Casualty Actuarial Society (CAS) Practice Exam

What does an industry loss warranty typically cover?

1. Liability claims from customers

2. Exposure to geographic risks

3. Industry-wide losses from catastrophic events

4. Market competition issues

The correct answer is: Industry-wide losses from catastrophic events

An industry loss warranty is a type of financial protection that addresses the risks associated with significant events affecting an entire industry rather than individual companies. Specifically, it provides coverage for industry-wide losses stemming from catastrophic events, such as natural disasters, pandemics, or other large-scale incidents that lead to substantial financial impacts across all companies within a sector. This coverage is particularly valuable in instances where losses exceed a predetermined threshold, enabling companies to mitigate the negative financial consequences that could arise from these disasters. By providing a safety net for collective industry losses, these warranties help stabilize the market and support recovery efforts for affected businesses. This focus on industry-wide catastrophe distinguishes it from options that concern individual company liabilities or competitive market issues, which do not align with the primary purpose of an industry loss warranty. The warranty serves as a buffer against risks that impact the industry on a larger scale, fostering resilience in the face of significant disruptions.