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FRC Insurance Agent Licensing Examination study materials
FRC Insurance Agent Licensing Examination study resources

FRC Insurance Agent Licensing Examination: Underwriting, Risk Assessment and Rating

FRC Insurance Agent Licensing Examination · Work through your exam, one topic at a time.

All guide sections

Underwriting, Risk Assessment and Rating

Underwriting, Risk Assessment and Rating tests how insurers decide whether to accept a risk, on what terms, and at what price.

Underwriting process

  • Information comes from the proposal form, medical evidence, inspection reports, claims history, motor vehicle records and public data.
  • Physical hazards are tangible features: construction, age, occupancy, security, location, machinery condition.
  • Moral hazard is behavioural: indifference to loss, exaggeration of claims, staged incidents. Financial and reputational checks matter here.
  • Underwriting decisions: accept at standard rates, accept with loadings or exclusions, restrict cover, or decline.
  • Anti-selection (adverse selection) happens when those most likely to claim buy cover; underwriting and disclosure rules counter it.

Rating

  • Rates are built from risk classification: class, territory, sum insured, construction, occupancy, age and claims experience.
  • Manual or class rating uses published rates; experience rating adjusts for the insured's own loss record; retrospective rating adjusts after the period.
  • No-claims discounts reward claim-free years; loadings and deductibles penalise higher risk or transfer part of the loss back to the insured.
  • Premium = rate x exposure base (sum insured, payroll, turnover, vehicle count), then adjustments, policy fee and applicable taxes.
  • Reinsurance and capacity constrain how much risk an insurer can retain and therefore what it can write.

Worked example

A property risk is rated at 4 per mille on a sum insured of 500,000, giving 2,000. The occupancy attracts a 20% loading: 2,400. A 15% no-claims discount applies: 2,040. Add a 50 policy fee: 2,090 before taxes. The order of adjustments matters; the question may fix loadings before discounts, so follow the stated sequence.

Traps

Using the wrong exposure base, such as payroll instead of turnover. Applying discounts before loadings when the question fixes the order. Ignoring moral hazard because the physical risk looks good. Confusing a deductible with a premium discount.