Risk & Underwriting Principles Flashcards
7 cards from real CU 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 & Underwriting Principles flashcards as text
Which reinsurance arrangement allows a ceding insurer to decide case-by-case whether to cede a specific risk?
Answer: Facultative reinsurance
Facultative reinsurance is negotiated individually for each risk, giving the ceding insurer discretion on which risks to cede and allowing the reinsurer to accept or reject each submission.
In underwriting, 'line of business' primarily refers to:
Answer: A specific category of insurance coverage such as workers' compensation or commercial auto
Line of business classifies insurance products by type of coverage (e.g., property, liability, workers' comp), each governed by distinct underwriting rules.
What is the significance of the 'combined ratio' in underwriting performance measurement?
Answer: It combines the loss ratio and expense ratio to indicate underwriting profitability
A combined ratio below 100% indicates underwriting profit; above 100% indicates an underwriting loss before investment income.
Which term describes an insured's legal right to recover from a negligent third party after the insurer has paid a claim?
Answer: Subrogation
Subrogation gives the insurer the right to pursue a third party responsible for the loss, preventing the insured from collecting twice.
A manufacturing plant that stores large quantities of flammable solvents presents which type of hazard?
Answer: Physical hazard
Physical hazards are tangible conditions—such as flammable materials, structural deficiencies, or equipment age—that increase the probability or severity of loss.
Why do underwriters require insurable interest to exist at the time of policy inception?
Answer: To prevent wagering and ensure the policyholder has a financial stake in the subject of insurance
Insurable interest ensures the policyholder faces genuine financial loss if the insured event occurs, distinguishing insurance from gambling.
An underwriter who intentionally avoids writing policies in certain neighborhoods due to demographic factors may be violating:
Answer: Fair lending and anti-redlining regulations
Redlining—refusing to underwrite or charging higher premiums based on geography used as a proxy for protected class characteristics—violates fair lending and state anti-discrimination laws.