Insurance Insurance Claims & Underwriting 2

Question 1

In insurance, what is a 'reservation of rights' letter?

Accepted Answer

A letter from the insurer notifying the insured that it is investigating the claim while reserving the right to deny coverage

Answer

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?

Accepted Answer

The increased likelihood that having insurance causes an insured to take greater risks or be less careful

Answer

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?

Accepted Answer

It states that the larger the number of similar exposures, the more predictable the actual loss results will be

Answer

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?

Accepted Answer

To recover and sell damaged property in order to reduce the total loss amount paid

Answer

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?

Accepted Answer

The policyholder must stand to suffer a financial loss if the insured event occurs

Answer

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.

Insurance Practice Test

Insurance Practice Test

Insurance Insurance Claims & Underwriting 2