Mixed Deck — All CU Topics Flashcards

The 'prior approval' rate regulation system differs from 'file-and-use' in that:

Answer: Rates cannot be used until regulators formally approve them

Under prior approval, insurers must obtain explicit regulatory approval before implementing new rates, unlike file-and-use where immediate implementation is allowed.

An insurance policy is considered an aleatory contract because it is characterized by which of the following?

Answer: An unequal exchange of value between the insurer and the insured.

An aleatory contract is one where the performance of one or both parties is contingent upon an uncertain event. In insurance, the insured pays a relatively small premium, while the insurer may be required to pay a much larger sum if a covered loss occurs. This unequal exchange of value, dependent on chance, is the defining characteristic of an aleatory contract.

The doctrine of 'reasonable expectations' in insurance contract interpretation holds that:

Answer: Courts honor the objectively reasonable expectations of the insured even if policy language is ambiguous

The reasonable expectations doctrine protects insureds by enforcing what an ordinary person would reasonably expect the policy to cover, especially when exclusions are hidden or complex.

A liability insurer pays defense costs that erode the policy limit. This is known as:

Answer: Defense within limits or 'burning limits' coverage

Defense within limits (burning limits) policies reduce the available indemnity limit as defense costs are paid, unlike supplementary payment provisions.

What is the main underwriting concern with using third-party data aggregators for risk scoring?

Answer: Data accuracy, completeness, and potential regulatory compliance issues with data use

Third-party data may be outdated, incomplete, or subject to fair lending and privacy regulations, requiring underwriters to validate quality and compliance before relying on it.

Which NAIC model act establishes standards for unfair claims settlement practices by insurance companies?

Answer: Unfair Claims Settlement Practices Act

The NAIC Unfair Claims Settlement Practices Act prohibits specific claims handling behaviors such as misrepresenting policy provisions, failing to acknowledge claims promptly, and offering unreasonable settlements.

What does 'algorithmic underwriting bias' refer to?

Answer: Unintentional discrimination embedded in automated underwriting models that leads to unfair treatment of protected classes

When models are trained on historical data that reflects past discriminatory practices, they can perpetuate those patterns, raising regulatory and ethical concerns.

Which document must insurers provide to applicants outlining how their personal information will be collected, used, and shared?

Answer: Privacy notice

Under GLBA and state privacy laws, insurers must provide a privacy notice explaining their information practices to applicants and policyholders.

What is the purpose of an underwriting audit conducted by a reinsurer on a ceding company?

Answer: To verify that the ceding company's underwriting standards and practices align with treaty terms and expectations

Reinsurers conduct audits to ensure the ceding insurer is applying agreed-upon underwriting criteria and not ceding risks that fall outside treaty terms.

A small business owner is applying for a line of credit. The underwriter notes that while the company's financial ratios are acceptable, the owner has limited experience in the industry, and a key supplier represents over 60% of their inventory purchases. These factors relate to which of the '5 Cs of Credit'?

Answer: Character and Conditions

The owner's limited experience pertains to 'Character' (management expertise and reliability). The heavy reliance on a single supplier and potential industry vulnerabilities relate to 'Conditions' (the external economic and industry environment). While other Cs are always considered, these specific qualitative risks fall squarely under Character and Conditions.

A policy that covers all risks of physical loss unless specifically excluded is called:

Answer: Open perils (all-risk) coverage

Open perils or all-risk policies provide broad coverage for any cause of loss not explicitly excluded, placing the burden of proof on the insurer to show an exclusion applies.

A prospective insured submits a completed application containing material misrepresentations. What remedy is typically available to the underwriter?

Answer: Void the policy from inception if the misrepresentation was material and relied upon

A material misrepresentation that induces the insurer to issue coverage it would not otherwise have issued gives the insurer the right to rescind the policy from its inception.

What is the primary function of a 'binder' in the underwriting process?

Answer: A binder provides temporary evidence of coverage until the formal policy is issued

A binder is a temporary agreement that provides immediate insurance coverage until the formal policy is prepared and delivered, protecting the insured during the interim period.

Which of the following best describes a 'filed rate' in a prior-approval state?

Answer: A rate that has been submitted to and approved by the state insurance department before use

In prior-approval states, insurers must file proposed rates with the state insurance department and receive explicit approval before implementing them.

In data-driven underwriting, the term 'model drift' refers to:

Answer: The degradation of a predictive model's accuracy over time as real-world conditions change from those in the training data

Model drift occurs when the population or risk environment shifts away from the historical patterns the model was trained on, reducing its predictive power and requiring recalibration.

When evaluating a manufacturing facility's fire risk, an underwriter would give the MOST favorable consideration to which protection class attribute?

Answer: Proximity to a staffed fire station with adequate water supply

ISO Protection Class ratings heavily weight proximity to a staffed (not volunteer) fire station and adequate municipal water supply as the strongest fire protection factors.

Under a Workers' Compensation policy, Part Two — Employers Liability covers:

Answer: Lawsuits by employees alleging employer negligence beyond statutory limits

Employers Liability (Part Two) covers common-law suits by employees or their families that fall outside the exclusive-remedy provisions of workers' comp statutes.

Which legal principle prevents an insurer from later denying coverage based on a policy condition that the insurer previously accepted as satisfied or expressly waived?

Answer: Estoppel and waiver

Waiver and estoppel prevent an insurer from asserting a coverage defense after it has, by its conduct or statements, led the insured to believe the condition was satisfied or the defense would not be raised.

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?

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.

An applicant with significant assets, including a high-performance boat and two rental properties, applies for a $2 million personal umbrella policy. The underwriter notes the applicant's underlying auto policy has liability limits of 100/300/50. What is the most immediate underwriting concern that must be resolved before the policy can be issued?

Answer: The applicant's underlying auto liability limits are insufficient.

Personal umbrella policies require the insured to maintain specific minimum limits on their underlying homeowners and auto policies. Common minimums for auto insurance are $250,000/$500,000. The applicant's limits of 100/300/50 are below this typical requirement, creating a potential gap in coverage. The underwriter must require the applicant to increase their underlying limits before the umbrella policy can be issued.