CIA Risk Assessment & Underwriting 2 — Questions and Answers
Question 1: Which underwriting principle states that insured parties should not profit from an insurance claim beyond their actual loss?
- Subrogation
- Indemnity (Correct answer)
- Insurable interest
- Utmost good faith
Correct answer: Indemnity
The principle of indemnity requires that insurance restore the insured to their pre-loss financial position without allowing them to profit from a claim.
Question 2: An underwriter is evaluating a commercial property in a flood zone. Which factor would MOST significantly increase the risk tier assigned?
- Age of the building's electrical system
- Distance from the nearest fire station
- Proximity to a 100-year floodplain (Correct answer)
- Occupancy type of adjacent properties
Correct answer: Proximity to a 100-year floodplain
Location within or near a designated 100-year floodplain is a primary geographic risk factor that substantially elevates flood loss probability.
Question 3: What is the primary purpose of a schedule rating modification in commercial underwriting?
- To standardize premiums across all policyholders
- To adjust the base rate up or down for specific risk characteristics (Correct answer)
- To eliminate the need for physical inspections
- To cap the maximum premium charged
Correct answer: To adjust the base rate up or down for specific risk characteristics
Schedule rating allows underwriters to apply debits or credits to the manual rate based on individual risk features not captured in the class rate.
Question 4: In property underwriting, 'moral hazard' is best described as:
- Physical conditions that increase the probability of loss
- Carelessness resulting from having insurance coverage
- Intentional acts or dishonesty by the insured that increase risk (Correct answer)
- Environmental factors outside the insured's control
Correct answer: Intentional acts or dishonesty by the insured that increase risk
Moral hazard involves dishonest character or intent, such as an insured deliberately causing a loss or misrepresenting facts to obtain coverage.
Question 5: Which loss ratio formula is used by underwriters to evaluate profitability of a line of business?
- (Earned premiums / Incurred losses) × 100
- (Incurred losses / Earned premiums) × 100 (Correct answer)
- (Written premiums / Paid losses) × 100
- (Net premiums / Total expenses) × 100
Correct answer: (Incurred losses / Earned premiums) × 100
The loss ratio divides incurred losses by earned premiums and multiplies by 100 to express losses as a percentage of premium income.
Question 6: An applicant for homeowners insurance fails to disclose a prior arson conviction. This constitutes:
- A warranty breach
- Material misrepresentation
- Concealment (Correct answer)
- An exclusionary condition
Correct answer: Concealment
Concealment occurs when an insured intentionally withholds material information that would affect the insurer's decision to provide coverage or the premium charged.
Question 7: Which reinsurance arrangement provides coverage for aggregate losses exceeding a set retention over an entire policy year?
- Per-occurrence excess of loss
- Quota share treaty
- Stop-loss (aggregate excess of loss) (Correct answer)
- Facultative reinsurance
Correct answer: Stop-loss (aggregate excess of loss)
Stop-loss reinsurance protects the ceding insurer when total losses for a period exceed a predetermined aggregate retention amount.
CIA Risk Assessment & Underwriting 2
Which underwriting principle states that insured parties should not profit from an insurance claim beyond their actual loss?