Personal Lines Risk Evaluation Flashcards

A personal lines underwriter uses credit-based insurance scores primarily because research has shown they correlate with:

Answer: The frequency and severity of insurance losses

Studies show that credit-based insurance scores are predictive of the likelihood and cost of insurance claims, making them a valid risk-selection tool.

Which of the following personal auto coverages would respond if the insured's vehicle is stolen?

Answer: Comprehensive physical damage

Comprehensive coverage pays for vehicle theft and other non-collision losses such as fire, vandalism, and weather damage.

An underwriter reviewing a rental dwelling application notes the property is vacant. How does vacancy typically affect risk evaluation?

Answer: It increases risk due to higher likelihood of vandalism, undetected damage, and arson

Vacant properties face elevated risks of vandalism, arson, and undetected water damage, making vacancy a significant underwriting concern.

The principle of indemnity in personal lines insurance means the insured should:

Answer: Be restored to approximately the same financial position as before the loss

Indemnity limits recovery to the actual financial loss suffered, preventing profit from insurance while restoring the insured's pre-loss financial position.

A homeowner adds a wood-burning stove without notifying the insurer. From an underwriting perspective, this represents:

Answer: A material change in risk that could affect coverage

A wood-burning stove significantly increases fire risk and represents a material change in the risk that the insurer accepted at inception.

In evaluating personal umbrella liability eligibility, underwriters typically require that the applicant maintain minimum underlying limits on their auto and homeowners policies because:

Answer: The umbrella is designed to sit above adequate primary limits, not replace them

Umbrella policies are excess coverage designed to trigger after underlying primary policies are exhausted, so adequate underlying limits are a prerequisite.

When applying the 'law of large numbers' to personal lines underwriting, insurers benefit from:

Answer: Pooling a large number of similar risks to predict losses more accurately

The law of large numbers states that as the number of similar exposure units increases, actual loss experience approaches predicted loss probability, enabling accurate pricing.