helps the insurer determine the likelihood of a claim being made in the future and establishes suitable policy terms, including premiums. By examining these details, underwriters can categorize applicants into different risk levels, allowing for informed decision-making regarding coverage and pricing.

The other choices do not align with how insurers assess risk. Randomly selecting policies for review does not provide a reliable method of assessing individual applicant risk. Evaluating claims from other policyholders pertains more to the insurer's overall performance rather than assessing a specific applicant's risk. A public auction for policy terms is not a standard practice in the insurance industry, as terms and conditions are typically set based on individual underwriting assessments rather than through a competitive bidding process.