AU 60 Commercial Underwriting Principle_Qs

In relation to underwriting, unfair trade practices prohibit acts that would lead to what results?

In relation to underwriting, these laws generally prohibit practices that would result in unfair discrimination against an insurance consumer.

Describe the potential advantages of using predictive modeling in making underwriting decisions.

Predictive modeling can provide a consistent way to review individual applications that improves the overall profitability of a book of business. It can also help in managing a large book of business for which conducting an in-depth underwriting review on every account would be too costly.

How do pricing standards benefit insurers?

Pricing standards enable insurers to determine levels of premium adequacy by comparing premiums charged to the established pricing standards. Insurers also track the extent to which their underwriters deviate from the insurer's established pricing for specific classifications. This information might be useful in determining the extent to which the underwriter's book of business is underpriced or overpriced and where pricing adjustments might be made, should market conditions change.

Insurance Co. has incurred underwriting expenses of $5 million, incurred losses and loss adjustment expenses of $14million, net written premiums of $25 million, and earned premiums of $20 million. (a) Determine Ins. Co's trade-basis combined ratio. (b) What does this ratio indicate regarding Ins. Co's use of its premium dollars?

(a) Ins. Co's trade basis combined ratio would be calculated: incurred losses & loss adjustment expense/earned premiums + incurred underwriting expenses/net written premiums = 14,000,000/20,000,000 + 5,000,000/25,000,000 = .70 + .20 = .90, or 90%. (b) The ratio indicates that insurance co has an underwriting profit b/c not all of its premium dollars are being used for claims and expenses.

Describe the ways an underwriter can verify insurance values submitted by the insured.

1 way to verify values involves comparing values on the submission to an outside estimate of the values. Some fee for service companies, for example, estimate buildings values as part of their reports. Producers often have a "value estimator" to help determine values. In many cases, these are the same tools that underwriters use. Also, underwriters can have the applicant or insured hire an appraisal company to appraise the property.

List 3 types of regulations designed to prevent unfair discrimination.

3 types of regulations designed to prevent unfair discrimination are (1) those that contain insurers' ability to accept, modify, or decline loss exposures; (2) those that limit allowable classifications: & (3) those that restrict the timing and conditions of coverage cancellation and non- renewals.

Describe the type of information provided in a 10-K report.

A 10-K report provides not only extensive financial information on a company, but also a detailed history of the company, a description of current operations, and, possibly plans for the future.

Describe how insurers communicate underwriting authority through underwriting guidelines.

A notation next to a specific classification in the underwriting guide might indicate that a senior underwriter must review and approve an application from that classification before it is processed further. Depending on the concerns that underwriting management places on a classification, underwriting approval might be required from the line underwriter's branch manager or a staff underwriter at the home office.

Why is it important for the underwriter to correctly classify each loss exposure in a submission when determining the appropriate premium?

Accurate classification ensures a pooling of loss exposures whose expected loss frequency and loss severity are smilier. Misclassification can produce adverse results, including insufficient premium to cover losses and expenses, inability to sell policies because prices are higher than competitors' prices, and charges that the insurer has violated regulations prohibiting unfair trade practices.

An insurer decides to make its underwriting criteria more restrictive. Explain how this change affects premium volume and the insurer's combined ratio.

An insurer that becomes more restrictive in its underwriting criteria will usually see a reduction in premiums written. B/c incurred losses remain outstanding from the prior period that had a less restrictive underwriting policy, the loss ratio component of the combined ratio will likely deteriorate. With this reduction in premiums written, the expense ratio will increase, even though the insurer's underwriting expenses might have remained relatively unchanged.

Describe the components of an insurer's financial capacity.

An insurer's financial capacity refers to the relationship between premiums written and the size of the policyholders' surplus or the insurer's net worth.

What 4 major modifications might an underwriter recommend to make a submission more acceptable?

An underwriter may suggest these modifications to a submission: *Require loss control measures, *Change insurance rates, rating plans, or policy limits, *Amend policy terms and conditions, *Use facultative reinsurance

List the reasons why an underwriter may need additional information beyond what is provided on an insurance application.

An underwriter might want additional information for any of the reasons: *to collect missing information, *to investigate conflicting information, *to verify the accuracy of the information provided, *to handle complex accounts or ones that present a relatively high degree of risk.

What would an underwriter conclude about each of the following combined ratios? (a) A combined ratio of exactly 100%, (b) A combined ratio of greater than 100%, (c) A combined ratio of less than 100%.

