Risk Assessment & Underwriting Flashcards
7 cards from real GAP practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Risk Assessment & Underwriting flashcards as text
A GAP program caps maximum eligible vehicle age at 5 model years. What risk principle does this underwriting guideline address?
Answer: Older vehicles have more volatile and harder-to-predict ACV, increasing claim uncertainty
As vehicles age, ACV becomes harder to predict accurately, and loan terms relative to value become disproportionate, raising claim settlement risk.
From an underwriting standpoint, why is the 'first-year depreciation rate' a critical variable in GAP pricing models?
Answer: The largest gap between loan balance and ACV typically occurs in the first 12 months
Vehicles lose a significant portion of their value in the first year while loan paydown is slowest, creating peak GAP exposure in this period.
An underwriter is pricing GAP for a lease versus a retail installment contract (RIC) on the same vehicle. Which statement is CORRECT?
Answer: Lease GAP typically covers the difference between ACV and remaining lease obligation, which has different risk characteristics than a purchase loan
Lease GAP pays the difference between ACV and the remaining lease balance/residual, which involves unique factors like disposition fees and residual value guarantees not present in purchase loans.
Which scenario represents the LOWEST GAP risk at the time of loan origination?
Answer: 95% LTV, 48-month term, certified pre-owned sedan with strong residuals
A lower LTV, shorter term, and vehicle model with strong residual values combine to minimize the gap between loan balance and ACV throughout the loan.
When assessing GAP eligibility for a vehicle with aftermarket accessories financed into the loan, the underwriter should be aware that:
Answer: Most insurance ACV settlements do not include aftermarket accessory value, widening the potential GAP
Insurance companies typically value vehicles at standard ACV without accounting for aftermarket additions, leaving those financed costs as uncompensated GAP exposure.
A risk manager discovers that GAP claims are significantly higher for 84-month loans originated in Q1. The MOST likely root cause is:
Answer: Q1 originations may coincide with year-end model clearance pricing that inflates LTV from day one
Year-end clearance sales often involve dealer incentives and rolled-in costs that drive loan amounts above MSRP, starting Q1-originated loans at very high LTV with long terms.
What is the purpose of a GAP 'cap amount' in an underwriting policy?
Answer: To set the maximum dollar amount the GAP program will pay on any single claim, limiting program loss exposure
A cap amount limits the insurer's maximum payout per claim, protecting the program from catastrophic losses on extremely high negative-equity situations.