ABC Risk Assessment & Underwriting 3 — Questions and Answers
Question 1: Which document formally outlines an insurer's guidelines for acceptable risks, coverage limits, and rating criteria for its underwriters?
- Underwriting guidelines (Correct answer)
- Loss run report
- Reinsurance treaty
- Policy declarations page
Correct answer: Underwriting guidelines
Underwriting guidelines (or manuals) set the standards and authority levels within which individual underwriters must operate when evaluating submissions.
Question 2: A facultative reinsurance arrangement differs from a treaty arrangement primarily because:
- Each risk is negotiated individually rather than covered automatically under a standing agreement (Correct answer)
- Facultative covers an entire class of business automatically
- Treaty reinsurance requires per-risk approval from the reinsurer
- Facultative arrangements apply only to life insurance products
Correct answer: Each risk is negotiated individually rather than covered automatically under a standing agreement
Facultative reinsurance is placed risk-by-risk at the reinsurer's discretion, whereas treaty reinsurance automatically covers all risks within defined parameters.
Question 3: The combined ratio in insurance underwriting is calculated as:
- Loss ratio plus expense ratio (Correct answer)
- Net premiums written divided by surplus
- Investment income divided by earned premiums
- Incurred losses minus salvage and subrogation
Correct answer: Loss ratio plus expense ratio
A combined ratio below 100% indicates underwriting profitability; above 100% means the insurer is paying out more in losses and expenses than it collects in premiums.
Question 4: An underwriter discovers that a commercial auto fleet applicant has five at-fault accidents in 36 months. The MOST appropriate response is to:
- Decline or surcharge the risk based on the adverse loss history (Correct answer)
- Accept the risk at standard rates to remain competitive
- Defer to the sales team's recommendation without adjustment
- Issue the policy and notify the state insurance department
Correct answer: Decline or surcharge the risk based on the adverse loss history
A poor loss history is a primary underwriting red flag; declining or applying a significant surcharge protects the insurer's book of business.
Question 5: What is the purpose of a site inspection or risk survey in the commercial underwriting process?
- To verify application information and identify physical hazards not disclosed by the applicant (Correct answer)
- To set the final premium without actuarial input
- To fulfill a legal requirement for all personal lines policies
- To determine the market value of the insured property for tax purposes
Correct answer: To verify application information and identify physical hazards not disclosed by the applicant
A field inspection allows the underwriter or a risk engineer to confirm stated facts and uncover conditions that could affect the acceptance, rating, or coverage terms.
Question 6: Which underwriting tool uses historical loss data grouped by risk characteristics to estimate expected future losses for pricing purposes?
- Actuarial rate filing
- Loss development triangle (Correct answer)
- Schedule rating modification
- Excess and surplus lines endorsement
Correct answer: Loss development triangle
A loss development triangle tracks how incurred losses for a given accident year grow over time, enabling actuaries to project ultimate losses for pricing and reserving.
Question 7: A schedule rating modification allows an underwriter to adjust a risk's premium based on:
- Specific favorable or unfavorable characteristics not fully captured by experience rating (Correct answer)
- The insured's credit score alone
- Mandatory state-mandated rate adjustments only
- Investment returns on premium reserves
Correct answer: Specific favorable or unfavorable characteristics not fully captured by experience rating
Schedule rating credits or debits reflect individual risk attributes (e.g., management quality, safety programs) that experience rating may not yet reflect due to limited history.
ABC Risk Assessment & Underwriting 3
Which document formally outlines an insurer's guidelines for acceptable risks, coverage limits, and rating criteria for its underwriters?