Assignment 5 Questions

Insureds must share enough characteristics with each other to be grouped together when using A. Class rating. B. Judgment rating. C. Experience rating. D. Retrospective rating.

A. Insureds must share enough characteristics with each other to be grouped together when using class rating.

Which one of the following is the fundamental measure of loss exposure used in insurance rating? A. Premium B. Rate C. Exposure unit D. Risk

C. Exposure Unit.

Which one of the following is a condition that increases the likelihood that a person will intentionally cause or exaggerate a loss? A. Physical hazard B. Moral hazard C. Morale hazard D. Legal hazard

B. Moral hazard is a condition that increases the likelihood that a person will intentionally cause or exaggerate a loss.

Class rating relies on A. All insureds being charged the same rate. B. A highly refined classification. C. Insureds with similar characteristics. D. Similar frequency and severity of loss.

C. Class rating relies on grouping insureds with similar characteristics.

How do states prohibit unfair discrimination by insurers? A. By reviewing each policy cancellation or nonrenewal and the justification for the insurer's action B. By requiring reunderwriting of policyholder complaints C. By prohibiting rejection of applications due to certain characteristics without justification D. By examining insurers' mission statements and objectives

C. States prohibit the rejection of applications based on certain characteristics without justification that they are likely to have an unacceptable level of loss.

A situation that occurs because people with the greatest probability of loss are the ones likely to purchase insurance is known as A. Underwriting selection. B. Applicant "pre-qualification." C. Loss exposure evaluation. D. Adverse selection.

D. Adverse selection

Sports, Inc. is looking to obtain a commercial property policy on its building for $400,000. If their insurer decides to charge them a rate of $0.50 per $100 of building insurance, what premium must Sports, Inc. pay? A. $1,000 B. $2,000 C. $4,000 D. $8,000

B. $2,000

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. This company is currently in need of a A. Line underwriter. B. Staff underwriter. C. Producer. D. Premium auditor.

A. his insurance company needs a line underwriter.

If a manufacturer has $1 million in annual sales, its liability insurance is priced per 1,000 of sales, and the per-unit rate is $0.50, what is the manufacturer's liability insurance premium? A. $500 B. $1,000 C. $5,000 D. $10,000

A. Calculated at 1,000 units ($1 million sales ÷ price per $1,000) × $0.50 rate = $500

Rating agencies such as Dun & Bradstreet (D&B) provide A. Data on credit ratings of businesses. B. Information about business operations' safety records. C. Data on motor vehicle reports. D. Aggregate loss experience data.

A. Rating agencies provide data on credit ratings of businesses.

Which one of the following is true about the participation of the head of the underwriting department in the insured's management? A. May participate in selecting the type of marketing system to be used B. Is generally restricted to enforcing underwriting guidelines C. Reviews all underwriting decisions for adherence to underwriting guidelines D. Is heavily involved in the day-to-day claims, finance, and actuarial decisions, as well as other decisions

A. The head of the underwriting department participates in broad business decisions that may include the type of marketing system to be used.

The type of insurance most likely to use individual rates is A. Homeowners. B. Commercial property. C. Business auto. D. Personal auto.

B. The type of insurance most likely to use individual rates is commercial property.

Underwriting management arranges treaty reinsurance to reinsure A. Individual accounts. B. A group or group of insureds. C. All insurance of the primary insurer. D. Insureds that do not meet underwriting guidelines.

B. Treaty reinsurance is arranged for a portion of all eligible insurance of the primary insurer.

Which one of the following will draft a manuscript policy or endorsement that is worded to address the specific needs of the insured? A. Underwriting supervisor B. Staff underwriter C. Underwriting specialist D. Line underwriter

D. The line underwriter will draft a manuscript policy or endorsement that is worded to address the specific needs of the insured.

The next step in the rate development process, after insurance advisory organizations and/or insurers gather historical loss costs, is A. Insurers establish prospective loss costs. B. Insurers enter loss cost data into a rating system. C. Insurers adjust for expenses, profits, and contingencies. D. Insurers determine the final rate.

A. After insurance advisory organizations and/or insurers gather historical loss costs, they establish prospective loss costs.

All of the following are principal sources of underwriting information, EXCEPT: A. Underwriting authority reports B. Producers C. Financial rating services D. Applications

A. All listed are principal sources of underwriting information, EXCEPT underwriting authority reports.

Insurers do not use the law of large numbers to predict future losses from hurricanes because A. Exposure units are not independent. B. Hurricanes do not affect enough policyholders to achieve accurate predictions. C. Exposure units are not homogeneous. D. Hurricanes affect too many policyholders to achieve accurate predictions.

A. Insurers do not use the law of large numbers to predict future losses from hurricanes because exposure units are not independent.

