CAS CAS Property and Casualty Insurance Fundamentals 2 — Questions and Answers
Question 1: What distinguishes surplus lines insurance from admitted insurance in the US?
- Surplus lines insurers are not licensed in the state but may write risks that admitted carriers decline (Correct answer)
- Surplus lines insurers offer lower premiums than admitted carriers
- Surplus lines policies are backed by state guaranty funds
- Surplus lines carriers must file rates with state regulators
Correct answer: Surplus lines insurers are not licensed in the state but may write risks that admitted carriers decline
Surplus lines insurers operate outside normal state licensing requirements and state guaranty fund protection, filling coverage gaps for risks that admitted carriers won't write.
Question 2: What is a 'combined ratio' in property and casualty insurance?
- The sum of the loss ratio and the expense ratio, indicating overall underwriting profitability (Correct answer)
- The ratio of net premiums written to policyholder surplus
- The ratio of investment income to total premium revenue
- The ratio of reinsurance premiums ceded to gross written premium
Correct answer: The sum of the loss ratio and the expense ratio, indicating overall underwriting profitability
A combined ratio below 100% indicates underwriting profit; above 100% indicates an underwriting loss, though investment income may still make the line profitable overall.
Question 3: Which of the following is an example of a 'long-tail' line of business in casualty insurance?
- Medical malpractice liability (Correct answer)
- Homeowners property coverage
- Personal auto collision
- Inland marine coverage
Correct answer: Medical malpractice liability
Medical malpractice is a long-tail line because claims can be reported and settled many years after the policy period ends, creating significant reserving uncertainty.
Question 4: What does 'adverse development' mean in the context of loss reserves?
- Actual losses emerging higher than previously estimated reserves (Correct answer)
- A decline in premium volume due to competitive market conditions
- Negative investment returns on reserve assets
- Regulatory action requiring higher capital requirements
Correct answer: Actual losses emerging higher than previously estimated reserves
Adverse development occurs when actual claim payments and emerging losses exceed the amounts previously set aside as reserves, requiring reserve strengthening.
Question 5: In commercial property insurance, what does 'business interruption' coverage provide?
- Replacement of lost income and continuing expenses when a covered peril forces a business to suspend operations (Correct answer)
- Coverage for damage to business equipment and inventory only
- Liability protection for customers injured on business premises
- Coverage for employee theft and dishonesty losses
Correct answer: Replacement of lost income and continuing expenses when a covered peril forces a business to suspend operations
Business interruption insurance covers the income a business would have earned and necessary continuing expenses during the period of restoration after a covered property loss.
Question 6: What is the 'law of large numbers' and why is it fundamental to insurance?
- As the number of similar exposure units increases, actual loss experience approaches the expected (average) loss rate (Correct answer)
- Larger insurance companies are more profitable than smaller ones
- Premium rates increase as the number of policyholders grows
- Larger deductibles reduce claim frequency proportionally
Correct answer: As the number of similar exposure units increases, actual loss experience approaches the expected (average) loss rate
The law of large numbers allows insurers to predict losses with greater accuracy over large pools of similar risks, making the business of insurance mathematically feasible.
CAS CAS Property and Casualty Insurance Fundamentals 2
What distinguishes surplus lines insurance from admitted insurance in the US?