CU Risk Assessment and Selection 3 — Questions and Answers
Question 1: When evaluating a new workers' compensation account, which industry classification factor MOST directly affects the manual premium?
- The insured's years in business
- The payroll assigned to each job classification code (Correct answer)
- The number of employees on the payroll
- The insured's credit score
Correct answer: The payroll assigned to each job classification code
Workers' compensation premiums are calculated by multiplying the payroll per $100 by the applicable class code rate, making payroll allocation to correct classification codes critical.
Question 2: A 'monoline' policy differs from a 'package' policy in that:
- Monoline covers only a single line of insurance, while a package combines multiple coverages (Correct answer)
- Monoline policies always have lower premiums than package policies
- Package policies exclude liability coverage by definition
- Monoline policies are only available through surplus lines markets
Correct answer: Monoline covers only a single line of insurance, while a package combines multiple coverages
A monoline policy covers a single line of insurance (e.g., property only), whereas a package policy combines two or more lines (e.g., property and liability) under one contract.
Question 3: Which of the following BEST describes the purpose of an 'inspection report' in the underwriting process?
- To determine the insured's credit history
- To verify and supplement information provided on the application (Correct answer)
- To calculate the appropriate manual premium
- To approve or deny a claim after a loss
Correct answer: To verify and supplement information provided on the application
An inspection report, conducted by the insurer or a third-party vendor, verifies application information and identifies physical hazards not disclosed by the applicant.
Question 4: The 'maximum possible loss' (MPL) differs from the 'probable maximum loss' (PML) in that:
- MPL assumes total destruction of the insured property, while PML is a realistic worst-case estimate (Correct answer)
- PML is always higher than MPL for any given risk
- MPL is used only for personal lines, while PML applies to commercial lines
- MPL excludes contents coverage, while PML includes it
Correct answer: MPL assumes total destruction of the insured property, while PML is a realistic worst-case estimate
MPL represents the worst conceivable loss assuming all safety systems fail, while PML is a more realistic estimate of the largest loss likely to occur given normal functioning of protective features.
Question 5: An underwriter discovers that a new commercial property applicant is also the insured's own landlord and property manager. This situation primarily raises concerns about:
- Inadequate limits of insurance
- Potential moral hazard and conflicts of interest in the relationship (Correct answer)
- Incorrect classification of the business
- Insufficient construction quality
Correct answer: Potential moral hazard and conflicts of interest in the relationship
When the insured controls both sides of the property relationship, it creates a moral hazard concern because they may be motivated to inflate claims or manufacture losses.
Question 6: The underwriting term 'aggregate limit' refers to:
- The maximum amount payable for any single occurrence during the policy period
- The total maximum amount the insurer will pay for all covered losses during the policy period (Correct answer)
- The deductible amount applied to each individual claim
- The minimum premium required to write a policy
Correct answer: The total maximum amount the insurer will pay for all covered losses during the policy period
An aggregate limit caps the insurer's total liability for all covered claims combined during the policy period, regardless of the number of individual occurrences.
Question 7: Which reinsurance structure provides the cedant with protection against catastrophic loss accumulation across many small risks?
- Facultative reinsurance
- Per-risk excess of loss reinsurance
- Catastrophe excess of loss reinsurance (Correct answer)
- Quota share reinsurance
Correct answer: Catastrophe excess of loss reinsurance
Catastrophe excess of loss reinsurance activates when aggregate losses from a single catastrophic event (e.g., hurricane, earthquake) exceed a specified retention, protecting against correlated loss accumulation.
CU Risk Assessment and Selection 3
When evaluating a new workers' compensation account, which industry classification factor MOST directly affects the manual premium?