What is the effect of adverse loss experience on the need to review a policy?

The correct answer highlights that adverse loss experience significantly impacts the re-evaluation of a policy. When an insurance company experiences higher-than-expected claims or adverse loss ratios, it often prompts a thorough review of the insured's policy. This is necessary to assess the current risk associated with the insured and to determine if changes to the policy are required.

Re-underwriting involves taking a closer look at the information provided during the policy’s initial underwriting process, as well as any changes in the circumstances surrounding the insured. This process allows the insurer to determine whether the current coverage terms, limits, and premiums are still appropriate in light of the adverse experience. Additionally, the insurer may consider implementing measures to mitigate future risks, such as requiring higher deductibles or implementing risk management strategies.

Understanding how adverse loss experience necessitates a policy review is crucial, as it reflects the insurance industry's need to proactively manage risk and maintain financial stability.