Which of the following describes the primary function of insurance rates?

The primary function of insurance rates is to cover the risks assumed by the insurer. Insurance operates on the principle of risk pooling, where premiums collected from policyholders are used to pay for the claims of those who experience a loss. When setting insurance rates, insurers analyze various factors such as historical data, types of coverage, and underlying risks associated with the insured entities. The rates must be sufficient not only to cover expected claims but also to account for operational costs and ensure the financial stability of the insurance company.

By accurately assessing and pricing the risk, insurers are able to fulfill their obligation to pay claims while remaining economically viable. Therefore, the establishment of insurance rates serves a fundamental purpose in balancing the financial needs of the insurer with the coverage requirements of policyholders. This foundational aspect of insurance emphasizes why the function of rates is critical to the industry.

The other options, while they may relate to aspects of insurance, do not capture the primary purpose of insurance rates as directly as the correct answer does. Policyholder eligibility and managing expectations are relevant but secondary functions, while providing a competitive advantage is a marketing strategy rather than a primary function of rates themselves.