Casualty Actuarial Society (CAS) Practice Exam

Why is it crucial for Jake to assess the financial condition of an insurer providing umbrella or excess liability policy coverage?

1. If the insurer has a history of paying claims

2. If the insurer’s solvency affects the defense of a claim

3. If the insurer has a higher market share

4. If the insurer offers discounts on policies

The correct answer is: If the insurer’s solvency affects the defense of a claim

It is crucial for Jake to assess the financial condition of an insurer providing umbrella or excess liability policy coverage primarily because the insurer's solvency directly impacts their ability to defend and pay claims. Umbrella or excess liability policies are designed to provide coverage above and beyond the limits of primary insurance policies. If an insurer is not financially sound, it may struggle to honor claims when they arise or may even become insolvent. This assessment ensures that, in the event of a significant liability claim, there will be sufficient funds available to cover the claim and provide the necessary legal defense. A financially stable insurer will not only be more likely to pay claims in full but will also maintain the resources needed to engage legal representation if the situation calls for it. Evaluating the insurer's financial health is thus a critical step in ensuring that coverage is reliable and that Jake is adequately protected against potential losses.