Risk & Underwriting Principles Flashcards
7 cards from real CU practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Risk & Underwriting Principles flashcards as text
What does 'adverse selection' mean in the context of insurance underwriting?
Answer: Higher-risk individuals being more likely to seek and obtain insurance than lower-risk individuals
Adverse selection occurs when those with higher loss probability disproportionately purchase insurance, potentially destabilizing the risk pool if not managed through underwriting.
In property underwriting, 'coinsurance' typically requires that:
Answer: The insured carry coverage equal to a specified percentage of the property's value to receive full loss recovery
A coinsurance clause (e.g., 80%) penalizes insureds who underinsure by reducing claim payments proportionally if coverage falls below the required percentage of value.
Which underwriting tool provides the most direct information about a commercial applicant's past loss experience?
Answer: Loss runs from prior insurers
Loss runs are detailed claim histories provided by prior insurers showing dates, types, amounts paid, and reserves for past losses.
What is a 'retention' in the context of a reinsurance program?
Answer: The portion of risk the ceding insurer keeps for its own account
The retention is the amount of loss the primary insurer absorbs before the reinsurance treaty responds.
When underwriting a new commercial account, an underwriter performs a risk selection decision. Which factor would most likely lead to a declination?
Answer: Evidence of intentional misrepresentation on the application
Intentional misrepresentation violates the principle of utmost good faith and typically renders the application fraudulent, warranting declination or policy voidance.
A policy that covers all risks of physical loss unless specifically excluded is called:
Answer: Open perils (all-risk) coverage
Open perils or all-risk policies provide broad coverage for any cause of loss not explicitly excluded, placing the burden of proof on the insurer to show an exclusion applies.
Which financial metric do underwriters use to assess whether premium adequacy covers expected losses plus expenses?
Answer: Loss ratio
The loss ratio (losses incurred ÷ premiums earned) measures what percentage of premium is consumed by claims, a key indicator of underwriting adequacy.