CIA Risk Assessment & Underwriting 3 — Questions and Answers
Question 1: When underwriting a manufacturing facility, which construction type generally receives the most favorable rating?
- Frame construction
- Joisted masonry
- Fire-resistive construction (Correct answer)
- Non-combustible construction
Correct answer: Fire-resistive construction
Fire-resistive construction, featuring steel or concrete frames with fire-rated walls and floors, offers the greatest resistance to structural damage and receives the best underwriting treatment.
Question 2: A property underwriter calculates a 'probable maximum loss' (PML). What does this estimate represent?
- The average expected annual loss from all perils
- The worst-case loss assuming all safety systems fail simultaneously
- The largest loss likely to occur given functioning fire protection (Correct answer)
- The replacement cost value of the insured property
Correct answer: The largest loss likely to occur given functioning fire protection
PML estimates the maximum loss expected under adverse but realistic conditions, assuming normal protective systems such as sprinklers are functioning.
Question 3: Under the ISO Commercial Lines Manual, which protection class designation indicates the LOWEST level of fire protection?
- Class 1
- Class 5
- Class 8B
- Class 10 (Correct answer)
Correct answer: Class 10
ISO Protection Class 10 designates properties with no recognized fire protection, resulting in the highest fire insurance rates.
Question 4: Which underwriting tool is specifically used to evaluate the acceptability of large individual risks that fall outside standard market guidelines?
- Excess and surplus (E&S) lines placement (Correct answer)
- Advisory organization rating bureaus
- Inland marine floaters
- Retrospective rating plans
Correct answer: Excess and surplus (E&S) lines placement
Excess and surplus lines insurers are authorized to write non-standard risks that admitted carriers decline, providing a market for hard-to-place exposures.
Question 5: An underwriter applies a 'coinsurance clause' to a commercial property policy. What is the primary purpose of this clause?
- To require the insured to purchase coverage from multiple insurers
- To ensure the insured carries insurance equal to a minimum percentage of property value (Correct answer)
- To split losses proportionally between insured and insurer
- To cap the insurer's liability to a fixed dollar amount
Correct answer: To ensure the insured carries insurance equal to a minimum percentage of property value
The coinsurance clause requires insureds to maintain coverage at a specified percentage (commonly 80% or 90%) of replacement cost to avoid a penalty at the time of loss.
Question 6: In workers' compensation underwriting, the 'experience modification factor' (EMR) is derived from:
- The insured's industry classification and state rates
- A comparison of the insured's actual losses to expected losses for their class (Correct answer)
- The total payroll divided by the number of employees
- A state-mandated fixed rate for each hazard group
Correct answer: A comparison of the insured's actual losses to expected losses for their class
The EMR compares an employer's actual loss experience to the statistically expected losses for similar businesses, adjusting premiums to reflect individual risk quality.
Question 7: Which term describes the practice of an insurer limiting the total amount of risk it retains on any single loss occurrence?
- Risk pooling
- Net retention limit (Correct answer)
- Spread of risk
- Adverse selection
Correct answer: Net retention limit
The net retention limit is the maximum loss amount an insurer keeps for its own account on any single risk or occurrence before reinsurance responds.
CIA Risk Assessment & Underwriting 3
When underwriting a manufacturing facility, which construction type generally receives the most favorable rating?