Risk Assessment & Underwriting Flashcards
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Read the first 7 Risk Assessment & Underwriting flashcards as text
Which underwriting principle states that an insurer should not profit more from a loss than the actual financial harm suffered?
Answer: Indemnity
The principle of indemnity ensures the insured is restored to their pre-loss financial position, preventing profit from insurance claims.
An underwriter reviews a commercial property application and notes the building lacks a sprinkler system. This finding is best described as a:
Answer: Physical hazard
A physical hazard is a tangible condition—such as the absence of fire suppression equipment—that increases the probability or severity of a loss.
What does a loss ratio measure in underwriting performance evaluation?
Answer: Incurred losses divided by earned premiums
The loss ratio (incurred losses ÷ earned premiums) is a primary metric underwriters use to assess the profitability of a book of business.
A prospective insured conceals a prior arson conviction on a commercial fire application. This violates which insurance contract doctrine?
Answer: Utmost good faith (uberrimae fidei)
Uberrimae fidei requires both parties to disclose all material facts honestly; concealing relevant criminal history voids this obligation.
Which of the following best describes adverse selection in the context of underwriting?
Answer: High-risk individuals disproportionately seeking insurance coverage
Adverse selection occurs when those with higher-than-average risk are more motivated to purchase coverage, skewing the insurer's risk pool negatively.
When an underwriter requires a higher deductible as a condition of coverage, the primary goal is to:
Answer: Reduce moral hazard and eliminate small nuisance claims
Higher deductibles shift a portion of risk to the insured, encouraging loss prevention and eliminating small claims that cost more to process than they are worth.
In risk classification, a 'preferred' tier typically refers to applicants who:
Answer: Present below-average risk characteristics relative to the standard population
Preferred-tier applicants exhibit favorable risk characteristics (e.g., clean loss history, strong financials), qualifying them for lower premiums than standard-tier insureds.