ACE Risk Assessment & Underwriting 2 — Questions and Answers
Question 1: Which ACORD form is primarily used to submit commercial property underwriting information to an insurer?
- ACORD 125 (Correct answer)
- ACORD 75
- ACORD 140
- ACORD 101
Correct answer: ACORD 125
ACORD 125 is the Commercial Insurance Application used to capture property and general liability risk data for underwriting.
Question 2: In underwriting, 'adverse selection' refers to which phenomenon?
- Insurers selecting only the best risks
- Higher-risk individuals being more likely to seek coverage (Correct answer)
- Underwriters rejecting applications without cause
- Agents submitting only profitable accounts
Correct answer: Higher-risk individuals being more likely to seek coverage
Adverse selection occurs when those with higher risk exposure are disproportionately drawn to purchase insurance, skewing the insurer's risk pool.
Question 3: A 'schedule rating' modification in underwriting allows the underwriter to do what?
- Apply a fixed rate across all accounts in a class
- Adjust the manual rate based on individual risk characteristics (Correct answer)
- Assign risks to reinsurance pools automatically
- Eliminate the need for loss history review
Correct answer: Adjust the manual rate based on individual risk characteristics
Schedule rating permits debits or credits to the manual rate to reflect specific risk features not captured in class rating.
Question 4: When reviewing a commercial risk, an underwriter finds the insured has no written safety program. This is best classified as which type of hazard?
- Physical hazard
- Moral hazard
- Morale hazard
- Management hazard (Correct answer)
Correct answer: Management hazard
Absence of a safety program reflects management hazard, indicating poor risk management practices that increase loss probability.
Question 5: Which underwriting concept describes the practice of spreading risk across many policyholders to minimize the impact of any single large loss?
- Risk retention
- Law of large numbers (Correct answer)
- Subrogation
- Indemnification
Correct answer: Law of large numbers
The law of large numbers allows insurers to predict losses more accurately as the insured pool grows, stabilizing results.
Question 6: In the context of ACORD standards, what does 'data element standardization' primarily benefit in the underwriting workflow?
- It restricts underwriters to approved risk classes
- It enables consistent data exchange between agencies and carriers (Correct answer)
- It replaces manual underwriting decisions with automation
- It limits the number of endorsements an insurer can offer
Correct answer: It enables consistent data exchange between agencies and carriers
ACORD's standardized data elements ensure that information flows accurately and consistently between trading partners, reducing errors.
Question 7: A surplus lines placement is typically required when what condition exists?
- The risk qualifies for preferred pricing
- No admitted insurer is willing to write the risk (Correct answer)
- The insured requests a higher deductible than standard
- The policy term exceeds three years
Correct answer: No admitted insurer is willing to write the risk
Surplus lines markets are accessed when standard admitted carriers decline to cover a risk due to its unusual or high-hazard nature.
ACE Risk Assessment & Underwriting 2
Which ACORD form is primarily used to submit commercial property underwriting information to an insurer?