Casualty Actuarial Society (CAS) Practice Exam

What should underwriters consider when determining estimates for business income coverage?

1. Only the past performance of the business

2. Current market trends and competitors

3. The length of the period of restoration and future income

4. Consulting with legal advisors

The correct answer is: The length of the period of restoration and future income

When estimating business income coverage, underwriters must take into account the length of the period of restoration and potential future income. This is essential because business income insurance is designed to cover the loss of income that a business suffers due to a covered cause of loss, which interrupts its normal operations. The period of restoration refers to the timeframe required to restore the business to its pre-loss condition after a claim event. Accurately estimating this duration is vital since it directly impacts the amount of income loss that will be covered. Additionally, considering future income projections allows underwriters to assess not just historical performance, but also how the business is expected to generate income going forward. This comprehensive view helps ensure that the coverage limits are adequate to protect the insured against potential losses during the downtime caused by the incident. While looking at past performance of the business, current market trends, and competition can provide valuable insights, they do not encompass the complete picture necessary for determining the specific business income coverage. Therefore, focusing on the restoration period and future income projections is the most holistic approach for underwriters in this context.