Practice Exam Section 1
Specialty insurers such as those offering surety bonds, aviation insurance, and livestock mortality insurance usually
Centralize underwriting authority
While developing goals for its book of business, an insurer's staff underwriter decides to increase its market share of workers compensation insurance in the construction industry. This type of underwriting activity is known as Select one: A. Developing underwriting guides. B. Reviewing and revising rating plans. C. Providing assistance to policyholders. D. Formulating underwriting policy.
D
Depending on the type of insurance, insurers use automated underwriting systems to
Encode underwriting guidelines.
Which one of the following is a constraint to the development of underwriting policy?
Financial Capacity
To achieve profitability, the underwriting function serves which one of the following additional purposes?
Guarding against adverse selection.
Which one of the following will draft a manuscript policy or endorsement that is worded to address the specific needs of the insured?
Line underwriter.
Staff underwriters share research of the market responsibilities with actuarial and marketing departments. Research includes an ongoing evaluation of which one of the following?
Optimal product mix in the book of business
The overarching purpose of underwriting is...
To develop and maintain a profitable book of business.
Underwriting authority requirements are usually communicated to an underwriter through
Underwriting guidelines.
Underwriting guidelines serve which one of the following purposes? Select one: A. Provide rates for individual risks B. Allow for the development of insights and experience C. Avoid duplication of effort D. Provide for flexible and unstructured decisions
c
A rating plan available to commercial insurance applicants that awards debits and credits to a submission based on specific categories is known as a(n) Select one: A. Schedule rating plan. B. Financial rating plan. C. Experience rating plan. D. Retrospective rating plan.
A
All of the following statements are true regarding the factors affecting the formation of an insurer's underwriting policy, EXCEPT: Select one: A. The higher an insurer's premium-to-surplus ratio, the greater its ability to expand premium writings. B. Return-on-equity thresholds guide insurers in deciding where to allocate capital. C. The availability and cost of adequate reinsurance can influence underwriting policy. D. Insurers are subject to penalties from the states if they deviate from filed forms or rates.
A
Insurer B (IB) notifies one of its independent agents that its agency contract will be terminated unless the agency improves its hit (or success) ratio during the next 90 days. This indicates that IB has Select one: A. Written too few of the accounts it quoted for the agency. B. Less restrictive underwriting selection criteria than other insurers the agency represents. C. Renewed too few of the accounts the agency wrote with IB in the past year. D. A higher-than-expected loss ratio with the agency.
A
Underwriting guidelines include acceptable approaches to evaluating applicants and the overall desirability of a particular type of risk or class of business. Which one of the following purposes of underwriting guidelines is best served by inclusion of these acceptable approaches? Select one: A. Ensure uniformity and consistency in risk selection B. Ensure proper policy issuance C. Synthesize insights and experience D. Avoid duplication of effort
A
Which one of the following cases illustrates how underwriting guidelines ensure uniformity and consistency? Select one: A. Chloe and Elin are underwriting identical homeowners risks for Cromley Insurance Company. The applicants have the same protection class, construction, and coverage amount. After checking the underwriting guidelines, they come to the same underwriting decision. B. Cromley identifies applicants that present a lower underwriting risk by assigning a rank or score of all the variables presented by an account and its loss exposures. C. Cromley's contractor's equipment underwriting guidelines might indicate that equipment use is of paramount importance in determining acceptability and pricing. D. Furkan and Daniel have experience in underwriting workers compensation policies for Cromley Insurance Company. They have provided feedback and expertise in updating the current workers compensation guidelines in the underwriting manual.
A
Which one of the following is a condition that increases the likelihood that a person will intentionally cause or exaggerate a loss? Select one: A. Moral hazard B. Legal hazard C. Morale hazard D. Physical hazard
A
Which one of the following is a financial measure of underwriting performance? Select one: A. Combined ratio B. Line of business mix C. Retention ratio D. Hit ratio
A
Which one of the following ratios is considered the accepted financial measure of an insurer's underwriting performance? Select one: A. Combined ratio B. Expense ratio C. Success ratio D. Retention ratio
A
Which one of the following statements is correct regarding nonfinancial measures of underwriting results? Select one: A. Selection standards for underwriters usually support overall underwriting goals and are evaluated during audits. B. Underwriters are rarely held accountable for supporting an insurer's overall product or line of business mix goals. C. A high hit ratio might indicate that underwriting selection criteria is too stringent. D. Nonfinancial measures evaluate underwriters on their results rather than on their actions.
A
Which one of the following statements is correct with regard to underwriting guidelines? Select one: A. Compliance with underwriting guidelines ensures selection of loss exposures commensurate with planned rate levels. B. The purpose of developing underwriting guidelines is to ensure that an insurer writes only above average accounts. C. Once effective underwriting guidelines are established, they need not be evaluated or modified. D. One purpose underwriting guidelines serve is to provide for flexible and unstructured decisions.
