Risk Assessment and Selection Flashcards

The 'retention line' in a reinsurance treaty refers to:

Answer: The portion of each risk the primary insurer keeps for its own account

The retention line (or 'net retention') is the amount of risk the cedant (primary insurer) keeps on its own books, with losses above that level ceded to the reinsurer.

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.

A 'claims-made' policy differs from an 'occurrence' policy primarily in that:

Answer: Claims-made policies cover claims reported during the policy period regardless of when the incident occurred, subject to the retroactive date

A claims-made policy covers claims first reported during the policy period for incidents occurring after the retroactive date, regardless of when the loss-causing event occurred.

An underwriter is considering a large commercial account that represents 15% of the regional office's total written premium. The MOST significant underwriting concern this raises is:

Answer: Concentration of risk creating portfolio vulnerability if the account suffers a large loss or cancels

Excessive concentration in a single account creates dangerous portfolio dependency — both from a loss accumulation standpoint and from a premium revenue standpoint if the account leaves.

Which of the following scenarios BEST illustrates 'adverse selection'?

Answer: High-risk individuals are more likely to seek insurance than low-risk individuals, skewing the insured pool

Adverse selection occurs when individuals with higher-than-average risk are disproportionately attracted to purchase insurance, resulting in a pool of insureds with worse-than-expected loss experience.

An underwriter reviewing a contractor's general liability application notices the insured performs both residential and commercial work. The MOST important underwriting step is to:

Answer: Separate and correctly classify all operations to ensure proper rating and coverage adequacy

Mixed contractor operations must be separately classified and rated because residential and commercial work carry different risk profiles and corresponding classification rates.

The concept of 'indemnity' in insurance means that after a covered loss, the insured should be:

Answer: Restored to approximately the same financial position as before the loss, no better and no worse

The principle of indemnity prevents the insured from profiting from a loss by limiting recovery to the actual financial loss suffered, restoring them to their pre-loss financial position.