GAC Risk Assessment & Underwriting 3 — Questions and Answers
Question 1: Which underwriting factor is most unique to governmental entities compared to private commercial accounts when assessing liability exposure?
- Number of full-time employees
- Sovereign immunity statutes and statutory liability caps (Correct answer)
- Annual revenue and profitability trends
- Credit rating assigned by Moody's or S&P
Correct answer: Sovereign immunity statutes and statutory liability caps
Governmental liability underwriting uniquely considers sovereign immunity laws and statutory caps that limit the government's legal exposure.
Question 2: In risk pooling for governmental entities, 'spread of risk' is achieved primarily by:
- Investing pool reserves in high-yield instruments
- Aggregating exposures from many members so no single loss devastates the pool (Correct answer)
- Requiring members to purchase commercial excess coverage independently
- Limiting pool membership to entities with identical operations
Correct answer: Aggregating exposures from many members so no single loss devastates the pool
Risk pooling achieves spread of risk by aggregating many members' exposures so that any one large loss is shared across the pool.
Question 3: Under GASB 10, pool participants that transfer risk to a public entity risk pool should report:
- No liability as long as premiums are paid to the pool
- A contingent liability equal to the pool's total unfunded claims
- A liability only if it is probable the entity will be assessed for pool deficits (Correct answer)
- The full actuarial reserve amount in their own financial statements
Correct answer: A liability only if it is probable the entity will be assessed for pool deficits
Under GASB 10, a pool participant recognizes a liability only when it is probable the entity will be assessed by the pool to fund a deficit.
Question 4: The 'experience modification factor' in workers' compensation underwriting for a government adjusts the premium based on:
- The employer's payroll growth rate over the prior three years
- The entity's actual loss experience compared to the expected losses for its class (Correct answer)
- The number of safety training hours completed by employees annually
- The jurisdiction's statutory benefit schedule for permanent disability
Correct answer: The entity's actual loss experience compared to the expected losses for its class
The experience modification (mod) factor compares the entity's actual historical losses to what would be expected for similar employers, adjusting the premium up or down.
Question 5: When conducting an underwriting review of a municipality's police department, which exposure is classified as a professional liability risk rather than a general liability risk?
- A slip-and-fall at the police headquarters lobby
- Damage to a third-party vehicle during a high-speed pursuit
- An allegation of excessive force or wrongful arrest by an officer (Correct answer)
- Property damage caused by a police vehicle in a parking lot
Correct answer: An allegation of excessive force or wrongful arrest by an officer
Excessive force and wrongful arrest claims arise from the officer's professional duties and are underwritten as law enforcement professional liability (EPL).
Question 6: An actuarial 'tail factor' in loss development is applied to:
- Reported losses in the most recent accident year to account for unreported claims (Correct answer)
- Investment income earned on reserves during the development period
- Administrative expenses incurred after the policy period ends
- Premium adjustments collected after the original policy expiration
Correct answer: Reported losses in the most recent accident year to account for unreported claims
A tail factor is applied to the latest diagonal of a development triangle to project losses to their ultimate settled value beyond available data.
Question 7: A government risk manager who implements a 'total cost of risk' (TCOR) analysis is attempting to measure:
- Only the premiums paid to commercial insurers for the fiscal year
- All risk-related costs including retained losses, insurance premiums, and risk management expenses (Correct answer)
- The market value of insurable assets minus accumulated depreciation
- The net present value of future workers' compensation obligations
Correct answer: All risk-related costs including retained losses, insurance premiums, and risk management expenses
TCOR captures all costs attributable to risk: retained losses, premiums, administrative expenses, and risk control costs, providing a complete picture.
GAC Risk Assessment & Underwriting 3
Which underwriting factor is most unique to governmental entities compared to private commercial accounts when assessing liability exposure?