CAIB 2 Chapter 2 Practice Test 2 Questions and Correct Answers

Define 'adverse selection' This happens when only those accounts exposed to certain perils are the accounts applying for coverage such as those near rivers are the only accounts applying for flood coverage What are four functions performed by underwriters 1) Risk selection 2) Risk classification 3) Rating and rate making 4) Policyholder's services Define 'Risk Classification" Taking all accounts similar to each other and placing them in categories based on their likelihood for loss What is the main advantage of risk classification? This allows insurers to calculate proper premiums to charge Identify an internal source underwriters utilize when rate making Staff inspectors Identify an external source underwriters utilize when rate making Insurer's Advisory Organization (IAO) What are two influences that cause premiums to change from year to year? i) Increasing claims paid due to inflation ii) Rates return on insurance company's investments What are characteristics of soft markets? Heavy competition among insurers as well as lower premiums What are characteristics of hard markets? Underwriting standards become more strict and premiums rise What is a physical hazard? These are hazards which arise from the use of insured property which cause perils to occur List six types of physical hazards common to all commercial risks and provide an example of each. (PET HOG) (PET HOG) i) Protection - fire extinguishers ii) External exposures - being next to restaurants iii) Type of building construction- fire resistive vs frame iv)House keeping - presence of waste materials or general cleanlines