CU Risk & Underwriting Principles 3 — Questions and Answers
Question 1: Which reinsurance arrangement allows a ceding insurer to decide case-by-case whether to cede a specific risk?
- Quota share treaty
- Surplus share treaty
- Facultative reinsurance (Correct answer)
- Excess of loss treaty
Correct answer: Facultative reinsurance
Facultative reinsurance is negotiated individually for each risk, giving the ceding insurer discretion on which risks to cede and allowing the reinsurer to accept or reject each submission.
Question 2: In underwriting, 'line of business' primarily refers to:
- The insurer's direct sales distribution channel
- A specific category of insurance coverage such as workers' compensation or commercial auto (Correct answer)
- The maximum policy limit offered per account
- The geographic territory an underwriter covers
Correct answer: A specific category of insurance coverage such as workers' compensation or commercial auto
Line of business classifies insurance products by type of coverage (e.g., property, liability, workers' comp), each governed by distinct underwriting rules.
Question 3: What is the significance of the 'combined ratio' in underwriting performance measurement?
- It measures investment income relative to total assets
- It combines the loss ratio and expense ratio to indicate underwriting profitability (Correct answer)
- It shows the ratio of reinsurance recoveries to gross premiums
- It compares new business to renewals
Correct answer: It combines the loss ratio and expense ratio to indicate underwriting profitability
A combined ratio below 100% indicates underwriting profit; above 100% indicates an underwriting loss before investment income.
Question 4: Which term describes an insured's legal right to recover from a negligent third party after the insurer has paid a claim?
- Contribution
- Subrogation (Correct answer)
- Assignment
- Salvage
Correct answer: Subrogation
Subrogation gives the insurer the right to pursue a third party responsible for the loss, preventing the insured from collecting twice.
Question 5: A manufacturing plant that stores large quantities of flammable solvents presents which type of hazard?
- Moral hazard
- Physical hazard (Correct answer)
- Morale hazard
- Legal hazard
Correct answer: Physical hazard
Physical hazards are tangible conditions—such as flammable materials, structural deficiencies, or equipment age—that increase the probability or severity of loss.
Question 6: Why do underwriters require insurable interest to exist at the time of policy inception?
- To satisfy state filing requirements
- To prevent wagering and ensure the policyholder has a financial stake in the subject of insurance (Correct answer)
- To determine the appropriate deductible level
- To qualify the risk for reinsurance
Correct answer: To prevent wagering and ensure the policyholder has a financial stake in the subject of insurance
Insurable interest ensures the policyholder faces genuine financial loss if the insured event occurs, distinguishing insurance from gambling.
Question 7: An underwriter who intentionally avoids writing policies in certain neighborhoods due to demographic factors may be violating:
- The McCarran-Ferguson Act
- Fair lending and anti-redlining regulations (Correct answer)
- The Sherman Antitrust Act
- NAIC model law on rate filings
Correct answer: Fair lending and anti-redlining regulations
Redlining—refusing to underwrite or charging higher premiums based on geography used as a proxy for protected class characteristics—violates fair lending and state anti-discrimination laws.
CU Risk & Underwriting Principles 3
Which reinsurance arrangement allows a ceding insurer to decide case-by-case whether to cede a specific risk?