CU - Certified Underwriter Commercial Underwriting Practices Questions and Answers 1

Question 1

An underwriter is evaluating a submission for a large chemical manufacturing plant with a total insurable value (TIV) of $150 million. The underwriter's company has a per-risk treaty reinsurance limit of $50 million. The risk meets all internal guidelines for safety and loss control. What is the most appropriate next step for the underwriter to provide full coverage?

Accepted Answer

Seek facultative reinsurance for the amount exceeding the treaty limit.

Answer

When a specific, desirable risk exceeds an insurer's automatic (treaty) reinsurance capacity, the underwriter must secure individual reinsurance for that specific risk. This is known as facultative reinsurance. Declining a good risk is not the best option, issuing a partial policy is poor customer service, and binding coverage without reinsurance in place would expose the company to catastrophic loss.

Question 2

In the context of workers' compensation underwriting, what does an Experience Modification Rate (Mod) of 1.15 indicate about the applicant?

Accepted Answer

The applicant's historical losses are 15% worse than the industry average.

Answer

The Experience Modification Rate compares an employer's actual historical losses to the expected losses for their industry. A Mod of 1.00 is average. A Mod above 1.00, like 1.15, indicates worse-than-average loss experience and results in a 15% debit or surcharge on the premium. A Mod below 1.00 is a credit.

Question 3

An underwriter receives a loss control report for a large woodworking facility. Which of the following recommendations in the report would be of the highest priority for the underwriter to see implemented before binding coverage?

Accepted Answer

Implementing a formal lockout/tagout program for machinery maintenance.

Answer

In a woodworking facility, machinery presents a significant risk of severe injury. A lockout/tagout program is a critical safety procedure designed to prevent accidental startups during maintenance, directly addressing a major life-safety and workers' compensation exposure. The other options represent much lower-severity risks and would be a lower priority for an underwriter.

Question 4

A commercial underwriter is assessing a Business Income (Business Interruption) application for a high-end restaurant that relies on a single, exclusive supplier for its imported specialty ingredients. This reliance on one supplier represents a significant:

Accepted Answer

Contingent business income exposure.

Answer

A contingent business income exposure exists when the insured's ability to operate is dependent on a third-party supplier (a contributing property) or a key customer (a recipient property). A disruption at this single supplier could interrupt the restaurant's operations even if the restaurant itself suffers no direct physical damage.

Question 5

A commercial insurer's management is emphasizing the need to improve underwriting profitability. An underwriter's risk selection and pricing decisions directly impact which two primary components of the company's combined ratio?

Accepted Answer

Incurred losses and underwriting expenses.

Answer

The combined ratio is calculated as (Incurred Losses + Underwriting Expenses) / Earned Premium. It measures underwriting profitability, excluding investment income. An underwriter's primary functions are risk selection (which directly affects incurred losses) and managing the costs of acquiring and servicing business (underwriting expenses).

(CU) Certified Underwriter Practice Test

(CU) Certified Underwriter Practice Test

CU - Certified Underwriter Commercial Underwriting Practices Questions and Answers 1