Underwriting and Risk Assessment
Underwriting and Risk Assessment
This domain tests how an underwriter identifies, measures, prices and controls risk before accepting it. Expect questions on rating factors, policy conditions that shape exposure, and the distinction between hazards that can be priced and those that must be excluded.
Core underwriting rules
Underwriting is a disciplined trade-off between price and exposure. The underwriter gathers material facts, classifies the risk, applies rating factors, and imposes terms:
- Risk identification: occupancy, construction, protection, exposure and management quality for property; age, health and occupation for life/health.
- Moral hazard reflects dishonest intent; morale hazard reflects carelessness or indifference. They require different controls.
- Adverse selection: applicants with higher-than-average risk seek cover disproportionately; underwriting questions and exclusions counter it.
- Rating factors must be objective, verifiable and non-discriminatory where regulation requires.
- Deductibles and excesses share small losses and reduce moral hazard.
- Warranties and conditions are contractual promises; breach can entitle the insurer to avoid liability.
- Sum insured must reflect reinstatement or market value, depending on the basis.
- Reinsurance protects the insurer's capacity and solvency, not the insured's contract.
Worked example
A warehouse owner seeks fire cover. The underwriter finds plastic storage in a non-standard building with no hydrant and a neighbouring timber yard. She classifies occupancy as high-hazard, loads the base rate, imposes a 2% deductible, excludes spontaneous combustion, and requires a fire-detection warranty. She sets the sum insured at reinstatement value and records that a market-value basis would create a coinsurance gap.
Traps that cost marks
Using moral hazard and morale hazard interchangeably; ignoring probable maximum loss; treating a warranty as a mere representation; and accepting a sum insured without checking the valuation basis.