Insurance Insurance Claims & Underwriting 2 — Questions and Answers
Question 1: In insurance, what is a 'reservation of rights' letter?
- A letter from the insured demanding full claim payment
- A letter from the insurer notifying the insured that it is investigating the claim while reserving the right to deny coverage (Correct answer)
- A request for premium payment before coverage begins
- A court order requiring the insurer to pay a claim
Correct answer: A letter from the insurer notifying the insured that it is investigating the claim while reserving the right to deny coverage
A reservation of rights letter informs the insured that the insurer will provide a defense or investigate a claim, but reserves the right to disclaim coverage if the investigation reveals a valid exclusion.
Question 2: What is 'moral hazard' in insurance?
- The risk of natural disasters beyond human control
- The increased likelihood that having insurance causes an insured to take greater risks or be less careful (Correct answer)
- The insurer's ethical obligation to pay valid claims
- The risk associated with insuring high-net-worth individuals
Correct answer: The increased likelihood that having insurance causes an insured to take greater risks or be less careful
Moral hazard is the behavioral change—often involving less caution or even intentional misconduct—that can result from being insured, since the insured bears less financial consequence for losses.
Question 3: What is the 'law of large numbers' and why is it important to insurance?
- It requires insurers to write at least 1,000 policies per state
- It states that the larger the number of similar exposures, the more predictable the actual loss results will be (Correct answer)
- It limits the maximum coverage an insurer can offer
- It governs reinsurance treaty structures
Correct answer: It states that the larger the number of similar exposures, the more predictable the actual loss results will be
The law of large numbers allows insurers to predict losses more accurately as the insured pool grows, making it the statistical foundation for setting premiums.
Question 4: What is the purpose of a 'salvage' operation in property insurance claims?
- To recover and sell damaged property in order to reduce the total loss amount paid (Correct answer)
- To rebuild damaged structures using the insurer's own contractors
- To reassign the policy to a new insured after a total loss
- To reinsure the claim with another carrier
Correct answer: To recover and sell damaged property in order to reduce the total loss amount paid
Salvage refers to the insurer taking possession of damaged property after paying a total loss claim and then selling it to recover some of the claim cost.
Question 5: What does 'insurable interest' require of the policyholder?
- The policyholder must be a licensed insurance agent
- The policyholder must stand to suffer a financial loss if the insured event occurs (Correct answer)
- The policyholder must own the insured property free and clear
- The policyholder must have no prior claims history
Correct answer: The policyholder must stand to suffer a financial loss if the insured event occurs
Insurable interest requires that the policyholder would suffer a genuine financial loss if the insured person dies or the insured property is damaged or destroyed.
Question 6: In the underwriting process, what is a 'schedule rating' adjustment?
- Pricing a policy based solely on published manual rates
- A modification to the manual rate based on specific characteristics of the individual risk, such as management quality or physical condition (Correct answer)
- The process of scheduling a policyholder's renewal date
- A mandatory rate filing with the state insurance department
Correct answer: A modification to the manual rate based on specific characteristics of the individual risk, such as management quality or physical condition
Schedule rating allows underwriters to adjust the standard manual premium up or down based on specific positive or negative characteristics unique to the individual risk.
Insurance Insurance Claims & Underwriting 2
In insurance, what is a 'reservation of rights' letter?