An underwriter would reach these conclusions about the combined ratios: (a) Exactly 100%-Every premium dollar is being used to pay claims and cover operating costs, with nothing remaining for insurer profit. (b) Greater than 100%-An underwriting loss occurs; more dollars are being paid out than are being taken in as premiums. (c) Less than 100%-An underwriting profit occurs; not all premium dollars taken in are being used for claims and expenses.

List 5 principal sources of underwriting information.

Any 5 of these are principal sources of underwriting information: producers, insurance applications, inspection reports, government records, financial rating services, loss data, field marketing, personnel, premium auditors, claim files, production records, and consultants' reports.

In a market conduct examination of an insurer's underwriting function, what might be revealed by a comparison of cancellation and nonrenewable practices across different lines of insurance?

Comparisons of this information across different insurance lines can reveal inappropriate underwriting in one particular line, a practice that might be overlooked in a study of general trends.

Explain why it is important that underwriters operate within their assigned levels of underwriting authority.

Compliance with levels of authority ensures that the insurer accepts applicants within the underwriting policy.

Explain how compliance with underwriting guidelines ensures adherence to reinsurance treaty limitations.

Compliance with underwriting guidelines ensures that coverage limits and accepted loss exposures will not exceed the insurer's treaty reinsurance, because staff underwriters reflect those treaty limitations in the guidelines.

Describe the goals of effective account selection by line underwriters.

Effective account selection by line underwriters is essential to attaining these goals: *Avoiding adverse selection *Charging adequate premiums for accounts with a higher-than-average chance of loss *Selecting better-than-average accounts for which the premium charges will be more than adequate *Rationing an insurer's available capacity to obtain an optimum spread of loss exposures by location, class, size of risk, and line of business

Describe the approaches underwriters take to ensure that the policies of accepted applicants adhere to underwriting guidelines.

If loss exposures, risks, or policy limits on an application exceed an underwriter's authority, he or she will seek approval through supervisory and management ranks within the underwriting department.

How does rate regulation affect underwriting?

If rates are inadequate or biased, underwriters cannot be sure that the classification system will distribute the costs of insurance coverage equitably. Accurate distribution of costs is key to achieving equity among insureds-agoal of both rate and underwriting regulation. Rate regulation also seeks to ensure that the rates for each class are adequate, fair, and not excessive, and underwriting regulation strives to make certain that insureds are assigned to the correct classification.

Insurance Co. refuses all applications it received for property coverage of restaurants that serve meat, but approves policies for many other dining establishments. Is the co's approach a possible regulatory violation? Explain.

Insurance Co's practices may be unfairly discriminatory and in violation of regulation unless the company can provide statistical evidence that serving meat exposes a restaurant's premises to a higher level of risk.

Explain why insurance fraud is a serious problem for the insurance-buying public.

Insurance rates assume that each insured makes a fair contribution to the pool from which many pay the losses of a few. Misleading statements on an application might lead to a lower rate than the loss exposure justifies. The insured benefits at the expense of other policyholders and receives an unjust reward for its lack of truthfulness.

Describe typical notice requirements to which an insurer must adhere when denying coverage to an insurance applicant.

Insurers denying coverage must provide a written explanation directly to applicants or must inform them that a written explanation is available on request. Some states require that, if a producer represents the applicant, insurers provide a written notes of declination directly to the producer, and the producer then forwards the notice to the applicant.

What do insurers use the combined ratio to measure?

Insurers use the combined ratio to measure the success of underwriting activities.

Marisa purchases a commercial coverage policy from insurer for her small business. The policy takes effect on March 1. On April 14, she receives a letter from insurer informing her that the policy has been canceled (terminated). No reason is given. Has insurer violated state law?

It would depend on the law in that state. Most states allow cancellation (termination) of insurance policies for any reason if the policy has been effective for a short time (usually 60 days). However, laws relating to notice of termination (which includes cancellation and nonrenewable) usually require the insurer to provide a reason for termination, and such rules do not generally make exceptions based on the time the policy has been in effect. If Marisa's state has such a law, it may require insurer to provide the reason for cancellation of her policy in mid-term.

Distinguish between the activities of line underwriters and those of staff underwriters.

Line underwriters evaluate individual accounts for acceptability and execute underwriting policy by following practices and procedures outlined by staff underwriters. Staff underwriters work closely with underwriting management to perform activities essential for profitable risk selection.

Explain why loss history is one of the most important items of information obtained by underwriters.

Loss history is one of the most important items of information an underwriter obtains about an account b/c past losses are a good indication of the types of losses that the account will present in the future.

Explain why a motor vehicle report (MVR) might not be perfectly accurate.

