Property And Casualty Insurance License Underwriting and Rating

Question 1

What is the primary purpose of underwriting in insurance?

Accepted Answer

To select and classify risks so that appropriate premiums are charged and adverse selection is avoided

Answer

Underwriting evaluates applicants, classifies risks into appropriate groups, and determines whether and at what price to offer coverage, protecting the insurer's book of business.

Question 2

What is 'adverse selection' in insurance?

Accepted Answer

The tendency for higher-risk individuals to seek insurance more than lower-risk individuals

Answer

Adverse selection occurs when those most likely to suffer a loss disproportionately seek insurance, threatening the insurer's ability to price coverage fairly.

Question 3

What is a 'rating bureau' in property and casualty insurance?

Accepted Answer

An organization that develops and files advisory loss costs and rating systems used by member insurers

Answer

Rating bureaus like ISO (Insurance Services Office) collect industry loss data, develop advisory loss costs, and file rating systems that member insurers can adopt or modify.

Question 4

What are 'loss costs' in insurance rating?

Accepted Answer

The portion of the premium intended to cover expected claims, before loading for expenses and profit

Answer

Loss costs (also called pure premiums) represent the actuarially projected cost of claims per exposure unit, which insurers then load with their own expense and profit factors.

Question 5

What is 'experience rating'?

Accepted Answer

Adjusting a premium based on the insured's own past loss experience

Answer

Experience rating modifies a policyholder's premium up or down based on their individual loss history relative to what was expected for their class.

Property And Casualty Insurance License Practice Test

Property And Casualty Insurance License Practice Test

Property And Casualty Insurance License Underwriting and Rating