CU Core Underwriting Principles 3 — Questions and Answers
Question 1: When an underwriter 'non-renews' a policy rather than cancelling it mid-term, the primary reason is usually:
- Non-renewal avoids paying return premiums to the insured
- Non-renewal requires shorter advance notice than cancellation
- Mid-term cancellation is often restricted by state law, making non-renewal the practical exit (Correct answer)
- Non-renewal allows the insurer to keep unearned premiums
Correct answer: Mid-term cancellation is often restricted by state law, making non-renewal the practical exit
Many states restrict mid-term cancellation to specific grounds after the policy has been in force beyond a brief initial period, so underwriters use non-renewal at expiration as the standard exit strategy.
Question 2: What is 'experience rating' in commercial underwriting?
- Rating based solely on the insured's years in business
- Adjusting premiums based on the insured's own past loss history relative to expected losses (Correct answer)
- Setting premiums equal to the industry average for similar businesses
- Rating that accounts for the experience level of the underwriting team
Correct answer: Adjusting premiums based on the insured's own past loss history relative to expected losses
Experience rating modifies a prospective premium by comparing the insured's actual past losses to the expected losses for its class, rewarding good loss history with credits.
Question 3: Which underwriting action is most appropriate when a risk has one unacceptable characteristic but is otherwise desirable?
- Decline the entire account
- Issue a flat policy with no modifications
- Exclude the unacceptable exposure or add an endorsement to address it (Correct answer)
- Refer the risk to the state residual market without review
Correct answer: Exclude the unacceptable exposure or add an endorsement to address it
Underwriters can exclude a specific hazard or modify coverage terms via endorsement rather than declining the entire account, preserving a profitable relationship while managing the problematic exposure.
Question 4: Which document formally outlines the underwriting guidelines and risk appetite for a specific line of business?
- Loss run report
- Underwriting manual (Correct answer)
- Binder agreement
- Reinsurance treaty
Correct answer: Underwriting manual
An underwriting manual contains the rules, eligibility criteria, rating procedures, and authority levels that guide underwriters in evaluating and pricing risks for a given line.
Question 5: In property underwriting, 'coinsurance' is a provision that penalizes an insured who:
- Files more than one claim per year
- Insures property for less than a required percentage of its value (Correct answer)
- Selects a deductible above the policy average
- Adds a co-insured to the policy after binding
Correct answer: Insures property for less than a required percentage of its value
Coinsurance clauses require the insured to carry coverage equal to a specified percentage (commonly 80%) of property value; underinsurance results in the insured bearing a proportionate share of any partial loss.
Question 6: What is the primary function of a 'binder' in the underwriting process?
- A binder permanently transfers risk to a reinsurer
- A binder provides temporary evidence of coverage until the formal policy is issued (Correct answer)
- A binder is the insurer's internal underwriting review document
- A binder replaces the declarations page in all commercial policies
Correct answer: A binder provides temporary evidence of coverage until the formal policy is issued
A binder is a temporary agreement that provides immediate insurance coverage until the formal policy is prepared and delivered, protecting the insured during the interim period.
Question 7: Which loss development concept do underwriters use to project ultimate losses from immature claims data?
- Loss trending
- Loss development factors (link ratios) (Correct answer)
- Pure premium method
- Burning cost calculation
Correct answer: Loss development factors (link ratios)
Loss development factors, derived from historical patterns of how reported losses grow over time, are applied to current immature loss data to project ultimate claim costs.
CU Core Underwriting Principles 3
When an underwriter 'non-renews' a policy rather than cancelling it mid-term, the primary reason is usually: