CU Commercial Underwriting Practices 3 — Questions and Answers
Question 1: When underwriting commercial umbrella liability, the underwriter's FIRST concern regarding the underlying policies is:
- Whether the underlying insurer is admitted in the state
- That underlying limits meet the umbrella's required minimum retained limits (Correct answer)
- That the underlying policies are written on a claims-made basis
- That the underlying carrier has an A.M. Best rating of A+
Correct answer: That underlying limits meet the umbrella's required minimum retained limits
Umbrella policies require underlying policies to carry specified minimum limits so the umbrella does not drop down to cover gaps the insured should self-retain.
Question 2: Which underwriting tool allows a commercial lines underwriter to adjust the manual rate up or down based on individual risk characteristics within a pre-approved range?
- Experience rating
- Schedule rating (Correct answer)
- Composite rating
- Retrospective rating
Correct answer: Schedule rating
Schedule rating applies credits or debits to the manual premium for specific positive or negative risk characteristics within filed guidelines.
Question 3: A commercial property underwriter is concerned about 'moral hazard.' Which scenario BEST exemplifies this concept?
- A warehouse with inadequate fire suppression systems
- An insured who inflates inventory values to collect excess claim proceeds (Correct answer)
- A business located in a high-crime neighborhood
- A building constructed of combustible materials
Correct answer: An insured who inflates inventory values to collect excess claim proceeds
Moral hazard arises from the insured's intent to defraud or take undue advantage of coverage, such as over-insuring and then filing inflated claims.
Question 4: In workers compensation underwriting, the payroll audit is critical because:
- It determines whether the insured qualifies for experience rating
- Workers compensation premiums are based on actual payroll by class code (Correct answer)
- It establishes the insured's credit worthiness
- It verifies the number of full-time versus part-time employees
Correct answer: Workers compensation premiums are based on actual payroll by class code
WC premiums are calculated as a rate per $100 of payroll by classification, so accurate payroll figures directly determine final earned premium.
Question 5: A commercial lines underwriter is reviewing a restaurant account. Which hazard is MOST unique to this class of business?
- Employee theft
- Products liability from food-borne illness (Correct answer)
- Automobile fleet exposure
- Contractual liability from vendor agreements
Correct answer: Products liability from food-borne illness
Food service operations carry a heightened products liability risk because contaminated food can injure multiple customers simultaneously.
Question 6: The coinsurance clause in a commercial property policy primarily protects the insurer by:
- Requiring the insured to carry limits equal to a specified percentage of property value (Correct answer)
- Allowing the insurer to cancel for non-payment of premium
- Limiting coverage to the actual cash value of the property
- Preventing the insured from collecting more than the policy limit
Correct answer: Requiring the insured to carry limits equal to a specified percentage of property value
The coinsurance clause penalizes underinsurance by reducing claim payments proportionally if the insured carries less than the required percentage of value.
Question 7: When an underwriter uses 'ISO loss costs' as a basis for commercial pricing, what are they using?
- Insurer-specific historical loss data adjusted for trend
- Industry-wide pure loss and LAE components filed by ISO for a given class (Correct answer)
- A government-mandated pricing floor for admitted carriers
- A competitor benchmarking survey of commercial rates
Correct answer: Industry-wide pure loss and LAE components filed by ISO for a given class
ISO loss costs represent the pure loss and loss adjustment expense component filed with state regulators, to which each carrier adds its own expense loading.
CU Commercial Underwriting Practices 3
When underwriting commercial umbrella liability, the underwriter's FIRST concern regarding the underlying policies is: