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Associate Commercial Insurance Underwriter (ACIU) study materials
Associate Commercial Insurance Underwriter (ACIU) study resources

Associate Commercial Insurance Underwriter (ACIU) practice questions

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Question 1AU 300: Strengthening Commercial Underwriting Decision-Making

In commercial underwriting, which financial statement element best indicates a prospect's ability to absorb a large retained loss without threatening solvency?

  1. Total shareholders' equity Correct answer.
  2. Inventory turnover ratio
  3. Gross revenue growth rate
  4. Net income for the most recent fiscal year

Explanation

Retained losses reduce balance-sheet equity directly, so the size of shareholders' equity relative to the proposed retention is the primary solvency buffer underwriters examine. Annual net income is a flow measure that can swing widely and does not represent accumulated cushion.

Question 2AU 300: Strengthening Commercial Underwriting Decision-Making

A commercial underwriter is triaging submissions and wants the fastest signal that a risk departs from the standard appetite for its class. Which approach is most consistent with sound underwriting discipline?

  1. Identify the few characteristics that most drive loss cost for the class and test the submission against them first Correct answer.
  2. Quote the account at the manual rate and revisit only at renewal
  3. Defer all risk assessment until the loss control report arrives
  4. Assign the account to the most recently hired underwriter for development

Explanation

Effective triage focuses scarce attention on the variables that explain most of the loss variance within a class, such as occupancy, protection, or driver exposure. Blind manual rating or delaying judgment until all reports arrive wastes time and misses clear appetite mismatches.

Question 3AU 300: Strengthening Commercial Underwriting Decision-Making

Which statement correctly describes the role of a loss run in commercial underwriting?

  1. It projects future premiums using exposure bases
  2. It replaces the need for a completed application
  3. It summarizes an insured's historical claims experience, including paid and reserved amounts Correct answer.
  4. It certifies that the insured complies with safety regulations

Explanation

A loss run is the carrier's record of reported claims, showing dates, status, paid amounts, and reserves by policy period. Underwriters use it to validate the applicant's description of operations and to test loss frequency and severity against expected norms.

Question 4AU 300: Strengthening Commercial Underwriting Decision-Making

An applicant reports three small fire claims in four years at one location, each under $5,000. Which underwriting conclusion is most defensible?

  1. Three claims in four years is below average for any commercial class
  2. Frequency at a single location suggests a controllable hazard that warrants loss control attention Correct answer.
  3. The account should be declined automatically
  4. Small claims are irrelevant because they fall below the deductible

Explanation

Repeated small losses at one site usually point to a correctable condition such as housekeeping, maintenance, or ignition-source control rather than to random bad luck. Frequency is an early warning even when individual severity is modest.

Question 5AU 300: Strengthening Commercial Underwriting Decision-Making

When an underwriter applies a schedule credit or debit to a commercial account, what is the intended effect?

  1. To adjust the manual premium to reflect characteristics of the individual risk Correct answer.
  2. To satisfy state premium tax requirements
  3. To fund the insurer's claim reserves
  4. To cover the cost of issuing the policy

Explanation

Schedule rating modifies manual premium up or down based on risk-specific features such as management quality, housekeeping, or protective devices. It is the mechanism that lets judgment reflect conditions the class rate does not capture.

Question 6AU 300: Strengthening Commercial Underwriting Decision-Making

A manufacturer's loss history shows steady frequency but one recent claim that alone exceeded annual premium. Which underwriting response best reflects severity analysis?

  1. Ignore the large claim as an anomaly and rate on frequency alone
  2. Examine the specific cause of the large loss and whether a similar event could recur Correct answer.
  3. Reduce the premium to retain the account
  4. Increase the deductible and take no other action

Explanation

Severity analysis asks what produced the outlier and whether the underlying condition, such as a single high-value process or concentration, remains present. That determines whether the loss is truly anomalous or a signal of catastrophic potential.

Question 7AU 300: Strengthening Commercial Underwriting Decision-Making

Which of the following best describes the function of a coinsurance clause in a commercial property policy?

  1. It guarantees replacement cost settlement on all covered property
  2. It requires the insured to share a percentage of every loss regardless of limits
  3. It penalizes underinsurance by reducing recovery when the limit is below a specified percentage of value Correct answer.
  4. It transfers the deductible to the mortgagee

Explanation

A coinsurance clause sets a minimum limit relative to property value and applies a proportional reduction when the insured carries less. The purpose is to discourage buying limits well below probable loss exposure.

Question 8AU 300: Strengthening Commercial Underwriting Decision-Making

An underwriter reviewing a general liability submission learns the insured subcontracts most installation work to uninsured independent contractors. What is the primary underwriting concern?

  1. The policy will automatically be void
  2. Completed operations exposure may be uncontrolled and difficult to transfer Correct answer.
  3. The insured will owe additional premium tax
  4. The insured's payroll will be overstated

Explanation

Uninsured subcontractors create completed operations exposure that the insured cannot shift through certificates of insurance or indemnity agreements. That leaves the carrier bearing defect-related losses with little recovery potential.

Question 9AU 300: Strengthening Commercial Underwriting Decision-Making

Which factor most directly affects the credibility an underwriter should give to an applicant's five-year loss history?

  1. The applicant's marketing budget
  2. The number of years the producer has represented the account
  3. The size of the applicant's exposure base relative to the class Correct answer.
  4. The location of the producer's office

Explanation

Credibility depends on whether the exposure volume is large enough for losses to be statistically meaningful. A small exposure base can produce a loss ratio that is mostly noise, while a large one supports reliable inference.

Question 10AU 300: Strengthening Commercial Underwriting Decision-Making

A commercial auto fleet shows a rising preventable accident rate while total miles driven is flat. Which underwriting action is most appropriate?

  1. Reduce the rate because miles are unchanged
  2. Ignore the trend because no large claims have occurred
  3. Request driver training and telematics data and consider a management-conditioned quote Correct answer.
  4. Cancel the policy immediately

Explanation

Rising preventable accidents with flat exposure indicate a driver or management issue rather than a mileage issue. Conditioning the quote on verifiable safety improvements addresses the root cause while preserving a potentially viable account.

Question 11AU 300: Strengthening Commercial Underwriting Decision-Making

What is the underwriter's primary purpose in comparing an applicant's loss ratio to the class expected loss ratio?

  1. To calculate the producer's commission
  2. To determine whether the account's experience is better or worse than the rate assumes Correct answer.
  3. To establish the policy period
  4. To verify the insured's credit rating

Explanation

Class rates embed an expected loss ratio, and comparing the applicant's actual ratio to that benchmark shows whether the risk is likely to be profitable at manual rates. The gap informs schedule modification and pricing judgment.

Question 12AU 300: Strengthening Commercial Underwriting Decision-Making

An underwriter receives a submission with a stated value for a warehouse that is far below the cost to rebuild it. Which conclusion is most appropriate?

  1. The policy should be written on a reporting form to solve the problem
  2. The limit may be inadequate and coinsurance or margin clauses could reduce recovery Correct answer.
  3. The valuation is acceptable because the insured chose it
  4. The discrepancy is irrelevant if the insured has other locations

Explanation

A limit set below replacement cost exposes the insured to coinsurance penalties and leaves the carrier with an inaccurate picture of the probable maximum loss. The underwriter should verify values and address the shortfall before binding.

Question 13AU 300: Strengthening Commercial Underwriting Decision-Making

Which statement best captures the concept of probable maximum loss (PML) in commercial property underwriting?

  1. A realistic estimate of the largest loss a specific risk could sustain under adverse but credible conditions Correct answer.
  2. The deductible selected by the insured
  3. The total insured value across all locations
  4. The largest single claim the insurer has ever paid in the class

Explanation

PML estimates the worst credible loss for a specific risk given its construction, protection, and exposure, and it drives capacity allocation and reinsurance decisions. It is risk-specific rather than a class historical maximum.

Question 14AU 300: Strengthening Commercial Underwriting Decision-Making

An applicant's business income worksheet omits the period needed to rebuild after a severe fire. What is the underwriting implication?

  1. Business income coverage is unaffected by the restoration period
  2. The omission reduces premium and should be accepted
  3. The insured can rely on the property limit to cover lost income
  4. Business income limits may be exhausted before operations resume, increasing the insured's and insurer's exposure Correct answer.

Explanation

Business income limits must reflect the indemnity period, which should extend through the realistic time to repair or replace damaged property and restore operations. An understated period leaves the insured underinsured for a serious loss.

Question 15AU 300: Strengthening Commercial Underwriting Decision-Making

Which of the following is the best example of a moral hazard in a commercial insurance submission?

  1. A fleet operating in heavy urban traffic
  2. A manufacturing process using flammable solvents
  3. A building located in a flood zone
  4. A financially distressed insured with little incentive to prevent losses Correct answer.

Explanation

Moral hazard concerns the insured's attitude and incentives toward loss prevention, which can be distorted by financial distress or indifference. Physical conditions such as flood zone, flammable processes, and traffic density are examples of physical or moral-adjacent hazards, not attitudinal ones.

Question 16AU 300: Strengthening Commercial Underwriting Decision-Making

A general contractor's revenue is projected to grow 40 percent next year while its safety staffing stays flat. How should the underwriter treat the exposure base?

  1. Use the current year's revenue because it is audited
  2. Apply a flat charge regardless of revenue
  3. Rate on the projected exposure and monitor through audit provisions Correct answer.
  4. Ignore the growth because it has not yet occurred

Explanation

Premium should track the exposure that will actually be generated during the policy period, so projected receipts are used with audit provisions to true up at expiration. Flat charges unrelated to exposure break the link between price and risk.

Question 17AU 300: Strengthening Commercial Underwriting Decision-Making

Which of the following best explains why an underwriter reviews an insured's contractual risk transfer arrangements?

  1. To assess whether liability the insured assumes by contract is insured and properly transferred Correct answer.
  2. To set the policy's cancellation terms
  3. To confirm the insured collects premium from vendors
  4. To verify the insured's tax filings

Explanation

Contractual liability can expand exposure well beyond common-law liability, and indemnity and insurance requirements determine whether that exposure is shared. Reviewing contracts reveals uninsured assumptions of liability and gaps in required coverage from counterparties.

Question 18AU 300: Strengthening Commercial Underwriting Decision-Making

An underwriter is deciding whether to write a risk outside standard appetite guidelines. What is the most appropriate governance step?

  1. Bind the risk and inform the producer afterward
  2. Ask the producer to guarantee the loss ratio
  3. Document the rationale and obtain authority from the appropriate underwriting referral level Correct answer.
  4. Decline the risk without evaluation

Explanation

Exceptions to appetite require documented justification and approval at the authority level designated for that deviation. This preserves accountability and ensures the decision is visible to those managing portfolio aggregation.

Question 19AU 300: Strengthening Commercial Underwriting Decision-Making

Which portfolio-level concern arises when an underwriter writes many similar risks in a single coastal region?

  1. Increased correlation of losses from a single catastrophic event Correct answer.
  2. Improved diversification of results
  3. Reduced need for reinsurance
  4. Lower average claim severity

Explanation

Concentrating similar exposures geographically makes losses highly correlated, so one event can affect many policies at once. Aggregation monitoring and catastrophe modeling are used to keep this concentration within appetite.

Question 20AU 300: Strengthening Commercial Underwriting Decision-Making

A workers compensation applicant has high turnover and limited formal safety training. Which underwriting treatment is most consistent with the exposure?

  1. Ignore turnover because it is a human resources matter
  2. Recognize elevated frequency risk and consider debit modification or safety requirements Correct answer.
  3. Apply a credit for workforce flexibility
  4. Assume experience modification will offset the risk

Explanation

High turnover and thin safety training correlate with more inexperienced workers and higher injury frequency, which justifies a debit or conditions on the quote. The experience modification reflects past losses but does not by itself neutralize an unaddressed hazard.

Question 21AU 300: Strengthening Commercial Underwriting Decision-Making

Which of the following best describes the purpose of a coverage gap analysis in commercial underwriting?

  1. To identify exposures the proposed program does not insure or insures inadequately Correct answer.
  2. To calculate the producer's contingency
  3. To determine the insurer's investment allocation
  4. To confirm the insured has paid all prior premiums

Explanation

Gap analysis maps the insured's identified exposures against the coverages, limits, and exclusions in the proposed program to find uninsured or underinsured areas. That mapping supports recommendations and clarifies the insured's retained risk.

Question 22AU 300: Strengthening Commercial Underwriting Decision-Making

An insured's loss experience is excellent, but its industry is entering a period of severe supply-chain disruption. How should the underwriter weigh these signals?

  1. Recognize that favorable history reflects past conditions and adjust for the emerging exposure Correct answer.
  2. Apply a credit because the insured has proven resilience
  3. Rely solely on the favorable loss history
  4. Decline the account because disruption is inevitable

Explanation

Loss history is backward-looking, and material changes in operating conditions can invalidate it as a predictor. The underwriter should adjust pricing or terms to reflect the emerging supply-chain exposure while still crediting the favorable record.

Question 23AU 300: Strengthening Commercial Underwriting Decision-Making

Which item is most relevant when an underwriter evaluates the financial strength of a commercial insured?

  1. Liquidity, leverage, and profitability trends over several years Correct answer.
  2. The age of the insured's fleet vehicles
  3. The insured's trade dress and branding
  4. The number of social media followers

Explanation

Financial analysis focuses on the insured's ability to fund retained losses, deductibles, and operations through measures such as liquidity, debt leverage, and earnings trends. Trend analysis across years reveals deterioration that a single snapshot can hide.

Question 24AU 300: Strengthening Commercial Underwriting Decision-Making

An underwriter notices that an applicant's reported payroll is well below industry benchmarks for the number of employees described. What is the most appropriate response?

  1. Increase the rate to offset the discrepancy
  2. Ignore the discrepancy because audit will correct it
  3. Verify the exposure base before finalizing premium because understated payroll undercharges the risk Correct answer.
  4. Accept the payroll figure because the insured certified it

Explanation

Payroll is the exposure base for many liability and workers compensation lines, so a figure inconsistent with employee counts signals a rating error or misrepresentation. Verifying the base before binding protects both pricing adequacy and the integrity of the policy.

Question 25AU 300: Strengthening Commercial Underwriting Decision-Making

Which statement best reflects the relationship between underwriting judgment and predictive analytics in commercial decision-making?

  1. Analytics are only useful for personal lines
  2. Analytics inform the decision, while judgment interprets model output and contextual factors Correct answer.
  3. Judgment should be discarded when a model produces a score
  4. Analytics replace the need for underwriting judgment

Explanation

Models produce estimates based on historical patterns, and the underwriter interprets those outputs against current conditions, data quality, and risk-specific facts. Neither the model nor intuition alone is sufficient for a sound commercial decision.

Question 26AU 300: Strengthening Commercial Underwriting Decision-Making

An underwriter is documenting the rationale for a declination on a commercial property submission. Which practice best supports a defensible underwriting decision record?

  1. Summarizing the decision in a single sentence referencing the producer's reputation in the market
  2. Deferring documentation until the annual audit so all decisions are written consistently
  3. Recording only the final decision so the file stays concise and free of subjective commentary
  4. Recording the specific risk characteristics, appetite guidelines, and authority level that drove the outcome Correct answer.

Explanation

A defensible decision record ties the outcome to identifiable risk factors, published appetite or guidelines, and the authority level used. This makes the decision reviewable by others and consistent across similar risks. Vague or retrospective documentation cannot demonstrate that the decision was reasoned rather than arbitrary.

