Casualty Actuarial Society (CAS) Practice Exam

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Prepare for the Casualty Actuarial Society Exam. Study with practice questions and detailed explanations. Enhance your understanding and increase your chances of passing the exam with confidence!

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What could high hit ratios in underwriting indicate?

Greater risk acceptance
Increased underwriting software usage
Inadequate rates or broader coverage
Higher policy cancellation rates

The correct answer is: Inadequate rates or broader coverage

High hit ratios in underwriting can indicate inadequate rates or broader coverage due to the following reasons. A high hit ratio means that a significant proportion of the applications submitted for insurance are accepted. When underwriters are accepting a large number of applications, it may suggest that the pricing for the policies being offered is not appropriately aligned with the risks being accepted. If rates are too low compared to the risk involved, it may result in a higher acceptance of applications, as there is a tendency to attract a broader range of risks, including those that may not be fully accounted for in the pricing. Additionally, broader coverage may lead to higher acceptance since policies may be designed to cover more potential risks, which also results in more applications being approved. In essence, a high hit ratio could imply that the underwriting standards might be too lenient, or the rates might not reflect the true risk profile adequately, which can lead to future profitability issues for the insurer.