Which of the following best describes the relationship between risk and premium in class rating?

In insurance, the relationship between risk and premium is fundamental to understanding how premiums are determined for policyholders. When we refer to class rating, it is a method used by insurers to categorize risks into classes based on shared characteristics.

A key principle in this context is that the higher the risk associated with a particular policyholder or group, the higher the premium that insurer will charge. This is because higher risks are more likely to result in claims; therefore, insurers need to adjust premiums to adequately cover the potential for loss. The reasoning is straightforward: if an individual or entity presents a greater chance of experiencing a loss, it's necessary for the insurer to collect more in premiums to offset that potential financial exposure.

This principle ensures that the pool of policyholders remains financially viable for the insurance company, as the premiums collected must be sufficient to pay for any claims that arise, along with administrative costs and profit margins. Thus, higher risk leads to higher premiums is the correct portrayal of the relationship between these two factors within the insurance industry.