CU Claims & Loss Analysis 3 — Questions and Answers
Question 1: A liability insurer pays defense costs that erode the policy limit. This is known as:
- Umbrella erosion
- Defense within limits or 'burning limits' coverage (Correct answer)
- Sublimit depletion
- Aggregate exhaustion
Correct answer: Defense within limits or 'burning limits' coverage
Defense within limits (burning limits) policies reduce the available indemnity limit as defense costs are paid, unlike supplementary payment provisions.
Question 2: The incurred but not reported (IBNR) reserve represents:
- Claims reported but not yet paid
- Losses that have occurred but haven't yet been reported to the insurer (Correct answer)
- Denied claims under appeal
- Salvage value recoveries pending
Correct answer: Losses that have occurred but haven't yet been reported to the insurer
IBNR reserves account for losses that have already occurred in the real world but haven't yet been reported to the insurance company.
Question 3: Which of the following best describes 'severity' in claims analysis?
- The number of claims filed in a period
- The average cost per claim (Correct answer)
- The percentage of claims denied
- The time taken to settle claims
Correct answer: The average cost per claim
Claim severity measures the average dollar amount per claim, while frequency measures the number of claims.
Question 4: A property claim involves both structural damage and business interruption. Which valuation approach applies to the business interruption portion?
- Replacement cost value
- Actual cash value
- Net profit plus continuing fixed expenses (Correct answer)
- Fair market value
Correct answer: Net profit plus continuing fixed expenses
Business interruption losses are typically measured as net profit that would have been earned plus continuing fixed expenses during the interruption period.
Question 5: In claims-made liability policies, the 'retroactive date' serves to:
- Extend coverage into future policy periods
- Eliminate coverage for losses occurring before that date (Correct answer)
- Reset the aggregate limit annually
- Trigger automatic renewal provisions
Correct answer: Eliminate coverage for losses occurring before that date
The retroactive date bars coverage for claims arising from incidents that occurred before that date, even if reported during the policy period.
Question 6: When an underwriter reviews a loss run showing a loss ratio of 95%, this primarily indicates:
- The account is highly profitable
- Claims costs are consuming nearly all premium collected (Correct answer)
- The insurer has excessive administrative expenses
- Reinsurance recoveries are insufficient
Correct answer: Claims costs are consuming nearly all premium collected
A 95% loss ratio means $0.95 of every premium dollar is paid in claims, leaving insufficient margin for expenses and profit.
Question 7: A general contractor's liability claim involves a subcontractor's negligent work. Under most CGL policies, the contractor's coverage for such claims depends on:
- The subcontractor's employee count
- Whether the 'your work' exclusion applies and if a subcontractor exception exists (Correct answer)
- The project's total contract value
- State licensing status of the subcontractor
Correct answer: Whether the 'your work' exclusion applies and if a subcontractor exception exists
CGL policies exclude 'your work' damage, but most include a subcontractor exception restoring coverage for damage caused by subcontractors' completed operations.
CU Claims & Loss Analysis 3
A liability insurer pays defense costs that erode the policy limit.
This is known as: