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III IC-45 practice questions

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Question 1General Insurance Underwriting

In insurance underwriting, what does the term 'moral hazard' refer to?

  1. The risk that an insurer's reinsurer becomes insolvent
  2. The tendency of premiums to rise after a large catastrophe
  3. The probability that a building collapses under heavy snow
  4. The chance that a policyholder behaves dishonestly or carelessly because insurance removes the financial consequence Correct answer.

Explanation

Moral hazard describes behaviour risk: once insured, a person may act less carefully or even fraudulently because the loss falls on the insurer. It is distinguished from physical hazard, which concerns tangible conditions, and from morale hazard, which is mere carelessness without intent.

Question 2General Insurance Underwriting

An underwriter reviews a proposal where the applicant has a poor claims history across several insurers. Which underwriting factor is primarily being assessed?

  1. The applicant's choice of payment method
  2. The applicant's claims experience and loss record Correct answer.
  3. The insurer's reinsurance treaty structure
  4. The applicant's preferred correspondence channel

Explanation

Claims experience is a core rating and selection factor because past loss frequency and severity are statistically predictive of future losses. Underwriters use it to decide on acceptance, terms, and pricing, often alongside other factors.

Question 3General Insurance Underwriting

What is the primary purpose of a proposal form in the underwriting process?

  1. To capture standardised information the underwriter needs to assess and rate the risk Correct answer.
  2. To notify the regulator of a new product launch
  3. To serve as the legal contract of insurance once signed
  4. To record the insurer's investment returns for the year

Explanation

The proposal form gathers consistent, comparable information about the risk so the underwriter can decide whether to accept it and on what terms. It also forms the basis of the contract and supports the duty of disclosure, but it is not itself the policy contract.

Question 4General Insurance Underwriting

Which of the following best describes 'adverse selection' in underwriting?

  1. The tendency of underwriters to decline profitable business
  2. The random fluctuation of claims around the expected mean
  3. The selection of reinsurers with weak security ratings
  4. Applicants with higher-than-average risk are more likely to seek or retain insurance Correct answer.

Explanation

Adverse selection occurs when those most likely to claim are most eager to buy or keep cover, so the insured pool skews toward poorer risks. Underwriters counter it through accurate risk classification, exclusions, and pricing.

Question 5General Insurance Underwriting

What does 'sum insured' represent in a property policy?

  1. The premium paid by the policyholder for the year
  2. The commission paid to the intermediary
  3. The maximum amount the insurer will pay for a loss, subject to policy terms Correct answer.
  4. The deductible the policyholder must absorb

Explanation

The sum insured sets the ceiling of the insurer's liability for insured damage, and it also drives premium and any average or underinsurance condition. It is distinct from the premium, the deductible, and intermediary remuneration.

Question 6General Insurance Underwriting

An underwriter applies a 'no claims discount' to a motor renewal. Which underwriting objective does this most directly support?

  1. Increasing the insurer's expense ratio
  2. Broadening the policy coverage automatically
  3. Encouraging careful behaviour and rewarding favourable loss experience Correct answer.
  4. Reducing the insurer's regulatory capital requirement

Explanation

Experience-rated discounts reward policyholders with clean records and give an incentive to avoid claims, aligning the insured's behaviour with the insurer's interest. This is a pricing and retention tool rather than a coverage or capital measure.

Question 7General Insurance Underwriting

Which statement correctly distinguishes 'physical hazard' from 'morale hazard'?

  1. Physical hazard is assessed only at renewal, while morale hazard is assessed only at inception
  2. Physical hazard relates to fraud, while morale hazard relates to building construction
  3. Physical hazard is a tangible condition of the risk, while morale hazard is an attitude of carelessness Correct answer.
  4. Physical hazard applies only to liability, while morale hazard applies only to property

Explanation

Physical hazards are observable conditions such as construction, occupancy, or housekeeping that affect loss potential. Morale hazard is an indifferent attitude that increases loss because insurance exists, without any intent to defraud.

Question 8General Insurance Underwriting

Why do underwriters use risk classification?

  1. To eliminate the need for reinsurance
  2. To guarantee that every applicant receives identical terms
  3. To avoid the use of exclusions in policy wording
  4. To group similar risks so that each group pays a premium reflecting its expected loss cost Correct answer.

Explanation

Classification pools risks with comparable expected loss characteristics so pricing is equitable and subsidies between dissimilar risks are limited. It supports fairness and financial adequacy but does not remove the need for reinsurance or exclusions.

Question 9General Insurance Underwriting

A commercial property underwriter discovers that a warehouse stores flammable solvents but the proposal declared only 'general goods'. What is the most appropriate underwriting action?

  1. Cancel all commercial property business in the region
  2. Reduce the premium to reflect the lower declared hazard
  3. Ignore the discrepancy because the policy has already been quoted
  4. Re-rate or decline the risk because the actual occupancy materially increases the hazard Correct answer.

Explanation

Occupancy is a fundamental rating factor, and undisclosed flammable storage materially raises fire and explosion exposure. The underwriter should reassess terms, apply correct rating, or decline, and consider whether misrepresentation affects the contract.

Question 10General Insurance Underwriting

What is the effect of an 'average' (underinsurance) condition in a property policy?

  1. The policy is automatically voided on any loss
  2. Claims are reduced in proportion to the ratio of sum insured to the value at risk Correct answer.
  3. The deductible is waived when the sum insured is inadequate
  4. Claims are paid in full regardless of the sum insured

Explanation

Under an average condition, if the sum insured is below the value at risk, the insured bears a proportionate share of each loss. This encourages accurate sums insured and prevents premium avoidance through underinsurance.

Question 11General Insurance Underwriting

An underwriter is assessing a liability risk and notes that the applicant has recently changed from manual assembly to automated machinery. Why is this information relevant?

  1. Machinery changes are relevant only to property cover
  2. The change alters the exposure profile, including injury frequency and product defect potential Correct answer.
  3. Liability underwriting ignores operational changes
  4. Automation always reduces premiums by a fixed percentage

Explanation

Operational changes affect both employee injury exposure and the likelihood of product defects reaching customers, so they are central to liability assessment. Underwriters must reassess terms because the historical loss record may no longer reflect the new process.

Question 12General Insurance Underwriting

Which of the following is the best example of a 'catastrophe exposure' an underwriter should manage through accumulation control?

  1. Many insured properties concentrated in one flood-prone river basin Correct answer.
  2. A policyholder's decision to change payment frequency
  3. The insurer's choice of advertising agency
  4. A single small shop with a fire extinguisher on site

Explanation

Accumulation control addresses the risk that one event, such as a flood or windstorm, triggers many claims across a concentrated portfolio. Geographic concentration in a hazard zone is the classic example that requires aggregate monitoring and reinsurance.

Question 13General Insurance Underwriting

What is the role of an exclusion in an insurance policy?

  1. To guarantee renewal on identical terms
  2. To remove specified perils, property, or circumstances from the scope of cover Correct answer.
  3. To increase the sum insured automatically at renewal
  4. To replace the need for a proposal form

Explanation

Exclusions define the boundaries of cover by removing perils or situations the insurer does not intend to insure, such as war or wear and tear. Clear exclusions keep pricing accurate and prevent cover for uninsurable or catastrophic risks.

Question 14General Insurance Underwriting

An applicant with a history of fire losses asks for cover on a timber-framed factory. Which combination of underwriting responses is most appropriate?

  1. Impose a higher deductible, apply a fire-resistant conditions warranty, and re-rate for the hazard Correct answer.
  2. Reduce the sum insured to lower the premium
  3. Accept at standard rates because timber is a common material
  4. Decline all risks involving timber without exception

Explanation

A poor fire history combined with combustible construction supports risk-improvement measures such as warranties, higher deductibles, and increased rates. These align the terms with the elevated exposure while allowing the underwriter to write the risk prudently.

Question 15General Insurance Underwriting

What does 'proximate cause' mean when an underwriter and claims team assess whether a loss is covered?

  1. The most expensive peril listed in the policy
  2. The dominant, effective cause of a loss that sets in motion the chain of events Correct answer.
  3. The cause chosen by the policyholder in the claim form
  4. The last event in time before the damage occurred

Explanation

Proximate cause is the efficient or dominant cause that initiates an unbroken sequence leading to loss, and cover depends on whether that peril is insured. It is not simply the final event or the insured's own characterisation of the cause.

Question 16General Insurance Underwriting

An underwriter notes that a fleet operator has installed telematics and driver-behaviour monitoring. How should this most likely influence the assessment?

  1. It transfers the risk to the telematics provider
  2. It has no effect because technology is irrelevant to motor risk
  3. It may support more favourable terms because it can reduce accident frequency and improve loss control Correct answer.
  4. It automatically voids the policy

Explanation

Telematics provides objective data on driving behaviour and can demonstrate improved loss control, supporting better terms or usage-based pricing. The underwriter should verify how the data is used and whether it is reliable rather than assume automatic outcomes.

Question 17General Insurance Underwriting

Which statement best explains why underwriters assess 'sum insured adequacy' at inception?

  1. A higher sum insured always reduces the premium
  2. Sum insured only matters for liability policies
  3. Adequacy is assessed solely by the broker
  4. An inadequate sum insured both underfunds the risk and may trigger proportional claim reductions Correct answer.

Explanation

If the sum insured is below the true reinstatement or market value, premium is under-collected and average or underinsurance conditions can reduce claims. Underwriters therefore check adequacy against declared values and may require indexation.

Question 18General Insurance Underwriting

In underwriting, what is a 'warranty' in the context of policy conditions?

  1. A discount applied at renewal
  2. A promise by the insured that a specified state of affairs exists or will be maintained Correct answer.
  3. A statement by the insurer guaranteeing profits
  4. A reinsurance agreement covering catastrophe losses

Explanation

A warranty is a contractual promise about facts or conduct, such as maintaining a sprinkler system, and breach can affect cover depending on the applicable law and wording. It is a risk-control tool distinct from pricing discounts or reinsurance.

Question 19General Insurance Underwriting

An underwriter receives a proposal from a new business with no loss history. Which approach best reflects sound underwriting judgement?

  1. Assume the risk is better than average because no claims are recorded
  2. Use industry benchmarks and risk characteristics while applying a cautious initial rating pending experience Correct answer.
  3. Decline automatically because no history exists
  4. Apply the lowest possible rate to win the account

Explanation

Absence of a loss record is not evidence of low risk; for new ventures the underwriter relies on class data, management quality, and physical characteristics. A cautious initial rating that is revisited as experience develops is prudent.

Question 20General Insurance Underwriting

What is the main underwriting purpose of a deductible (excess)?

  1. To fund the insurer's marketing budget
  2. To retain a portion of each loss with the insured, reducing small claims and moral hazard Correct answer.
  3. To replace the need for a sum insured
  4. To increase the insurer's liability on every claim

Explanation

A deductible makes the insured share in each loss, which discourages small or frivolous claims and encourages loss prevention. It also reduces administrative costs and can lower premium in exchange for retained risk.

Question 21General Insurance Underwriting

An underwriter is offered a large industrial risk that exceeds the insurer's net capacity. What is the most appropriate way to handle the capacity constraint?

  1. Decline the risk without exploring risk-sharing options
  2. Arrange facultative reinsurance or co-insurance to share the risk within capacity limits Correct answer.
  3. Accept the entire risk and ignore capacity limits
  4. Reduce the sum insured without the insured's consent

Explanation

When a risk exceeds net retention, insurers use facultative reinsurance, treaties, or co-insurance to spread exposure while still serving the client. Ignoring capacity limits or unilaterally reducing cover would be imprudent or improper.

Question 22General Insurance Underwriting

An underwriter considers a professional indemnity risk where the firm's fee income has grown rapidly while staff numbers have stayed flat. What does this pattern most likely signal?

  1. A possible change in the nature or concentration of work that may increase professional liability exposure Correct answer.
  2. That the firm has stopped providing professional services
  3. An accounting error with no underwriting relevance
  4. A guaranteed improvement in risk quality

Explanation

Rising fee income with a static headcount can indicate larger or more complex engagements per professional, which may increase error and omission exposure. The underwriter should investigate the mix and size of assignments rather than assume improved quality.

Question 23General Insurance Underwriting

A property portfolio shows a rising frequency of small water-damage claims but stable large losses. Which underwriting conclusion is most defensible?

  1. Catastrophe reinsurance limits must be increased urgently
  2. The portfolio should be declined immediately
  3. The sum insured is certainly inadequate
  4. Poor maintenance or housekeeping is likely driving attritional losses and should be addressed through conditions and deductibles Correct answer.

Explanation

Frequent small water-damage claims typically point to maintenance or housekeeping weaknesses, which can be managed with risk-improvement requirements and higher deductibles. Large-loss stability suggests the issue is attritional rather than catastrophic.

Question 24General Insurance Underwriting

Under a 'claims-made' liability policy, which circumstance determines whether a claim is covered?

  1. The claim must be reported within thirty days of the policy's expiry in all cases
  2. The injury or damage must have occurred during the policy period
  3. The claim is first made and notified during the policy period, subject to any retroactive date Correct answer.
  4. The insured must have paid all premiums before any incident

Explanation

Claims-made cover responds to claims first made against the insured and notified during the period, with the retroactive date limiting how far back the triggering act may lie. This differs from occurrence cover, which is triggered by when the injury or damage happens.

Question 25General Insurance Underwriting

An underwriter must decide whether to bind cover on a risk pending receipt of a satisfactory fire survey. What is the most prudent approach?

  1. Bind subject to satisfactory survey conditions or postpone binding until the survey confirms acceptable risk features Correct answer.
  2. Decline the risk because a survey has been requested
  3. Bind unconditionally and ignore the survey outcome
  4. Ask the broker to complete the survey in place of a qualified inspector

Explanation

Binding subject to survey conditions protects the insurer if the inspection reveals unacceptable features, while allowing the client to proceed. Unconditional binding removes the protection the survey was intended to provide.

Question 26General Insurance Underwriting

An underwriter is reviewing the financial standing of a proposed commercial insured. Which document most directly provides audited figures on profitability, liabilities and net worth?

  1. The annual report and audited financial statements Correct answer.
  2. The certificate of incorporation
  3. The completed proposal form
  4. The loss run supplied by the previous insurer

Explanation

Audited financial statements are the primary source for verifying profitability, liabilities and net worth, and underwriters use ratios derived from them to judge financial risk. The other documents support the assessment but do not contain audited financial data.

Question 27General Insurance Underwriting

Which term describes the maximum amount of risk an insurer is willing to retain on a single risk before arranging reinsurance?

  1. The claims reserve
  2. The acquisition cost
  3. The premium loading
  4. The net capacity Correct answer.

Explanation

Net capacity is the limit an insurer chooses to retain for its own account on a single risk, with any excess ceded to reinsurers. It is set by management and reflects capital, accumulation and appetite.

Question 28General Insurance Underwriting

An underwriter declines a risk because it falls outside the classes the insurer is licensed to write. Which underwriting control is being applied?

  1. Portfolio balance
  2. Underwriting authority limits Correct answer.
  3. Reinsurance treaty terms
  4. Accumulation control

Explanation

Underwriting authority limits define which classes, sizes and territories an individual underwriter or insurer may accept. Writing outside the licensed class would breach those limits regardless of the risk quality.

Question 29General Insurance Underwriting

What is the primary function of a risk survey report in commercial underwriting?

  1. To satisfy a regulatory filing requirement for all commercial policies
  2. To calculate the reinstatement value of the buildings
  3. To provide independent evidence of the physical and management features of the risk Correct answer.
  4. To confirm the premium rate applied to the policy

Explanation

A survey report gives the underwriter independent, site-specific evidence on construction, protection, housekeeping and management controls. That evidence supports rating, terms and any risk-improvement requirements.

Question 30General Insurance Underwriting

Which element of the underwriting process establishes the insurer's formal record of the risk accepted and the terms applied?

  1. The claims register
  2. The policy schedule and underwriting file Correct answer.
  3. The marketing plan
  4. The reinsurance slip

Explanation

The policy schedule and the underwriting file together record what was accepted, on what terms and on what information. They provide the audit trail for later renewals, claims and disputes.

Question 31General Insurance Underwriting

An underwriter wants to compare a proposed risk against the insurer's historical loss experience for similar risks. Which source is most appropriate?

  1. The insurer's own portfolio experience statistics Correct answer.
  2. The insurer's share price history
  3. The national census
  4. The applicant's business plan

Explanation

Portfolio experience statistics give the insurer's own frequency and severity data by class, which is the most relevant benchmark for pricing and terms. External market data may supplement it but the internal data is the primary reference.

Question 32General Insurance Underwriting

Which of the following best describes 'appetite' in an insurer's underwriting strategy?

  1. The maximum discount an underwriter may grant
  2. The statutory solvency margin
  3. The commission paid to intermediaries
  4. The classes, characteristics and limits of risk the insurer chooses to pursue Correct answer.

Explanation

Underwriting appetite defines the types and features of risk the insurer actively wants, and by implication those it does not. It guides underwriters in accepting, modifying or declining business.

Question 33General Insurance Underwriting

An underwriter requests a completed proposal form signed by the applicant. What is the main underwriting value of the signature?

  1. It guarantees the policy will not be avoided
  2. It proves the premium has been paid
  3. It transfers the risk to the broker
  4. It confirms the applicant has declared the information and accepts its accuracy as a basis of cover Correct answer.

Explanation

A signed proposal confirms the applicant is responsible for the accuracy of the declared information, which underpins the basis of the contract. It supports the insurer's remedies if material facts are misrepresented.

Question 34General Insurance Underwriting

A commercial underwriter is offered a risk with a sum insured far above the insurer's treaty retention and no facultative support arranged. What is the most appropriate immediate action?

  1. Increase the premium to cover the additional exposure
  2. Bind the full risk and notify reinsurers afterwards
  3. Refer the risk for facultative reinsurance or reduce the accepted share before binding Correct answer.
  4. Decline the risk outright without further enquiry

Explanation

Where the risk exceeds net and treaty capacity, the underwriter must secure facultative support or limit the accepted share before binding. Binding beyond capacity creates uncontrolled exposure that cannot be corrected retrospectively.

Question 35General Insurance Underwriting

An underwriter is rating a hotel risk and discovers the fire detection system is not connected to a monitoring centre. How should this most appropriately affect the underwriting decision?

  1. Apply a rating loading or require an alarm upgrade as a condition Correct answer.
  2. Ignore it because the building is of fire-resistive construction
  3. Extend cover to include business interruption without adjustment
  4. Reduce the deductible to reflect the lower risk

Explanation

Unmonitored detection reduces the likelihood of prompt fire service response, increasing severity, particularly for a hotel with sleeping occupants. A loading or a condition requiring an approved monitored system is the proportionate response.

Question 36General Insurance Underwriting

An underwriter is assessing a contractor's liability risk and notes that the firm subcontracts most of its work to unvetted third parties. Which underwriting concern is most relevant?

  1. Higher motor fleet theft frequency
  2. Loss of gross profit following machinery breakdown
  3. Increased liability exposure from uncontrolled subcontractor activities Correct answer.
  4. Underinsurance of the contractor's plant

Explanation

Unvetted subcontractors can create liability exposures the contractor cannot demonstrate it controls, including defective work and injury to third parties. Underwriters typically require evidence of subcontractor vetting, insurance and supervision.

Question 37General Insurance Underwriting

An underwriter is reviewing a property portfolio where a single fire or flood event could affect several insured locations in the same district. Which underwriting technique most directly addresses this?

  1. Aggregating exposures by geographic zone and applying accumulation limits Correct answer.
  2. Increasing the deductible on each location
  3. Requiring a valuation of each building
  4. Applying an average condition to each location

Explanation

Accumulation management aggregates exposures that could be affected by one event and applies limits or reinsurance protection accordingly. This prevents a single catastrophe from producing losses beyond the insurer's tolerance.

Question 38General Insurance Underwriting

An underwriter is considering a new manufacturing risk and wants to assess the quality of management controls. Which information source is most useful?

  1. The insurer's claims payment history for unrelated classes
  2. The building's reinstatement value
  3. The completed management questionnaire and site survey findings Correct answer.
  4. The applicant's advertising material

Explanation

A management questionnaire combined with survey findings directly evidences how the firm controls risk, including maintenance, training and permit-to-work systems. This is the most relevant indicator of management quality.

Question 39General Insurance Underwriting

An underwriter proposes a policy condition requiring the insured to maintain a sprinkler system in working order. Which underwriting purpose does this condition serve?

  1. It transfers the risk of fire to the insured
  2. It guarantees the premium will be paid on time
  3. It removes the need for a risk survey
  4. It preserves the risk characteristics on which the rating and terms were based Correct answer.

Explanation

Conditions such as sprinkler maintenance warranties preserve the risk features the underwriter relied on when setting terms. If the protection is not maintained, the risk differs materially from the one accepted.

Question 40General Insurance Underwriting

An underwriter is comparing two proposals for a retail risk with identical sums insured but different claims histories. Which underwriting principle supports charging different premiums?

  1. Premium should reflect the expected cost of risk, including claims experience Correct answer.
  2. Premium should be fixed by the regulator for each class
  3. Premium should be equal for equal sums insured
  4. Premium should be set solely by the broker's recommendation

Explanation

Premium should reflect the expected cost of risk, and claims experience is a strong predictor of future frequency and severity. Equal sums insured do not imply equal expected loss cost.

Question 41General Insurance Underwriting

An underwriter is assessing a risk where the applicant has recently made substantial safety improvements but has a poor five-year loss record. What is the most balanced underwriting approach?

  1. Recognise the improvements while applying terms that reflect the remaining uncertainty Correct answer.
  2. Ignore the loss record because improvements have been made
  3. Apply the same rate as a loss-free risk
  4. Decline the risk permanently on the basis of the historical record

Explanation

Current controls are relevant to future loss expectation, but a poor record still signals possible management weaknesses. A balanced response acknowledges improvements while retaining loadings or conditions until the better experience is demonstrated.

Question 42General Insurance Underwriting

An underwriter is reviewing a professional indemnity proposal from a firm whose activities have expanded into a new discipline. Which underwriting action is most appropriate?

  1. Assess the new activity separately and restrict cover to declared activities Correct answer.
  2. Extend cover automatically because the firm is already insured
  3. Increase the deductible across all activities without further enquiry
  4. Cancel the policy at renewal as a matter of course

Explanation

A new discipline changes the risk profile and may fall outside the insurer's appetite or the existing rating basis. The underwriter should assess it on its own merits and define the covered activities precisely in the policy.

Question 43General Insurance Underwriting

An underwriter is offered a risk where the proposer refuses to provide requested financial information. What is the most appropriate underwriting response?

  1. Decline or defer the risk until adequate information is available Correct answer.
  2. Assume the applicant is financially sound
  3. Reduce the premium to encourage disclosure
  4. Bind cover and obtain the information at the first renewal

Explanation

Financial information is material to assessing the risk, and an underwriter cannot properly evaluate a risk on assumption. Declining or deferring until adequate information is provided protects the insurer from unquantified exposure.

Question 44General Insurance Underwriting

An underwriter is reviewing a motor fleet where the average vehicle age has risen sharply and maintenance records are poor. Which underwriting outcome best reflects the increased exposure?

  1. Extension of cover to include mechanical breakdown
  2. Reduced premium to reflect lower vehicle values
  3. Removal of the driver verification requirement
  4. Higher deductible, maintenance conditions or restricted cover for older vehicles Correct answer.

Explanation

An ageing, poorly maintained fleet increases both accident frequency and the severity of third-party losses. Higher deductibles, maintenance conditions or restricted cover are proportionate responses.

Question 45General Insurance Underwriting

An underwriter assesses a risk where the sum insured appears to be based on historic cost rather than reinstatement cost. Which underwriting action is most appropriate?

  1. Accept the sum insured because it is the applicant's choice
  2. Require a current valuation and adjust the sum insured and rate accordingly Correct answer.
  3. Remove the average condition from the policy
  4. Apply a lower rate because the sum insured is lower

Explanation

A sum insured based on historic cost is likely to be inadequate, creating underinsurance and reducing the premium base. Requiring a current valuation aligns the sum insured and rate with the actual exposure.

Question 46General Insurance Underwriting

An underwriter is deciding whether to accept a risk on a 'declined elsewhere' basis where the previous insurer's reasons are unknown. What is the most prudent approach?

  1. Obtain the previous insurer's reasons and assess them before deciding Correct answer.
  2. Accept on standard terms because the risk is new to the insurer
  3. Accept at a reduced premium to win the account
  4. Decline automatically because another insurer declined

Explanation

A previous decline may reflect a material hazard, claims history or appetite mismatch that the underwriter must understand. Obtaining the reasons allows an informed decision rather than an assumption either way.

Question 47General Insurance Underwriting

An underwriter must decide whether to write a large property risk where the only available information is a broker's summary containing no protection details. What is the most defensible underwriting decision?

  1. Apply the maximum rate available to the class and bind
  2. Request the missing protection information or a survey before committing terms Correct answer.
  3. Decline the risk without explanation
  4. Bind on the broker's summary and set a provisional rate

Explanation

Protection features are central to property pricing and terms, and a decision made without them is not properly evidenced. Requesting the information or a survey allows terms to be set on a sound basis.

Question 48General Insurance Underwriting

An underwriter is analysing a liability portfolio where frequency is stable but average claim severity has doubled over three years. Which underwriting conclusion is most sound?

  1. The deductible should be reduced to reflect fewer claims
  2. The risk is unchanged because frequency is stable
  3. The portfolio should be expanded to spread the cost
  4. The portfolio requires repricing and possibly tighter limits or terms to reflect severity trend Correct answer.

Explanation

Severity is a component of expected loss cost, so a doubling of average severity raises the cost of risk even with stable frequency. Repricing and review of limits or terms address the trend, which may reflect inflation, litigation or larger exposures.

Question 49General Insurance Underwriting

An underwriter is setting terms for a risk where the applicant's answers on the proposal conflict with information obtained from a survey. How should the underwriter proceed?

  1. Resolve the conflict with the applicant and base terms on the verified position Correct answer.
  2. Rely on the proposal because it is signed by the applicant
  3. Rely on the survey because it is independent and disregard the proposal
  4. Average the two positions and apply a mid-range rate

Explanation

A material conflict between declared and observed information must be resolved before terms are set, because the basis of cover depends on accurate disclosure. Verified information should then drive the rating and conditions.

Question 50General Insurance Underwriting

An underwriter is considering a new class of business with no internal loss data and limited market statistics. Which approach best supports a prudent pricing decision?

  1. Assume the class will perform like the closest existing class without adjustment
  2. Price at the lowest market rate to attract volume
  3. Defer pricing until five years of data are available
  4. Set a cautious initial rate with limits on exposure and monitor emerging experience Correct answer.

Explanation

Where data is scarce, a cautious initial rate combined with exposure limits protects the insurer while experience accumulates. Monitoring allows the rate to be adjusted as credible data emerges.