A
Which one of the following statements regarding underwriter responsibilities is correct? Select one: A. Staff underwriters typically share responsibility for researching fundamental insurance issues with the actuarial and marketing departments. B. Line underwriters are generally responsible for completing underwriting audits of the branch or region in which they work. C. Staff underwriters offer valuable technical assistance to the insured's risk manager and the producer who is directly responsible for determining what coverage best meets the insured's needs. D. Line underwriters often serve on industry committees that study standard policy forms and recommend changes.
A
In deciding which applicants they are willing to insure, insurance underwriters need to recognize the effects of adverse selection. Which one of the following is the best example of adverse selection?
After learning that a particularly active hurricane season is expected, several homeowners in a coastal community increase the limits on their windstorm coverage.
A group of policies with a common characteristic, such as a territory or type of coverage, or all policies written by a particular insurer, producer, or agency is referred to as Select one: A. A coverage pool. B. A book of business. C. A policy group. D. A line of business.
B
All of the following are principal sources of underwriting information, EXCEPT: Select one: A. Producers B. Underwriting authority reports C. Financial rating services D. Applications
B
An applicant for commercial property insurance is found unacceptable by an underwriter due to the nature of its operations and the construction of the building it occupies. If the applicant installs an automatic fire-extinguishing sprinkler system, the underwriter will approve the application. This type of underwriting modification is known as Select one: A. Amending the policy terms and conditions. B. Requiring loss control measures. C. Using facultative reinsurance. D. Changing insurance rates, rating plans, or policy limits.
B
An insurance company needs to hire an employee with knowledge of insurance policy forms and the ability to relate policy provisions to the loss exposures of individual policyholders. The person will also prepare premium quotes and process cancellations. Which one of the following employees would best suit the company's needs? Select one: A. Producer B. Line underwriter C. Premium auditor D. Staff underwriter
B
An insurer decides to discontinue writing a class of workers compensation insureds because losses on the business have exceeded expectations. Instead, in an effort to maximize its return on equity, the insurer plans to use its resources to increase the volume of accounts in an area that offers more promising returns. This need to redirect the focus for desired business is an example of an underwriting constraint due to Select one: A. Audit compliance. B. Financial capacity. C. Adherence to underwriting guidelines. D. Regulation.
B
An underwriter is working with a loss control representative on a new opportunity. Given the complexity of the exposures, a physical survey is conducted by the loss control representative, and a formal report is prepared. The report reveals that the insured owns several unattended properties, and that they were unlocked when the loss control representative conducted the survey. This failure to properly secure an unattended building would be an indicator to the underwriter of which one of the following types of hazard? Select one: A. Physical B. Morale C. Legal D. Moral
B
For underwriting to achieve its purpose, Select one: A. Underwriters must select applicants with legal hazards. B. Insurers must minimize the effects of adverse selection on the book of business. C. Underwriters must randomly select applicants to insure. D. Insurers must follow the steps in the underwriting process in strict sequence.
B
Paying close attention to hazards is an important consideration when reviewing an underwriting submission. An underwriter should recognize a moral hazard, which is a condition Select one: A. Of carelessness or indifference that increases loss frequency or severity. B. That increases the likelihood that a person will intentionally cause or exaggerate a loss. C. That increases the likelihood that a person will break the law. D. Of property, persons, or operations to be insured that increases loss frequency or severity.
B
Tania, an underwriting trainee for Keithly Insurance Company, has received a new homeowners application for Nanami. The home is to be insured for $150,000. It is a frame house with a swimming pool and trampoline in the back yard. The grass needs mowing and the shrubbery needs trimming. Nanami has a marginal credit score. What is Tania's first step in underwriting the policy for Nanami? Select one: A. Determine whether the credit score is acceptable. B. Check to see if she has the underwriting authority to make the decision. C. Check the underwriting guidelines on the pool and trampoline. D. Contact the agent about the upkeep problem.
B
Which one of the following is a major constraint of underwriting policy? Select one: A. Underwriting management B. Reinsurance C. Economy D. Competition
B
Which one of the following is the term used to refer to a situation that occurs because people with the greatest probability of loss are the ones most likely to purchase insurance? Select one: A. Risk inconsistency B. Adverse selection C. Spread of risk D. Probable maximum loss
B
Which one of the following statements is correct with regard to the submission evaluation step in the underwriting process? Select one: A. When an insurance application form is completed properly, an underwriter normally does not need any additional information. B. Government reports that provide underwriting information include motor vehicle reports, criminal records, and civil court records. C. An applicant's financial status as indicated by a financial rating service is not an important piece of underwriting information for evaluating potential loss exposures. D. While producers for direct writing and exclusive agency insurers perform field underwriting to screen applicants, independent agents and brokers generally do not.
