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 underwriter is evaluating a portfolio of loans. Which concentration risk would be MOST concerning?
Answer: Heavy concentration in a single vehicle brand known for rapid depreciation
Concentration in a single brand with high depreciation creates correlated loss risk — if that brand's residual values drop, claim frequency and severity spike simultaneously across the portfolio.
Under standard GAP underwriting guidelines, which condition at the time of a total loss would REDUCE the GAP benefit payable?
Answer: The primary insurer's ACV settlement is higher than initially estimated
GAP pays the difference between ACV and loan balance; a higher-than-expected ACV settlement from the primary insurer reduces or eliminates the gap that needs to be covered.
Which underwriting action BEST mitigates risk when a GAP program must accept high-LTV loans due to market competition?
Answer: Shortening maximum eligible loan terms for high-LTV tiers
Capping loan terms for high-LTV loans limits the duration of negative equity exposure, reducing the window during which a total loss could generate a large GAP claim.
A GAP program requires that the primary auto insurance policy maintain a maximum deductible of $1,000. This requirement exists because:
Answer: Many GAP programs waive the primary insurance deductible as part of the benefit, so excessively large deductibles increase program cost
GAP programs that include a deductible waiver benefit must limit that exposure; if deductibles are unlimited, the program bears uncontrolled additional cost beyond the core GAP benefit.
From a risk assessment standpoint, which borrower profile presents the GREATEST GAP exposure, all else being equal?
Answer: Borrower with 580 FICO, no down payment, 84-month term on a high-depreciation vehicle
Low FICO (higher default/theft correlation), zero down payment (maximum LTV), longest term (slowest equity building), and high-depreciation vehicle combine to create the greatest potential GAP exposure.
When a GAP program uses 'experience rating,' what data is MOST critical for accurate future premium setting?
Answer: Historical loss ratios segmented by LTV band, loan term, and vehicle type
Segmenting historical losses by LTV, term, and vehicle type reveals which combinations drive the highest frequency and severity, enabling precise premium differentiation.
A GAP underwriter notes that a specific vehicle model's 'invoice price' is significantly higher than its 'market transaction price' due to dealer incentives. The underwriter should:
Answer: Base LTV on the actual transaction price or recognized market value, not the inflated invoice price
LTV must reflect true market value; using an artificially high invoice price would understate the real LTV and misrepresent the program's risk exposure from day one.