Casualty Actuarial Society (CAS) Practice Exam

What is a key reason to maintain integrity in an underwriting process?

1. To ensure higher premiums are collected

2. To mitigate the rise of moral hazards in insured businesses

3. To simplify the claims process for clients

4. To encourage more clients to apply for coverage

The correct answer is: To mitigate the rise of moral hazards in insured businesses

Maintaining integrity in the underwriting process is crucial primarily to mitigate the rise of moral hazards in insured businesses. When underwriters operate with integrity, they carefully evaluate the risk associated with issuing a policy. This thorough assessment helps to prevent situations where insured parties might take undue risks because they feel protected by insurance coverage, which can lead to an increase in claims and overall financial instability for the insurer. By adhering to ethical standards and proper evaluation measures, underwriters can discourage clients from engaging in risky behaviors that could lead to losses. This is particularly important in ensuring that the risk pool remains stable and that insurance premiums fairly reflect the actual risk, which ultimately protects both the insurer and the insured. Other options, while they may have some merit in specific contexts, do not address the primary reason for integrity in underwriting as effectively as the need to manage moral hazards. For instance, while higher premiums collected or encouraging more clients may seem beneficial, they do not directly relate to the foundational goal of maintaining risk management and ethical standards. Simplifying the claims process is more of an outcome of effective underwriting and customer service rather than a direct reason for upholding integrity during underwriting.