In class rating, what is the consequence of grouping dissimilar risks?

In class rating, grouping dissimilar risks can lead to underpricing or overpricing of premiums. This occurs because when risks that have significantly different expected loss profiles are grouped together, the resulting premiums may not appropriately reflect the actual risk level associated with each group. For example, if a high-risk driver is grouped with low-risk drivers, the average premium charged may be too low for the high-risk individual or too high for the low-risk individuals. This discrepancy can ultimately distort the overall pricing structure, making it disadvantageous for the insurer and potentially leading to financial losses.

In contrast, accurate premium assessments rely on correctly classifying similar risks together so that each group's premium aligns with its actual risk, and streamlined underwriting procedures would also benefit from correctly identified risk categories. Increased customer loyalty may result from fair pricing, but it isn't a direct consequence of misgrouping risks. Therefore, the correct choice reflects the fundamental challenge in class rating when dissimilar risks are incorrectly evaluated together.