ABC Risk Assessment & Underwriting 2 — Questions and Answers
Question 1: Which underwriting principle states that an insurer should not profit more from a loss than the actual financial harm suffered?
- Indemnity (Correct answer)
- Subrogation
- Utmost good faith
- Insurable interest
Correct answer: Indemnity
The principle of indemnity ensures the insured is restored to their pre-loss financial position, preventing profit from insurance claims.
Question 2: An underwriter reviews a commercial property application and notes the building lacks a sprinkler system. This finding is best described as a:
- Physical hazard (Correct answer)
- Moral hazard
- Morale hazard
- Speculative risk
Correct 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.
Question 3: What does a loss ratio measure in underwriting performance evaluation?
- Incurred losses divided by earned premiums (Correct answer)
- Written premiums divided by total expenses
- Net profit divided by gross written premium
- Claims paid divided by policies issued
Correct 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.
Question 4: A prospective insured conceals a prior arson conviction on a commercial fire application. This violates which insurance contract doctrine?
- Utmost good faith (uberrimae fidei) (Correct answer)
- Indemnity
- Contribution
- Proximate cause
Correct answer: Utmost good faith (uberrimae fidei)
Uberrimae fidei requires both parties to disclose all material facts honestly; concealing relevant criminal history voids this obligation.
Question 5: Which of the following best describes adverse selection in the context of underwriting?
- High-risk individuals disproportionately seeking insurance coverage (Correct answer)
- Insurers selecting only low-risk applicants for coverage
- Policyholders filing claims for pre-existing conditions
- Underwriters setting premiums below market rates
Correct 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.
Question 6: When an underwriter requires a higher deductible as a condition of coverage, the primary goal is to:
- Reduce moral hazard and eliminate small nuisance claims (Correct answer)
- Increase the insurer's gross written premium
- Transfer risk entirely to the reinsurer
- Comply with state minimum coverage mandates
Correct 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.
Question 7: In risk classification, a 'preferred' tier typically refers to applicants who:
- Present below-average risk characteristics relative to the standard population (Correct answer)
- Have the highest claim frequency of any underwriting tier
- Are ineligible for standard market coverage
- Require manual review by a senior underwriter
Correct 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.
ABC Risk Assessment & Underwriting 2
Which underwriting principle states that an insurer should not profit more from a loss than the actual financial harm suffered?