CRU Risk Assessment & Mitigation 3 — Questions and Answers
Question 1: An underwriter reviews a home with a wood-burning fireplace and no documentation of chimney maintenance. This is best classified as which type of hazard?
- Moral hazard
- Morale hazard
- Physical hazard (Correct answer)
- Legal hazard
Correct answer: Physical hazard
An unmaintained chimney is a physical hazard—a tangible condition of the property that increases the probability of loss through fire or carbon monoxide exposure.
Question 2: Under the concept of 'adverse selection,' an insurer that offers rates below market average should expect:
- A portfolio with fewer high-risk applicants than average
- A disproportionate influx of higher-risk applicants seeking the low price (Correct answer)
- Improved loss ratios due to competitive pricing strategies
- A balanced mix of risk profiles identical to the general market
Correct answer: A disproportionate influx of higher-risk applicants seeking the low price
Adverse selection occurs when below-market pricing attracts a higher concentration of bad risks, as better-risk applicants find adequate coverage elsewhere at similar prices.
Question 3: A property in a coastal area has a hip roof rather than a gable roof. From a wind risk perspective, this is:
- A negative factor because hip roofs trap wind beneath the eaves
- A positive factor because hip roofs have superior wind resistance (Correct answer)
- Neutral because roof shape has no bearing on wind performance
- A negative factor because hip roofs are more expensive to repair
Correct answer: A positive factor because hip roofs have superior wind resistance
Hip roofs have four sloping sides that deflect wind more aerodynamically than gable roofs, making them significantly more resistant to high-wind events.
Question 4: A homeowner has a trampoline on the property but has erected a six-foot fence around it with a locked gate. The underwriter should:
- Automatically decline the risk regardless of mitigation measures
- Consider the fencing as a partial mitigation but still note the elevated liability (Correct answer)
- Treat the risk identically to a property without a trampoline
- Issue a standard policy with no notation since mitigation is complete
Correct answer: Consider the fencing as a partial mitigation but still note the elevated liability
While fencing reduces access, trampolines remain a significant liability exposure; underwriters should acknowledge the mitigation while still noting the residual risk.
Question 5: Which of the following is an example of risk transfer in residential property risk management?
- Installing storm shutters to prevent wind damage
- Building a seawall to reduce coastal erosion
- Purchasing a homeowners insurance policy (Correct answer)
- Raising the home on elevated pilings in a flood zone
Correct answer: Purchasing a homeowners insurance policy
Purchasing insurance is the classic example of risk transfer, shifting the financial consequences of a potential loss from the homeowner to the insurer.
Question 6: A property located within 1,000 feet of a fire station but served by only a private well and no fire hydrants would receive what rating consideration?
- An improvement for proximity to the fire station only
- A charge or surcharge for inadequate water supply despite station proximity (Correct answer)
- No modification since the station proximity fully offsets the water supply issue
- An automatic declination for lacking municipal water service
Correct answer: A charge or surcharge for inadequate water supply despite station proximity
Public Protection Class ratings consider both fire station proximity and water supply; inadequate water supply (no hydrants) significantly limits firefighting effectiveness even near a station.
Question 7: What does 'law and ordinance coverage' protect against in a residential policy?
- Fines levied by local governments for code violations
- The added cost of rebuilding to current codes after a covered loss (Correct answer)
- Legal defense costs for zoning disputes
- Coverage for illegal structures discovered during a loss investigation
Correct answer: The added cost of rebuilding to current codes after a covered loss
Law and ordinance coverage pays the additional rebuilding costs required to comply with current building codes when a covered loss triggers reconstruction.
CRU Risk Assessment & Mitigation 3
An underwriter reviews a home with a wood-burning fireplace and no documentation of chimney maintenance.
This is best classified as which type of hazard?