CU - Certified Underwriter Commercial Underwriting Practices Questions and Answers 1 — Questions and Answers
Question 1: An underwriter is evaluating a submission for a large chemical manufacturing plant with a total insurable value (TIV) of $150 million. The underwriter's company has a per-risk treaty reinsurance limit of $50 million. The risk meets all internal guidelines for safety and loss control. What is the most appropriate next step for the underwriter to provide full coverage?
- Issue a policy for $50 million and advise the insured to seek coverage elsewhere for the remainder.
- Decline the risk as it exceeds the company's net retention and treaty limits.
- Bind coverage for the full amount and notify the reinsurance department afterward.
- Seek facultative reinsurance for the amount exceeding the treaty limit. (Correct answer)
Correct answer: Seek facultative reinsurance for the amount exceeding the treaty limit.
When a specific, desirable risk exceeds an insurer's automatic (treaty) reinsurance capacity, the underwriter must secure individual reinsurance for that specific risk. This is known as facultative reinsurance. Declining a good risk is not the best option, issuing a partial policy is poor customer service, and binding coverage without reinsurance in place would expose the company to catastrophic loss.
Question 2: In the context of workers' compensation underwriting, what does an Experience Modification Rate (Mod) of 1.15 indicate about the applicant?
- The applicant's historical losses are 15% better than the industry average.
- The applicant's historical losses are 15% worse than the industry average. (Correct answer)
- The applicant is a new business with no prior loss experience.
- The applicant will receive a 15% credit on their standard premium.
Correct answer: The applicant's historical losses are 15% worse than the industry average.
The Experience Modification Rate compares an employer's actual historical losses to the expected losses for their industry. A Mod of 1.00 is average. A Mod above 1.00, like 1.15, indicates worse-than-average loss experience and results in a 15% debit or surcharge on the premium. A Mod below 1.00 is a credit.
Question 3: An underwriter receives a loss control report for a large woodworking facility. Which of the following recommendations in the report would be of the highest priority for the underwriter to see implemented before binding coverage?
- Implementing a formal lockout/tagout program for machinery maintenance. (Correct answer)
- Upgrading the landscaping around the main entrance.
- Repainting parking lot lines to improve traffic flow.
- Installing ergonomic workstations for office staff.
Correct answer: Implementing a formal lockout/tagout program for machinery maintenance.
In a woodworking facility, machinery presents a significant risk of severe injury. A lockout/tagout program is a critical safety procedure designed to prevent accidental startups during maintenance, directly addressing a major life-safety and workers' compensation exposure. The other options represent much lower-severity risks and would be a lower priority for an underwriter.
Question 4: A commercial underwriter is assessing a Business Income (Business Interruption) application for a high-end restaurant that relies on a single, exclusive supplier for its imported specialty ingredients. This reliance on one supplier represents a significant:
- Completed operations exposure.
- Premises liability exposure.
- Contingent business income exposure. (Correct answer)
- Commercial auto exposure.
Correct answer: Contingent business income exposure.
A contingent business income exposure exists when the insured's ability to operate is dependent on a third-party supplier (a contributing property) or a key customer (a recipient property). A disruption at this single supplier could interrupt the restaurant's operations even if the restaurant itself suffers no direct physical damage.
Question 5: A commercial insurer's management is emphasizing the need to improve underwriting profitability. An underwriter's risk selection and pricing decisions directly impact which two primary components of the company's combined ratio?
- Investment income and incurred losses.
- Incurred losses and underwriting expenses. (Correct answer)
- Earned premium and investment income.
- Earned premium and underwriting expenses.
Correct answer: Incurred losses and underwriting expenses.
The combined ratio is calculated as (Incurred Losses + Underwriting Expenses) / Earned Premium. It measures underwriting profitability, excluding investment income. An underwriter's primary functions are risk selection (which directly affects incurred losses) and managing the costs of acquiring and servicing business (underwriting expenses).
Question 6: When underwriting a Commercial General Liability (CGL) policy for a construction contractor, which of the following represents the MOST significant 'products-completed operations' hazard?
- A visitor slipping and falling on a wet floor at the contractor's main office.
- The collapse of a poorly constructed balcony three years after the project was finished. (Correct answer)
- An employee dropping a tool from a scaffold, injuring a pedestrian below.
- A company truck causing a multi-vehicle accident on the way to a job site.
Correct answer: The collapse of a poorly constructed balcony three years after the project was finished.
The 'products-completed operations' hazard covers bodily injury or property damage that arises out of the insured's work *after* the work has been completed and the contractor has left the site. The balcony collapse is a classic example of this. The slip-and-fall is a premises exposure, the falling tool is an ongoing operations exposure, and the truck accident is a commercial auto exposure.
CU - Certified Underwriter Commercial Underwriting Practices Questions and Answers 1
An underwriter is evaluating a submission for a large chemical manufacturing plant with a total insurable value (TIV) of $150 million.
The underwriter's company has a per-risk treaty reinsurance limit of $50 million.
The risk meets all internal guidelines for safety and loss control.
What is the most appropriate next step for the underwriter to provide full coverage?