Question 27AU 300: Strengthening Commercial Underwriting Decision-Making

An underwriter uses a structured risk scoring model, but the score conflicts with concerns raised by a site inspection report. What is the most appropriate underwriting response?

  1. Increase the premium by a fixed percentage and write the risk without further review
  2. Accept the model score because quantitative tools are designed to override qualitative findings
  3. Document the inspection concerns and adjust the final decision within the underwriter's authority Correct answer.
  4. Discard the inspection findings because they are subjective and not statistically validated

Explanation

Models summarize patterns but cannot capture every risk-specific fact, so material qualitative findings should inform and potentially override the raw score. The underwriter should document the conflict and adjust the decision within delegated authority. Escalation is appropriate only when the adjustment exceeds that authority.

Question 28AU 300: Strengthening Commercial Underwriting Decision-Making

An underwriter is evaluating whether an applicant can absorb a large retained loss under a high deductible. Which applicant characteristic is most directly relevant to that assessment?

  1. The applicant's available cash and borrowing capacity Correct answer.
  2. The number of years the applicant has been in business
  3. The applicant's marketing budget as a share of revenue
  4. The applicant's use of a single insurance broker

Explanation

A high deductible shifts loss payment to the insured, so the key question is whether the insured has liquid resources to fund a loss when it occurs. Cash position and access to credit are the most direct indicators of that capacity. Tenure, marketing spend, and broker relationships do not measure ability to absorb a retained loss.

Question 29AU 300: Strengthening Commercial Underwriting Decision-Making

Which action best demonstrates that an underwriter is applying a total-account perspective when pricing a commercial package?

  1. Setting price solely from the largest line because it dominates the total premium
  2. Pricing each coverage line in isolation to avoid cross-subsidy between lines
  3. Applying the same rate modification to every line regardless of the individual loss experience
  4. Weighing the combined premium, aggregate limits, and loss potential across all lines in the package Correct answer.

Explanation

A total-account view considers how the lines interact, including aggregate limits, combined loss potential, and overall premium adequacy. Pricing each line in isolation or letting one line dominate can misstate the account's true risk and return. The goal is a coherent price for the whole relationship.

Question 30AU 300: Strengthening Commercial Underwriting Decision-Making

An underwriter is deciding whether to offer terms that fall outside standard appetite for a mid-sized risk. Which consideration is most central to that decision?

  1. Whether the producer has submitted other profitable accounts this year
  2. Whether the risk can be supported by a documented exception with compensating controls and appropriate authority Correct answer.
  3. Whether the submission arrived before the busy renewal season
  4. Whether the applicant is willing to accept a shorter policy term

Explanation

Writing outside appetite requires a documented rationale showing why the risk is acceptable, what compensating features exist, and who holds the authority to approve the exception. This keeps exceptions deliberate and reviewable. Producer history, term length, and timing are not substitutes for that justification.

Question 31AU 300: Strengthening Commercial Underwriting Decision-Making

An underwriter is assessing the quality of an applicant's risk management program. Which evidence most strongly indicates an effective program rather than a paper policy?

  1. Documented inspection findings with tracked corrective actions and completion dates Correct answer.
  2. A safety manual distributed to all employees at onboarding
  3. A list of safety committee members posted in the facility
  4. A written commitment to safety signed by the chief executive

Explanation

Effective risk management is shown by closed-loop follow-through: hazards identified, actions assigned, and completion verified. Documentation of findings with tracked corrections demonstrates that the program changes conditions. Manuals, signatures, and rosters show intent but not results.

Question 32AU 300: Strengthening Commercial Underwriting Decision-Making

Which statement best describes the role of underwriting authority limits in a commercial insurance operation?

  1. They determine the commission schedule applied to each policy
  2. They set the maximum premium any producer may quote to a client
  3. They define the size and type of risk each underwriter may accept without escalation Correct answer.
  4. They establish the minimum loss ratio a portfolio must achieve each year

Explanation

Authority limits define the boundaries within which an individual underwriter may bind or commit the company, typically by premium, limit, or risk class. Risks beyond those boundaries must be referred to someone with higher authority. This preserves control over aggregate exposure and consistency.

Question 33AU 300: Strengthening Commercial Underwriting Decision-Making

An underwriter is reviewing a submission where the applicant's exposure base has changed materially mid-year due to an acquisition. How should this affect the underwriting decision?

  1. Ignore the change until the next renewal because the current policy is already bound
  2. Apply a flat surcharge without adjusting the exposure base or limits
  3. Restate the exposure base to reflect the acquisition and reassess hazard, limits, and pricing Correct answer.
  4. Use the prior year's exposure base because it reflects a full twelve months of operation

Explanation

An acquisition changes the nature, scale, and sometimes the class of the exposure, so the base used for rating and limit adequacy must be restated. The underwriter should then reassess hazard, limits, and price on the combined operation. Carrying forward stale exposure data misstates the risk.

Question 34AU 300: Strengthening Commercial Underwriting Decision-Making

Which factor most affects the weight an underwriter should place on a single large prior claim when setting terms for a new policy?

  1. Whether the claim reflects a systemic hazard that remains present or an isolated event unlikely to recur Correct answer.
  2. Whether the claim was handled by the insurer's own claims staff or an outside adjuster
  3. Whether the claim was reported in the same calendar year the policy incepted
  4. Whether the claim amount exceeded the previous policy's deductible

Explanation

A single large loss matters most when it signals an ongoing condition that will persist into the new policy period. If the cause was a one-time event and controls have changed, its predictive value is limited. The underwriter's task is to judge whether the hazard remains.

Question 35AU 300: Strengthening Commercial Underwriting Decision-Making

Which of the following best describes the purpose of a peer review or referral process in commercial underwriting?

  1. To provide a second qualified opinion on risks that are large, unusual, or near appetite boundaries Correct answer.
  2. To transfer pricing responsibility from the underwriter to a committee
  3. To shorten the time required to issue a policy to the applicant
  4. To replace the need for documented underwriting rationale in the file

Explanation

Peer review adds a second qualified perspective where risk size, complexity, or proximity to appetite limits warrant it. It supports consistency and catches errors the original underwriter may have missed. It does not remove the original underwriter's responsibility to document reasoning.

Question 36AU 300: Strengthening Commercial Underwriting Decision-Making

An underwriter observes that an applicant's reported sales have grown rapidly while its reported inventory and payroll have stayed flat. Which explanation should the underwriter investigate first?

  1. The applicant has improved its gross margin through better purchasing
  2. The applicant has shifted to a cash-basis accounting method
  3. The applicant may be understating exposure bases used for rating Correct answer.
  4. The applicant has reduced its workforce through automation

Explanation

Sales growth normally requires supporting inventory, staff, or both, so flat inventory and payroll alongside rising sales is an inconsistency worth testing. The most direct underwriting concern is that exposure bases used for rating are understated. Verifying the figures before binding protects premium adequacy and limit selection.

Question 37AU 300: Strengthening Commercial Underwriting Decision-Making

Which statement best explains why an underwriter reviews an insured's business continuity and recovery planning?

  1. It sets the minimum deductible the insurer must apply
  2. It establishes the legal liability the insured owes to third parties
  3. It determines the commission the producer earns on the policy
  4. It indicates how quickly operations resume, which affects business income exposure Correct answer.

Explanation

Recovery planning influences how long an insured's operations are interrupted after a loss, which directly drives business income exposure. Stronger planning tends to shorten the indemnity period needed and reduce loss severity. Legal liability, commissions, and deductibles are governed by other mechanisms.

Question 38AU 300: Strengthening Commercial Underwriting Decision-Making

An underwriter is weighing two similar accounts and must allocate limited capacity. Which approach best reflects sound portfolio management?

  1. Select the account that best improves diversification and overall portfolio loss profile Correct answer.
  2. Select the account with the newest producer relationship to encourage growth
  3. Select the account with the highest individual premium regardless of its correlation to existing exposures
  4. Select the account with the shortest policy term to preserve flexibility

Explanation

Portfolio management weighs how a new risk interacts with existing exposures, not just its standalone premium. Adding a risk that improves diversification and the aggregate loss profile supports long-term stability. Premium size alone can concentrate exposure in a single hazard or region.

Question 39AU 300: Strengthening Commercial Underwriting Decision-Making

Which of the following best describes how an underwriter should treat a reinsurance treaty when setting terms on an individual commercial risk?

  1. Treaty terms are relevant only to the reinsurer and never affect the primary underwriter
  2. Treaty terms replace the need for the underwriter to assess the risk
  3. Treaty terms determine the deductible the insured must accept
  4. Treaty capacity and retention shape how much limit the underwriter can commit on the risk Correct answer.

Explanation

Reinsurance treaties define the capacity available and the retentions the primary insurer keeps, which constrains how much limit can be committed on a single risk. The underwriter must align the terms offered with that capacity. Treaty terms do not substitute for risk assessment or set insured deductibles.

Question 40AU 300: Strengthening Commercial Underwriting Decision-Making

Which practice most improves consistency when multiple underwriters assess similar commercial risks?

  1. Using documented appetite guidelines and rating frameworks applied uniformly across the team Correct answer.
  2. Rotating submissions randomly among underwriters to avoid bias
  3. Assigning each risk to the underwriter with the longest tenure
  4. Allowing each underwriter to apply personal judgment without shared reference points

Explanation

Consistency comes from shared, documented reference points: appetite statements, rating frameworks, and referral thresholds applied the same way by everyone. This reduces variation that comes from individual preference. Tenure or random assignment alone does not create common standards.

Question 41AU 301: Analyzing Commercial Accounts

A commercial account has a building with a replacement cost of $2,000,000 and is insured on a replacement cost basis for $1,500,000 with an 80% coinsurance clause. A covered partial loss of $400,000 occurs. Ignoring deductibles, what indemnity does the insured collect?

  1. $320,000
  2. $375,000 Correct answer.
  3. $300,000
  4. $400,000

Explanation

The coinsurance requirement is 80% of $2,000,000, or $1,600,000. Because the limit carried ($1,500,000) is below that requirement, the loss is reduced by the ratio 1,500,000/1,600,000 = 0.9375, so $400,000 × 0.9375 = $375,000. The insured absorbs the shortfall because the policy was underinsured relative to the coinsurance clause.

Question 42AU 301: Analyzing Commercial Accounts

When underwriting a commercial property account, which factor most directly increases the probable maximum loss (PML) for a single fire?

  1. A sprinklered building with a supervised alarm
  2. A group of unprotected frame buildings sharing a common wall Correct answer.
  3. A building located near a fire station
  4. A single-story building with fire-resistive construction

Explanation

PML estimates the largest credible loss from a single event. Unprotected frame buildings sharing a common wall create a high conflagration exposure because fire can spread between structures without a fire wall. Fire-resistive construction, sprinklers, and proximity to a fire station all reduce expected loss severity.

Question 43AU 301: Analyzing Commercial Accounts

An underwriter is reviewing a commercial general liability (CGL) policy written on an occurrence basis. Which statement correctly describes how the policy responds to a claim?

  1. The policy in force when the injury occurred responds, regardless of when the claim is reported. Correct answer.
  2. The policy in force when the insured purchased the policy responds, regardless of the injury date.
  3. The policy in force when the claim is first made responds, regardless of when the injury occurred.
  4. The policy in force when the lawsuit is filed responds, regardless of the injury date.

Explanation

An occurrence-form CGL policy responds based on when the bodily injury or property damage occurred, not when the claim is made. The trigger is the date of injury or damage, subject to the policy period and any retroactive provisions. Claims-made forms, by contrast, key to when the claim is first made.

Question 44AU 301: Analyzing Commercial Accounts

A commercial auto fleet has 40 power units and reports three at-fault accidents in the past policy year. Which underwriting action is most appropriate?

  1. Review the loss ratio against premium and require a driver safety program as a condition. Correct answer.
  2. Reduce the fleet's limits automatically without discussion.
  3. Ignore the losses because fleet accident frequency is not predictive.
  4. Decline the account because any accident history makes it ineligible.

Explanation

Fleet underwriting weighs loss frequency and severity against premium to evaluate profitability. Three at-fault accidents in a 40-unit fleet warrant a loss-ratio review and risk-management requirements rather than automatic decline. A driver safety program addresses the underlying cause and can support continued favorable terms.

Question 45AU 301: Analyzing Commercial Accounts

Which statement best describes the role of a loss run in analyzing a commercial account?

  1. It projects future premium rates for the renewal term.
  2. It lists all open claims that the insured has not yet reported.
  3. It summarizes the insured's historical claims activity with prior carriers. Correct answer.
  4. It verifies the insured's current financial statements.

Explanation

A loss run is a carrier-produced summary of claims history, including dates, amounts, and status, often covering multiple years and carriers. Underwriters use it to evaluate loss frequency, severity, and reserving trends. It is not a rate projection, a list of unreported claims, or a financial statement.

Question 46AU 301: Analyzing Commercial Accounts

A manufacturer reports a gross sales figure of $12,000,000 and cost of goods sold of $7,800,000. Using a gross profit basis for business income coverage, what is the gross profit exposure?

  1. $19,800,000
  2. $12,000,000
  3. $7,800,000
  4. $4,200,000 Correct answer.

Explanation

On a gross profit basis, the exposure equals net sales minus cost of goods sold, which represents the income the business would lose if operations stopped. Here $12,000,000 − $7,800,000 = $4,200,000. This figure supports the business income limit selection.

Question 47AU 301: Analyzing Commercial Accounts

Under a commercial package policy, which coverage part would respond to a customer slipping on a wet floor in the insured's retail store?

  1. Commercial general liability coverage Correct answer.
  2. Business income coverage
  3. Commercial property coverage
  4. Equipment breakdown coverage

Explanation

Premises liability for bodily injury to a third party is addressed by commercial general liability coverage. Property coverage responds to damage to the insured's own property, and business income responds to lost earnings. Equipment breakdown covers accidental breakdown of covered equipment.

Question 48AU 301: Analyzing Commercial Accounts

An underwriter is evaluating a workers compensation account with a high experience modification factor. What does an experience modification above 1.00 indicate?

  1. The insured's loss experience is better than the class average.
  2. The insured's payroll has decreased since the last audit.
  3. The insured's loss experience is worse than the class average. Correct answer.
  4. The insured has no reported losses in the experience period.

Explanation

The experience modification compares an insured's actual losses to the expected losses for its class. A factor above 1.00 indicates worse-than-average experience and increases the manual premium. A factor below 1.00 indicates better-than-average experience.

Question 49AU 301: Analyzing Commercial Accounts

A commercial account has a building valued at $5,000,000 and contents valued at $1,000,000. The policy carries a $250,000 deductible. A fire causes $1,200,000 in building damage. Assuming adequate limits and no coinsurance penalty, what does the insured recover?

  1. $1,200,000
  2. $1,000,000
  3. $250,000
  4. $950,000 Correct answer.

Explanation

The deductible is subtracted from the covered loss before indemnity is paid. With $1,200,000 in covered damage and a $250,000 deductible, the insured recovers $950,000. Adequate limits mean no coinsurance reduction applies.

Question 50AU 301: Analyzing Commercial Accounts

Which of the following best describes the purpose of a statement of values in underwriting a commercial property risk?

  1. To establish the insured's credit rating
  2. To document the insured's inventory of insured property and its values by location Correct answer.
  3. To list the insured's employees and job classifications
  4. To record the insured's prior liability claims

Explanation

A statement of values itemizes insured property by location and category with associated values. Underwriters use it to test limits against replacement cost, verify coinsurance compliance, and assess concentration of values. It does not address liability claims, credit, or payroll classifications.