MVR's are not perfectly accurate and many accidents or violations never appear on an MVR due to factors such as variations in reporting violations in different jurisdictions or clerical errors in processing traffic citations.

Describe the major sources of financial data.

Major sources of financial date include the financial statements of companies and reports from financial reporting services.

What do market conduct examinations that focus on underwriting seek to determine?

Market conduct examinations that focus on underwriting seek to determine whether the insurer's underwriting function complies with applicable laws and regulations as well as with the insurer's internal standards.

Why should underwriters monitor underwriting results of territories or geographic areas?

Monitoring territorial underwriting results can help the insurer to target areas for future agency appointments in profitable regions. Poor results could indicate areas from which the insurer might withdraw or in which the insurer might raise rates, if permitted by regulators.

Explain how rapid premium growth can cause insurers to experience excessive premium-to-surplus ratios.

Rapid premium growth results in a reduction in policyholders' surplus to pay for expenses generated by that growth, due to conservative statutory accounting principles used in insurance. This constraint often precludes premium expansion unless the insurer purchases reinsurance or obtains more capital.

Identify four ways that regulation may affect underwriting policy.

Regulation may affect underwriting policy in these ways: *Insurers must be licensed to write insurance in each state in which they do business. *Rates, rules, and forms must be filed with state regulators. *Underwriting guidelines are required to be filed in some states. *If consumer groups believe that the insurance industry has not adequately served certain geographic areas, regulatory focus on insurance availability can lead to requirements to extend coverage to loss exposures that an insurer might otherwise not write.

Describe the types of underlying insurance forms that may concern reinsurers.

Reinsurers may expressly exclude reinsurance coverage for loss exposures covered by underlying manuscript forms developed for a particular insured or covered by underlying forms developed independently of an advisory organization.

Contrast routine underwriting decisions with non routine underwriting decisions.

Routine decisions are those for which the line underwriter clearly has decision-making authority according to the underwriting guidelines. Non-routine decisions involve submissions that fall outside the underwriter's authority.

How does solvency regulation affect underwriting?

Solvency regulation can indirectly influence underwriting by limiting the amount of new business an insurer can write under some circumstances.

Explain why some regulations to prevent insurance solvency apply to underwriting practices.

Some regulations to prevent insurance solvency apply to the underwriting function b/c inappropriate underwriting practices can drain an insurer's surplus to the point of insolvency.

Some underwriting guides contain systematic instructions for handling particular classes of commercial accounts. Describe the instructions such guides might include.

Such underwriting guides identify specific hazards to evaluate, alternatives to consider, criteria to use when making the final decision, ways to implement the decision, and methods to monitor the decision. The guides may also provide pricing instructions and reinsurance-related information.

Explain how staff underwriters are involved in the development of coverage forms.

Staff underwriters work cooperatively with the actuarial and legal departments to develop new coverages and modify existing coverage forms developed by advisory organizations.

State laws often expressly prohibit policy cancellation, declination, or termination based on specifically designated considerations. Name six such considerations included in various state laws.

State laws may prohibit policy cancellation, declination, or termination based on these considerations (among others): *Race, religion, nationality, ethnic group, age, gender, or marital status of the applicant or name insured, * Lawful occupation or profession of the applicant or names insured, *Previous declination or termination of the applicant or names insured, *Use of residual market mechanisms by the applicant or named insured, *Age or location of the property of the applicant or named insured, *Principal location of insured motor vehicle.

Describe the types of information an underwriter can obtain by using the internet.

The internet can provide a low-cost way for underwriters to search for references to the insured. In many instances, accounts maintain web sites that provide a description of the business and the types of work they do. When available, this information serves to broaden the underwriter's understanding of the account and confirm information already obtained.

How do compulsory auto insurance and financial responsibility laws affect auto insurance underwriters?

The laws require underwriters to provide auto insurance at specified risk limits they would not otherwise accept. This requirement affects the auto rating classification system and the spread of cost among insureds.

In response to several consumer complaints that insurer has declined coverage to businesses owned by a specific ethnic group, a state department of insurance performs a market conduct examination of insurer. In general, what would be the focus of the examination?

The examination team would focus on the underwriting function, looking specifically at the insurer's underwriting guidelines and its record of conformance to those guidelines and to the state laws and regulations.

Carlos is underwriting an application for business auto coverage for a trucking company that will offer shipping services in several adjoining states. Carlos realizes that the policy must provide blanket coverage for the trucks at a higher limit of liability than he would normally approve in similar policies. What type of regulation is affecting Carlos's underwriting decision in this matter?

The federal Motor Carrier Act requires insurance policies covering vehicles subject to the act to provide blanket coverage for all owned or hired autos at specified limits of liability.

Describe the information that is captured on an insurance application.

The insurance application captures the name and address of the individual or organization that wants to buy insurance and the types and amounts of insurance desired. A properly completed application also provides the information needed to classify the account for rating purposes and to determine the premium. In addition, the application contains information that the underwriter needs to evaluate the submission.

Describe the types of information about prior insurance that are provided on an insurance application.

The name of each prior insurer and policy # are usually requested on the application, along with a sketch of prior coverage, premium paid, and policy expiration date.

What factors beyond the content of a submission itself must an underwriter consider before selecting an underwriting alternative?

The underwriter must consider these factors before selecting an alternative: *Underwriting authority-whether the underwriter has the necessary underwriting authority, *Supporting business-whether an otherwise marginal submission might be acceptable if the other insurance components of the applicant's account(the supporting business) are desirable, *Mix of business-whether accepting the application supports the insurer's goals for mix of business, *Producer relationships-whether the relationship between the underwriter and the producer is based on mutually shared goals, *Regulatory restrictions-whether any state regulations restrict underwriters' ability to accept or renew business, and whether any federal and state privacy laws restrict the type and the amount of information about an applicant that an underwriter can obtain.

List some aspects of an insurer's operations that are affected by the underwriting cycle.

The underwriting cycle affects premium levels, capital allocation strategies, investment strategies, and insurer profitability.

What are the steps in the underwriting process?

The underwriting process entails these 6 steps: 1) Evaluate the submission, 2) Develop underwriting alternatives, 3) Select the underwriting alternative, 4) Determine an appropriate premium, 5) Implement the underwriting decision, 6) Monitor underwriting decisions.

Louise, an underwriter for insurance co., has received an application for commercial property and commercial general liability coverage for a printer. The application indicates the company has been in business for 15 years and includes favorable loss information. Louise is reviewing the application and considering possible external sources of information. (a) Describe the type of information that is most likely available on the applicant's web site. (b) Explain how court records might assist Louise in evaluating this account. (c) Describe the type of information Louise could determine by using Best's Underwriting Guide.

These answers address Louise's use of external sources of underwriting information. (a) Louise can refer to the applicant's web site to confirm application information and to learn more about the insured's business. B/c one of the purposes of a web site is marketing and public relations, she should verify any additional information found on the site. Information from internet sources should not be the sole source of an underwriting decision as it may not always be reliable. (b) Court records are sometimes helpful to an underwriter. Bankruptcy filings, pending lawsuits (both those filed by the applicant and those filed against the applicant), and records of settled lawsuits can be important sources of information. Verdicts relating to the applicant's products would be significant to a products liability underwriter. Lawsuits filed by the applicant might result in injury claims. Louise should be concerned if the applicant had financial difficulties and filed for bankruptcy. (c) This underwriting guide would provide information specific to printing operations including a hazard index and a risk description, as well as SIC codes and NAICS codes.

Rachel is a personal insurance underwriter for Acme Insurance Co, an insurer using the undefended agency system. One day, she receives a request for automobile insurance from a client of one of Acme's newly appointed agents. The applicant is a 24 year old single male who was previously insured by a direct writer. The application indicates no accidents or traffic violations in the previous 3 year period. Rachel suspects that the field underwriting may have been inadequate and believes that additional information is needed because the applicant is new business for the company. (a) List the external and internal sources of underwriting information that Rachel might use to reach her decision. (b) What factors will determine how much and what kinds of information Rachel might request?

These answers apply to questions regarding Rachel's underwriting decision: (a) Beyond the application, Rachel can use these sources to obtain additional underwriting information (other possible sources do not relate directly to personal auto insurance): *The producer may have firsthand knowledge of the applicant and may know the applicant's reputation in the community. *Government records include motor vehicle reports, criminal court records, and civil court records. Motor vehicle records (MVRs) are a fundamental information source for auto underwriting. *Production records of individual producers, indicating loss ratio, premium volume, mix of business, amount of supporting business, length of service, and industry experience, help underwriters make decisions about the quality of the applicants that the producer is submitting. In personal auto underwriting, for example, the mix of business indicates whether a particular producer is submitting an inordinately large percentage of young drivers or drivers with poor driving records. (b) The amount of time required to receive the information and the cost to acquire the information are important considerations. Underwriters must balance the degree of hazard with how much information is needed and the cost to acquire the information.