Which one of the following statements is correct with respect to line underwriters? A. Line underwriters offer assistance to producers by inquiring about an insured's risk management program. B. Line underwriters formulate underwriting policy and develop underwriting guides. C. Line underwriters select and rate new business. They are not generally involved in the proposal or renewal process. D. Line underwriters focus on risk characteristics and need not be knowledgeable about policy forms and provisions.

A. Line underwriters offer assistance to producers by inquiring about an insured's risk management program.

One of the responsibilities of underwriting management is to arrange reinsurance. One type of reinsurance is arranged to automatically reinsure a portion of all eligible risks of the primary insurer. This arrangement is called A. Treaty reinsurance. B. Temporary reinsurance. C. Facultative reinsurance. D. Underwriting reinsurance.

A. Reinsurance arranged to automatically reinsure a portion of all eligible risks of the primary insurer is known as treaty reinsurance.

If an insurance applicant charges that an insurer has rejected the application due to prohibited unfair discrimination, what is a likely valid defense to the charge? A. The risk did not meet objective underwriting criteria. B. The risk is located in a distressed area of a city. C. The applicant could not demonstrate stability through marriage records or other community ties. D. Unfair trade practices laws do not prohibit denying coverage for all discrimination, only in cases of racial discrimination.

A. Rejection of an application based on marital status is prohibited by unfair trade practices laws. Demonstrating that coverage was denied based on objective underwriting criteria is a valid defense that unfair discrimination did not occur.

The overarching purpose of underwriting is A. To develop and maintain a profitable book of business. B. Make and sustain a profit. C. Achieve the underwriting goals of the company. D. Add to policyholder surplus.

A. The overarching purpose of underwriting is to develop and maintain a profitable book of business.

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 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. Of property, persons, or operations to be insured that increases loss frequency or severity. D. That increases the likelihood that a person will break the law.

B. A moral hazard is a condition that increases the likelihood that a person will intentionally cause or exaggerate a loss.

While evaluating an application, an underwriter thinks that the class of business is not one that the company wishes to write, but would need to physically inspect to be certain. The underwriter also realizes that the business is located in an undesirable section of the city. Based on the location alone, the underwriter decides not to issue the policy. According to many state insurance laws, this would be an example of A. Diversification. B. Unfair discrimination. C. Fair discrimination. D. Regulated discrimination.

B. According to many state insurance laws, refusing to issue coverage for an applicant solely based on geographic location is unfair discrimination.

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? A. Spread of risk B. Adverse selection C. Probable maximum loss D. Risk inconsistency

B. Adverse selection 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.

An insurance company must have adequate policyholders' surplus if it wishes to A. Avoid adverse selection. B. Increase its written premium volume. C. Produce profitable business. D. Generate premiums that exceed losses.

B. An insurance company must have adequate policyholders' surplus if it wishes to increase its written premium volume.

During which one of the following steps in the underwriting process would an underwriter request a risk control visit to a prospective policyholder's location? A. Monitoring the loss exposures B. Evaluating the submission C. Determining underwriting alternatives D. Implementing the underwriting decision

B. An underwriter would request a risk control visit to a prospective policyholder's location while evaluating the submission.

Julio, a producer for Argot's Insurance Company (Argot) submits an application for a fifty year old residence to Mathilde, the underwriter. Julio wants to know why the homeowner rate is higher for his fifty year old residence. Mathilde explains that the homeowner rate for the fifty year old residence is not the same for a five year old residence. Which one of the following underwriting profitability functions of Argot is Mathilde's explanation supporting? A. Guarding against adverse selection B. Ensuring adequate policyholder's surplus C. Enforcing policy guidelines D. Protecting the homeowner rate

B. Ensuring adequate policyholder's surplus

Unfair discrimination is prohibited under state insurance laws as an unfair trade practice. However, an insurer's ability to discriminate fairly is essential so A. Insurers can select the specific people in a given area to be offered coverage. B. Insureds are charged a premium commensurate with their loss exposures. C. Insureds can be guaranteed the coverages they want at the price they request. D. Insurers can refuse to provide coverage based on an applicant's age and marital status.

B. Fair discrimination means insureds should be charged no more or no less than necessary for their coverage.

If a line of insurance is class rated, with all insureds possessing similar characteristics and paying the same rate, what determines the difference in premiums insureds pay? A. Considerations for profits and expenses B. Number of exposure units C. Credits and debits for changes in exposures D. Data from insurance advisory organizations

B. For individuals in the same class, all members are charged the same rate, although their premiums will be different if they have different numbers of exposure units.

The common distinction between line underwriters and staff underwriters is that line underwriters A. Develop underwriting guides. Staff underwriters provide service to policyholders. B. Implement the steps in the underwriting process. Staff underwriters assist underwriting management with formulating underwriting policy. C. Research the market. Staff underwriters verify that policies are issued with the appropriate forms and endorsements. D. Conduct underwriting audits. Staff underwriters prepare files for the data entry department.

