Casualty Actuarial Society (CAS) Practice Exam

How does increasing large-line capacity benefit an insurer?

1. It allows for more investment in technology

2. It enables the assumption of larger risks

3. It decreases operational costs

4. It ensures less regulatory oversight

The correct answer is: It enables the assumption of larger risks

Increasing large-line capacity primarily benefits an insurer by enabling the assumption of larger risks. When an insurer has a greater capacity to underwrite large lines of coverage, it can take on policies that involve higher sums insured or greater potential losses. This is crucial for managing and diversifying their risk portfolio, as the ability to underwrite significant risks can lead to increased premium revenue and potentially higher profitability. In the property and casualty insurance sector, large risks are often associated with substantial assets or significant financial implications. By being able to insure these larger clients and properties, an insurer not only enhances its market presence but also improves its competitive edge, as specialized companies tend to take on larger risks more readily. This capacity effectively allows insurers to participate in lucrative market segments that smaller or less-capable insurers may avoid. Other choices may reflect various operational or strategic advantages but do not directly address the core benefit of increased large-line capacity. For example, while investment in technology or reduction of operational costs can improve overall efficiency and service delivery, they are not the primary outcome of large-line capacity. Similarly, lessening regulatory oversight is generally not an outcome linked to capacity increase; regulatory environments still apply to larger risks.