Risk Assessment & Underwriting Flashcards

Which ratio do underwriters use to measure the percentage of premium consumed by losses and loss adjustment expenses?

Answer: Loss ratio

The loss ratio equals incurred losses plus LAE divided by earned premium, indicating how much of premium pays for claims.

Under experience rating, a risk with actual losses lower than expected losses will receive which modification?

Answer: A credit modification reducing the premium

Favorable loss experience relative to expected losses results in a credit mod, rewarding the insured with lower premium.

Which ACORD form captures inland marine underwriting information for a commercial floater?

Answer: ACORD 137

ACORD 137 is the Inland Marine Application used to submit floater and commercial inland marine risks to underwriters.

A facultative reinsurance arrangement differs from treaty reinsurance primarily because it involves which characteristic?

Answer: Individual underwriting of each risk by the reinsurer

Facultative reinsurance requires the reinsurer to individually evaluate and accept or reject each risk submitted.

When an underwriter evaluates 'replacement cost value' for a commercial building, what key principle guides this assessment?

Answer: The cost to rebuild the structure with like kind and quality materials

Replacement cost value reflects the expense to reconstruct the building at current labor and material prices without deducting depreciation.

Which underwriting tool allows an insurer to set maximum limits of liability it will retain on any single risk?

Answer: Retention limit

A retention limit defines the maximum loss amount the insurer keeps for its own account before reinsurance responds.

In commercial underwriting, 'moral hazard' is best illustrated by which scenario?

Answer: An insured who inflates a loss claim to profit from insurance

Moral hazard involves intentional dishonesty or fraud, such as deliberately exaggerating a claim for financial gain.