Casualty Actuarial Society (CAS) Practice Exam

What is required for an underwriter to issue employee dishonesty coverage?

1. No evidence of previous claims exists

2. Effective security measures and sound management practices are in place

3. The business is conducting higher sales than in previous years

4. The insured has a history of honesty in transactions

The correct answer is: Effective security measures and sound management practices are in place

For an underwriter to issue employee dishonesty coverage, it is important that effective security measures and sound management practices are in place. This requirement reflects the insurer’s need to mitigate risk associated with potential employee dishonesty. When strong security protocols, such as background checks, employee training, audits, and monitoring systems, are implemented, they significantly reduce the likelihood of fraud or theft occurring within an organization. Underwriters evaluate the overall risk involved in insuring a business, and robust management practices contribute to an environment where dishonesty is less likely to occur. Insurance policies are designed to protect against losses, but the presence of effective practices and security measures reinforces the idea that the company is actively working to prevent such incidents, making it more favorable for the insurer. While the other options presented might seem relevant, they do not align as closely with the core Underwriting criteria focused on risk management and prevention. For instance, while a history of honesty in transactions may be considered, it does not substitute the proactive measures and policies that can be implemented to protect against future incidences. Thus, the necessity for sound management practices and effective security measures makes option B the most justified choice for issuing employee dishonesty coverage.