CU Core Underwriting Principles 2 — Questions and Answers
Question 1: Which underwriting concept refers to the tendency of higher-risk individuals to seek insurance more than lower-risk individuals?
- Moral hazard
- Adverse selection (Correct answer)
- Risk pooling
- Subrogation
Correct answer: Adverse selection
Adverse selection occurs when those with greater risk are more likely to purchase insurance, skewing the insured pool toward higher-risk individuals.
Question 2: An underwriter applying the 'law of large numbers' is primarily trying to achieve which goal?
- Reduce policy premiums below market rates
- Increase the number of exclusions per policy
- Make loss predictions more statistically reliable (Correct answer)
- Eliminate all underwriting judgment
Correct answer: Make loss predictions more statistically reliable
The law of large numbers states that as the number of similar exposure units increases, actual losses tend to converge toward expected losses, improving predictability.
Question 3: What is the purpose of a deductible in an insurance policy from an underwriting perspective?
- To increase insurer profit margins
- To reduce moral hazard and eliminate small nuisance claims (Correct answer)
- To comply with state mandatory minimum requirements
- To allow insurers to deny all large claims
Correct answer: To reduce moral hazard and eliminate small nuisance claims
Deductibles make the insured bear a portion of the loss, reducing moral hazard by encouraging loss prevention and eliminating small claims that cost more to process than they pay.
Question 4: Which term describes the maximum amount an insurer will pay for all claims arising from a single occurrence?
- Per-occurrence limit (Correct answer)
- Aggregate limit
- Sublimit
- Retention limit
Correct answer: Per-occurrence limit
A per-occurrence limit caps the insurer's liability for losses arising from one event, regardless of how many claimants are involved.
Question 5: In underwriting, what does 'hazard' refer to specifically?
- The probability that a loss will occur
- A condition that increases the frequency or severity of loss (Correct answer)
- The financial consequence of a covered peril
- The premium charged for coverage
Correct answer: A condition that increases the frequency or severity of loss
A hazard is a condition that increases either the likelihood or the magnitude of loss from a given peril, distinct from the peril itself.
Question 6: What does an underwriter mean by 'schedule rating'?
- Setting premiums based solely on industry loss statistics
- Adjusting a standard premium up or down based on specific risk characteristics (Correct answer)
- Scheduling inspections for large commercial accounts
- Rating policies according to a fixed government fee schedule
Correct answer: Adjusting a standard premium up or down based on specific risk characteristics
Schedule rating allows underwriters to modify a manual premium by applying credits or debits based on individual risk characteristics not fully captured in class rates.
Question 7: Which type of underwriting authority allows a field agent to bind coverage up to specified limits without prior home-office approval?
- Facultative authority
- Delegated binding authority (Correct answer)
- Treaty authority
- Surplus lines authority
Correct answer: Delegated binding authority
Delegated binding authority (also called binding authority) grants agents or MGAs the right to commit the insurer to coverage within defined limits and classes.
CU Core Underwriting Principles 2
Which underwriting concept refers to the tendency of higher-risk individuals to seek insurance more than lower-risk individuals?