CU - Certified Underwriter Risk Assessment and Selection Questions and Answers

Question 1

An underwriter reviewing a life insurance application notices the applicant, a 45-year-old, has a history of reckless driving and participation in extreme sports. This information primarily helps the underwriter assess which type of hazard?

Accepted Answer

Morale Hazard

Answer

Morale hazard refers to an applicant's indifference or carelessness towards loss because they have insurance. Participating in high-risk activities and having a history of reckless behavior indicates a potential disregard for safety, which increases the likelihood of a claim. Moral hazard involves intentional dishonesty, physical hazard relates to tangible conditions, and speculative hazard involves a chance of gain or loss, which is not insurable.

Question 2

Which of the following is the PRIMARY purpose of risk classification in the underwriting process?

Accepted Answer

To categorize applicants based on their risk level to determine appropriate premium rates.

Answer

The primary goal of risk classification is to group individuals with similar risk characteristics to establish fair and adequate premium rates. This process allows insurers to match the price of coverage to the risk presented by the applicant, promoting equity among policyholders.

Question 3

A life insurance underwriter is evaluating an application for a high-value policy. Which of the following sources of information would be LEAST likely to be the primary factor in assessing the applicant's financial risk?

Accepted Answer

The Producer's (Agent's) Report

Answer

While the Producer's Report provides valuable insights, it is more subjective and less detailed regarding financial specifics compared to a credit report, income statements, or a formal inspection report. For a high-value policy, underwriters rely heavily on objective financial documentation to justify the coverage amount and assess the ability to pay premiums.

Question 4

The tendency for individuals who believe they have a higher-than-average risk of loss to seek insurance more aggressively than those with average or below-average risk is known as:

Accepted Answer

Adverse selection

Answer

Adverse selection occurs when there is an asymmetry of information, and individuals with a greater likelihood of filing a claim are more inclined to purchase insurance. This presents a significant challenge for insurers, as it can lead to a higher-than-expected number of claims if not properly managed through underwriting.

Question 5

An underwriter receives an application from an individual with a well-managed chronic health condition. After reviewing the Attending Physician's Statement (APS) and recent lab results, the underwriter decides to offer coverage but at a higher premium than the standard rate. This underwriting decision is an example of:

Accepted Answer

Acceptance with a rating

Answer

When a risk is higher than normal but still within an acceptable range, the underwriter may issue the policy with a 'rating'. This means the policy is approved but with a higher premium or modified terms to compensate for the increased risk.

(CU) Certified Underwriter Practice Test

(CU) Certified Underwriter Practice Test

CU - Certified Underwriter Risk Assessment and Selection Questions and Answers