Risk Assessment & Underwriting Flashcards
7 cards from real ABC practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Risk Assessment & Underwriting flashcards as text
In underwriting, 'moral hazard' most accurately refers to:
Answer: The increased risk of loss created by an insured's dishonesty or intent to profit from insurance
Moral hazard arises from character deficiencies or fraudulent intent—for example, an insured who might deliberately cause a loss to collect proceeds.
Which of the following is an example of a 'morale hazard'?
Answer: A driver who takes less care because they know any accident is covered by insurance
Morale hazard reflects indifference to loss prevention that stems from having insurance, rather than deliberate fraud, which characterizes moral hazard.
When assessing a new account, an underwriter examines the applicant's five-year loss runs. The PRIMARY purpose is to:
Answer: Evaluate historical claim frequency and severity as predictors of future losses
Loss runs provide documented evidence of past claims, which are among the most reliable indicators of future loss potential when evaluating a new submission.
The concept of 'law of large numbers' is fundamental to insurance because it explains how:
Answer: Pooling many similar risks makes actual losses more predictable and closer to expected losses
As the number of similar exposure units increases, actual loss experience converges toward the statistically expected loss, allowing insurers to price risk reliably.
Which method of risk transfer involves an insured paying a premium to an insurer to bear the financial consequences of a specified loss?
Answer: Insurance
Insurance is the formal mechanism for transferring risk to an insurer in exchange for a premium, which is the cornerstone of the underwriting function.
A workers' compensation underwriter calculates an experience modification factor (EMR) of 1.35 for an employer. This means the employer's premium will be:
Answer: 35% higher than the manual (class) rate due to worse-than-average loss experience
An EMR above 1.00 indicates the employer's actual losses exceed expected industry losses, resulting in a premium surcharge proportional to the excess.
A property underwriter uses 'probable maximum loss' (PML) primarily to:
Answer: Estimate the largest likely loss from a single occurrence under realistic adverse conditions
PML guides underwriters in setting coverage limits, reinsurance needs, and risk accumulation controls by estimating the worst realistic single-event loss.