B. Line underwriters implement the steps in the underwriting process. Staff underwriters assist underwriting management with formulating underwriting policy

In most states, how many days' notice must an insured be given of an insurer's intent to cancel or nonrenew coverage? A. No more than 10 days B. At least 30 days C. Not fewer than 45 days D. At least 60 days

B. Most states require a 30-day notification be given.

According to state insurance laws, unfair discrimination occurs when insurers deny coverage based solely on certain factors. Those factors include all of the following, EXCEPT: A. The applicant's geographic location B. The applicant's ability to pay the premium C. The applicant's gender D. The applicant's race

B. Rejection based solely on this factor is considered unfair discrimination. An applicant's ability to pay the required premium is not a factor the underwriter considers when evaluating the application for coverage.

Which one of the following tasks is the responsibility of a staff underwriter as opposed to a line underwriter? A. Assist producers and insureds in determining appropriate coverage B. Review and revise rating plans C. Verify that policies are issued with appropriate forms D. Prepare premium quotations

B. Reviewing and revising rating plans is the responsibility of a staff underwriter as opposed to a line underwriter.

Underwriting guidelines reflect the levels of A. Written premium by type of insurance. B. Underwriting authority. C. Loss exposure. D. Responsibility by job title.

B. Underwriting guidelines reflect the levels of underwriting authority.

Underwriting management monitors underwriting results A. By issuing periodic bulletins to field offices. B. Through a process called an underwriting audit. C. To determine if coverage changes will increase sales. D. To allow the insured to adjust goals if results are not as expected.

B. Underwriting management monitors underwriting results through a process called an underwriting audit.

Which one of the following describes the effect underwriting standards can have on premium? A. If more causes of loss are covered, premiums will increase. B. Insurers can lower premiums for better-than-average risks. C. The more services provided, the more premiums will increase. D. Reduced cash flow drives up premium interest charges.

B. Underwriting standards refer to selectivity in choosing who to insure. Insurers can lower premiums for better-than-average risks.

Facultative reinsurance is arranged by underwriting management for A. All eligible policies. B. Groups of policies. C. Individual policies. D. Policies covered by the treaty.

C. Facultative reinsurance is arranged for individual policies.

While developing goals for its book of business, an insurer's staff decides to increase its market share of workers compensation insurance in the construction industry. This type of underwriting activity is known as A. Reviewing and revising rating plans. B. Developing underwriting guides. C. Formulating underwriting policy. D. Providing assistance to policyholders.

C. This type of underwriting activity is formulating an underwriting policy.

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 A. Requiring loss control measures. B. Using schedule rating modifications. C. Amending policy terms and conditions. D. Using facultative reinsurance.

C. This type of underwriting modification is known as amending policy limits and conditions.

Sofie and the members of her homeowner's association have homeowner's policies on their coastal dwellings. They have heard that there will be eleven named hurricane storms predicted for their coastal area this year. Sofie and the homeowner association members plan to increase their homeowner's property coverage limits to handle their concern about the possible hurricane damage. Their action is known as A. Property limits assessment. B. Adverse selection. C. Prevention of errors and omission claims. D. Prevention of inadequate property limits.

C.Their action is known as adverse selection.

Bob is shopping for auto insurance. Insurance Comany A's rating system determines that Bob should be charge $800 per auto. If Bob is looking to insure four autos, what premium will he be charged by Insurance Company A? A. $200 B. $800 C. $2,400 D. $3,200

D. $3,200

All of the following are underwriting activities typically performed by staff underwriters, EXCEPT: A. Research the market B. Formulate underwriting policy C. Conduct underwriting audits D. Support producers and insureds

D. All listed are staff underwriting activities, EXCEPT supporting producers and insureds, which is a line underwriter's responsibility.

For an insurer to succeed in the long run, A. Its investment income must exceed claims and expenses. B. Its premium income must be adequate to pay claims. C. Its investment income must be adequate to generate profit for investors. D. Its premium and investment income must be adequate to pay claims and expenses.

D. For an insurer to succeed in the long run, its premium and investment income must be adequate to pay claims and expenses.

In individual rating, A. Underwriters are often forced to make an arbitrary judgment. B. Individual insureds are assigned to a specific class. C. The law of large numbers allows accurate premium determination. D. Points are added or subtracted to arrive at a rate.

D. In individual rating, points are added or subtracted to arrive at a rate.

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? A. Guarding against adverse selection B. Adequacy of trained staff C. Prevention of errors and omissions D. Enforcing underwriting guidelines

D. This illustrates enforcing underwriting guidelines