ACE Risk Assessment & Underwriting 3 — Questions and Answers
Question 1: Which ratio do underwriters use to measure the percentage of premium consumed by losses and loss adjustment expenses?
- Combined ratio
- Loss ratio (Correct answer)
- Expense ratio
- Retention ratio
Correct answer: Loss ratio
The loss ratio equals incurred losses plus LAE divided by earned premium, indicating how much of premium pays for claims.
Question 2: Under experience rating, a risk with actual losses lower than expected losses will receive which modification?
- A debit modification increasing the premium
- A credit modification reducing the premium (Correct answer)
- No modification because experience rating only applies to large risks
- A reinsurance surcharge
Correct 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.
Question 3: Which ACORD form captures inland marine underwriting information for a commercial floater?
- ACORD 137 (Correct answer)
- ACORD 125
- ACORD 163
- ACORD 80
Correct answer: ACORD 137
ACORD 137 is the Inland Marine Application used to submit floater and commercial inland marine risks to underwriters.
Question 4: A facultative reinsurance arrangement differs from treaty reinsurance primarily because it involves which characteristic?
- Automatic acceptance of all risks ceded
- Individual underwriting of each risk by the reinsurer (Correct answer)
- Coverage only for catastrophic losses
- A fixed quota share percentage for all policies
Correct answer: Individual underwriting of each risk by the reinsurer
Facultative reinsurance requires the reinsurer to individually evaluate and accept or reject each risk submitted.
Question 5: When an underwriter evaluates 'replacement cost value' for a commercial building, what key principle guides this assessment?
- The market sale price of the property
- The cost to rebuild the structure with like kind and quality materials (Correct answer)
- The original purchase price minus depreciation
- The assessed value for property tax purposes
Correct 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.
Question 6: Which underwriting tool allows an insurer to set maximum limits of liability it will retain on any single risk?
- Coinsurance clause
- Retention limit (Correct answer)
- Deductible schedule
- Rating bureau filing
Correct answer: Retention limit
A retention limit defines the maximum loss amount the insurer keeps for its own account before reinsurance responds.
Question 7: In commercial underwriting, 'moral hazard' is best illustrated by which scenario?
- A warehouse roof in poor structural condition
- An insured who inflates a loss claim to profit from insurance (Correct answer)
- A restaurant located in a high-crime neighborhood
- A business that lacks fire suppression systems
Correct 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.
ACE Risk Assessment & Underwriting 3
Which ratio do underwriters use to measure the percentage of premium consumed by losses and loss adjustment expenses?