B
Which one of the following tasks is the responsibility of a staff underwriter as opposed to a line underwriter? Select one: A. Prepare premium quotations B. Review and revise rating plans C. Verify policies are issued with appropriate forms and endorsements D. Assist producers and insureds in determining appropriate coverage
B
Argot Stock Insurance Company's (Argot) net income is $1,000,000 and its average owners' equity is $16,500,000. Argot's average policyholders' surplus is $20,000,000. Using the GAAP approach, which one of the following is Argot's return on equity? Select one: A. 5% B. 6% C. 18% D. 20%
B Correct. Argot's return on equity using the GAAP approach is 6 percent, determined by net income ($1,000,000) divided by average owners' equity ($16,500,000).
At year end, Omicron Insurance Company (OIC) posted these results: Premiums written $10,000,000 Premiums earned 9,500,000 Underwriting expenses incurred 4,000,000 Loss and loss adjustment expenses incurred 5,700,000 Based on this information, which one of the following represents OIC's trade basis combined ratio? Select one: A. 97% B. 100% C. 102% D. 110%
B Correct. OIC's trade basis combined ratio is 100 percent, calculated by (5,700,000/9,500,000) + (4,000,000/10,000,000) = 100%
Julio, a producer for Argot's Insurance Company, submits an application for a 50-year-old residence to Mathilde, the underwriter. Julio wants to know why the homeowners rate is higher for his 50-year-old residence. Mathilde explains that the homeowners rate for the 50-year-old residence is not the same for a five-year-old residence because the exposures are different. Which one of the following underwriting profitability functions of Argot is Mathilde's explanation supporting? Select one: A. Enforcing policy guidelines B. Guarding against adverse selection C. Ensuring adequate policyholder's surplus D. Protecting the homeowner rate
C
Rating agencies such as Dun & Bradstreet (D&B) provide Select one: A. Aggregate loss experience data. B. Information about business operations' safety records. C. Data on credit ratings of businesses. D. Data on motor vehicle reports.
C
The Bakery, an applicant for commercial property insurance, has experienced a series of property losses over the past three years. In order to find this applicant viable, the underwriter agrees to increase the property deductible. This type of underwriting modification is known as Select one: A. Requiring loss control measures. B. Using facultative reinsurance. C. Amending policy terms and conditions. D. Using schedule rating modifications.
C
The common distinction between line underwriters and staff underwriters is that line underwriters Select one: A. Research the market. Staff underwriters verify that policies are issued with the appropriate forms and endorsements. B. Conduct underwriting audits. Staff underwriters prepare files for the data entry department. C. Implement the steps in the underwriting process. Staff underwriters assist underwriting management with formulating underwriting policy. D. Develop underwriting guides. Staff underwriters provide service to policyholders.
C
The percentage of insurance policies that an insurer has renewed is referred to as its Select one: A. Hit ratio. B. Preservation ratio. C. Retention ratio. D. Success ratio.
C
Victor, sales manager for Hallbinger's Insurance Company wants the company to grow in written premium. He wants his agents to write more auto and homeowner business. In order to do so, the company must have adequate capacity. Which one of the following impacts Victor's agents and the company the most concerning surplus and capacity? Select one: A. Claims must pay only covered losses and have low expenses. B. Research and development must create policies which are marketable. C. Underwriting practices must generate policy premiums that exceed losses and expenses. D. Sales must write profitable business not loss producing business.
C
Which one of the following cases illustrates how underwriting guidelines ensure that selection decisions provide uniformity and consistency by all the insurer's underwriters? Select one: A. Cromley's underwriter, Ciara uses predictive modeling to analyze her risks. She is underwriting Chloe's homeowner application and it falls within the acceptable scores the company has created. B. Ella, an experienced staff underwriter provides insight for Cromley's Insurance on amusement parks by authoring a section on amusement parks in the underwriting guidelines. C. Cromley is training new underwriters and is using a work sample for a homeowner risk which has a unacceptable roof and an overgrown yard. New underwriters Erin and Filip check the guidelines and make the same underwriting decision to decline the risk. D. Cromley's underwriting guidelines provide a section on insuring swimming pools, illustrating the principal considerations for such risks. New underwriter Pedro refers to this section of the quidelines.
C
Which one of the following financial ratios is key for evaluating insurer solvency? Select one: A. Loss ratio B. Expense ratio C. Premium to surplus ratio D. Retention ratio
C
Which one of the following is the insurer's quality control check for uniform application of the underwriting guidelines and for continuous improvement? Select one: A. Market conduct examinations B. Reinsurance treaty C. Underwriting audits D. Predictive models
C
Which one of the following represents two nonfinancial measures that are used to evaluate underwriting performance by focusing on underwriting actions? Select one: A. Loss ratio and quote ratio B. Combined ratio and success ratio C. Retention ratio and hit ratio D. New business ratio and retention ratio
C
Which one of the following statements is correct with regard to the submission evaluation step in the underwriting process? Select one: A. While producers for direct writing and exclusive agency insurers perform field underwriting to screen applicants, independent agents and brokers generally do not. B. When an insurance application form is completed properly, an underwriter normally does not need any additional information. C. Government reports that provide underwriting information include motor vehicle reports, criminal records, and civil court records. D. An applicant's financial status as indicated by a financial rating service is not an important piece of underwriting information for evaluating potential loss exposures.
C
A management control tool used to determine whether line underwriters are properly implementing underwriting policy is known as an underwriting Select one: A. Process. B. Regulation. C. Guide. D. Audit.
D
Aaron, a senior producer for Blithe Insurance Company (Blithe) has over 15 years experience in the field. He knows Blithe's underwriting guidelines and is familiar with the type of business Blithe wants. He takes pride in the loss ratio produced by his office and also produced by Blithe as a company. He often trains new agents in his office because of his low rejection ratio of applications he writes. He is known as a front-line underwriter for Blithe. Which one of the following is a benefit of Aaron's field underwriting? Select one: A. Provides feedback to Blithe on underwriting procedures B. Save Blithe training time spent on new underwriters C. Serves as a resource for Blithe on marketing climate D. Saves Blithe from having to evaluate accounts that they will ultimately reject
D
An underwriter receives a renewal application for a property quote from his producer. The applicant has had a series of small losses in the recent past. The underwriter is debating whether to reject the submission or quote it with a property deductible of $5,000. During which one of the following steps in the underwriting process is the underwriter involved? Select one: A. Evaluating the submission B. Implementing the underwriting decision C. Monitoring underwriting decisions D. Developing underwriting alternatives
D
Because underwriting guidelines usually specify the attributes of accounts that insurers are willing to insure, insurers consider them Select one: A. The key to profitability. B. The tool for training underwriters. C. The level of authority. D. Trade secrets.
D
Depending on the type of insurance, insurers use automated underwriting systems to Select one: A. Decide accounts with subjective factors. B. Evaluate producers. C. Price commercial accounts. D. Encode underwriting guidelines.
D
During which one of the following steps in the underwriting process would an underwriter request a loss control visit to a prospective policyholder's location? Select one: A. Monitoring the loss exposures B. Implementing the underwriting decision C. Determining underwriting alternatives D. Evaluating the submission
D
Underwriting guidelines include acceptable approaches to evaluating applicants and the overall desirability of a particular type of risk or class of business. Which one of the following purposes of underwriting guidelines is best served by inclusion of these acceptable approaches? Select one: A. Synthesize insights and experience B. Avoid duplication of effort C. Ensure proper policy issuance D. Ensure uniformity and consistency in risk selection
D
Which one of the following is determined by a company's underwriting policy? Select one: A. The market pursued by the insurer B. The underwriting authority the insurer grants its producers C. The rating organization to which the insurer will belong D. Composition of the insurer's book of business
D
Which one of the following lists the financial components used to calculate a combined ratio? Select one: A. Loss and loss adjustment expenses incurred, investment earnings, and earned and written premiums B. Loss and loss adjustment expenses incurred, IBNR losses, and earned and written premiums C. Unearned premium reserves, earned and written premiums, and loss and loss adjustment expenses incurred D. Loss and loss adjustment expenses incurred, earned and written premiums, and underwriting expenses incurred.
D
The state advisory organization has developed a new homeowner's form which increases the personal property limits for guns, silverware, jewelry, and boats. Jancy Insurance Company is considering modifying the form for its own use. Which one of the following members of Jancy's staff would be involved in the research and development of this new form?
Emma, the staff underwriter.
Tania receives an application for homeowner's insurance for a home valued at $500,000 from Patrick, the producer for Keithly Insurance Company. Since Tania's underwriting authority is $350,000 on property risks, she must refer it to Lachlan, her underwriting supervisor. Which one of the following additional functions for underwriting profitability does this case illustrate?
Enforcing underwriting guidelines.
Which one of the following statements is correct with respect to line underwriters?
Line underwriters can offer valuable technical assistance to an insured's risk manager and to the producer responsible for the account.
Aaron, a senior producer for Blithe Insurance Company (Blithe) has over 15 years experience in the field. He knows Blithe's underwriting guidelines and is familiar with the type of business Blithe wants. He takes pride in the loss ratio produced by his office and also produced by Blithe as a company. He often trains new agents in his office because of his low rejection ratio of applications he writes. He is known as a front-line underwriter for Blithe. Which one of the following is a benefit of Aaron's field underwriting?
Saves Blithe from having to evaluate accounts that they will ultimately reject