CU Risk & Underwriting Principles 2 — Questions and Answers
Question 1: Which underwriting principle states that insureds should not profit from a loss beyond their actual financial damage?
- Law of large numbers
- Principle of indemnity (Correct answer)
- Principle of subrogation
- Principle of utmost good faith
Correct answer: Principle of indemnity
The principle of indemnity ensures the insured is restored to their pre-loss financial position but cannot gain a profit from the insurance claim.
Question 2: An underwriter notices that a commercial property applicant has filed three fire claims in five years. This pattern is best described as:
- Adverse selection
- A moral hazard indicator (Correct answer)
- Catastrophic exposure
- Reinsurance trigger
Correct answer: A moral hazard indicator
Repeated fire claims suggest a moral hazard, where the insured's behavior or attitude may increase the likelihood of loss.
Question 3: What does a 'scheduled rating' modification in commercial underwriting allow?
- Automatic renewal without re-underwriting
- Debits or credits applied to a base rate based on specific risk characteristics (Correct answer)
- Flat rate increases tied to inflation
- Group discounts for fleet accounts
Correct answer: Debits or credits applied to a base rate based on specific risk characteristics
Scheduled rating lets underwriters adjust the base premium up or down based on individual risk factors such as management quality or premises condition.
Question 4: In risk evaluation, 'severity' refers to:
- How often a loss is expected to occur
- The potential financial magnitude of a single loss (Correct answer)
- The speed at which a claim is processed
- The number of policyholders in a risk pool
Correct answer: The potential financial magnitude of a single loss
Severity measures the potential dollar impact of an individual loss event, distinct from frequency which measures how often losses occur.
Question 5: Which condition makes a risk generally uninsurable in the standard market?
- High frequency of small, predictable losses
- Presence of a deductible
- Loss that is already certain to occur (Correct answer)
- Exposure located in a coastal zone
Correct answer: Loss that is already certain to occur
Insurance requires that a loss be fortuitous (uncertain); a loss that is already certain to occur removes the element of chance needed for insurability.
Question 6: What is the primary purpose of an underwriting guide or manual?
- To set claim settlement amounts
- To ensure consistency in risk selection and pricing decisions (Correct answer)
- To list reinsurance treaty terms
- To document policyholder complaint history
Correct answer: To ensure consistency in risk selection and pricing decisions
Underwriting guides standardize risk selection criteria, pricing parameters, and coverage rules so underwriters apply consistent standards.
Question 7: A risk that transfers potential loss to the insurer in exchange for a premium is exercising which risk management technique?
- Risk avoidance
- Risk retention
- Risk reduction
- Risk transfer (Correct answer)
Correct answer: Risk transfer
Risk transfer shifts the financial consequences of a potential loss to another party—typically an insurer—through a contractual arrangement such as an insurance policy.
CU Risk & Underwriting Principles 2
Which underwriting principle states that insureds should not profit from a loss beyond their actual financial damage?