A commercial underwriter has received a new application covering a fleet of ten vehicles for a retail florist. The application indicates 12 drivers. The insurer currently writes a package policy for this insured. Determine the underwriting information sources based on these questions. (a) Describe the information that would be considered essential for the underwriter to make a decision for this application, (b) Describe the information the underwriter could locate by reviewing the existing package policy underwriting file, (c) Explain why the MVR for all drivers are important supplemental sources of underwriting information for this application.

These answers apply to the retail florist application case. (a) Most of the information that is requested on the commercial application would be considered essential. For this application, information such as loss experience, a full description of all covered vehicles, and a list of all drivers would be considered essential. The underwriter must decide how much information beyond what is required to classify and rate the coverage is truly essential. (b) By reviewing the insurer file for the package policy, the underwriter might locate financial information for this insured. The file might also contain loss information, a risk control report, and other underwriting information. This information could provide the underwriter with valuable insights to the insured's operation, safety consciousness, and compliance with prior recommendations. (c) MVR are an important supplemental source of information that provides details on each driver's record of accidents and violations. Such information can be a good predictor of future automobile loss activity.

Describe the types of information that might be provided to the underwriter by each of these sources: (a) Other underwriters working for the same insurer, (b) Claim representatives, (c) Marketing representatives, (d) Premium auditors.

These are the types of information provided by these sources. (a) Underwriters w/in the same insurer might have previous experience with similar accounts or they might be able to suggest where to look for additional information. (b) The claim representative may be able to provide information on the condition of the insured's premises and aspects of the insured's operations that were otherwise unknown. Even when the claim does not produce negative information about the account, underwriters often review the claim file, with its narrative and photos, to learn more about the account. (c) B/c marketing representatives are usually assigned a specific territory, they are familiar w/that territory and many of the accounts in it. Marketing representatives sometimes help underwrite small commercial accounts when the expertise of a risk control representative is not necessary. (d) The premium auditor may be the only insurer representative to meet the insured, see their operations, and review their financial records. B/c they review the insured's records from 1 year to the next, premium auditors are in a position to provide underwriters with information regarding the desirability of the account. They can also help guide underwriting decisions regarding the most appropriate coverage options and amounts. The premium auditor will also identify any new exposures that can result from a change in an insured's operations or a new venture.

Identify the types of publications provided by insurance advisory organizations.

These publications include rating manuals, circulars, form manuals, and classification guides.

Explain how producers can build a good working relationship with underwriters.

To build a good working relationship with underwriters, producers should clearly understand the type of accounts the insurer prefers to write, as well as the insurer's underwriting guidelines.

Describe the approaches underwriters take to minimize the effects of adverse selection.

To minimize the effects of adverse selection, underwriters carefully select the applicants whose loss exposers they are willing to insure, charge premiums that accurately reflect the loss exposures for those applicants they select, and monitor applications and books of business for unusual patterns of policy growth or loss.

Describe the approaches underwriters take to ensure the adequacy of policy holders' surplus.

Underwriters ensure the adequacy of policyholders' surplus by adhering to underwriting guidelines, making certain that all loss exposures are correctly identified, and charging adequate premiums for the applications that are accepted.

Explain why underwriters rely on the producer more than on other sources of information when reviewing accounts.

Underwriters rely on the producer b/c they are the 1st person to interview the prospective client, see the property or operations to be insured, and evaluate the account's exposure to loss.

Explain why underwriters should not ignore general information when evaluating an account.

Underwriters should not ignore general information b/c it helps put the account-specific information in context.

Identify the 3 categories of information used by underwriters to determine if additional information is needed.

Underwriters use these categories when determining whether additional information should be obtained: (1) Essential information, (2) Desirable information, (3) Available information.

Explain how underwriting guidelines provide a structure for underwriting decisions.

Underwriting guidelines provide a structure of underwriting decisions by identifying the major considerations underwriters should evaluate for each type of insurance the insurer writes.

Explain how underwriting audits provide staff underwriters with information on the effectiveness of existing underwriting guidelines.

Underwriting guidelines that are not being followed may either be outdated or considered unrealistic, which could indicate that a critical review for updates is required.

Describe the approaches to controlling the costs of ordering and using risk control reports.

Underwriting management usually establishes guidelines, such as total premium amount, for underwriters that encourage them to order risk control reports selectively. Another approach to controlling costs is to purchase the services of an independent contractor who specializes in risk control work.

Describe 2 ways that unfair discrimination could result from underwriting practices.

Unfair discrimination can result from the unfair application of standards as well as from underwriting decisions that are not supported by statistical evidence.

Name the specific underwriting functions a market conduct examination team would focus on when reviewing an insurer's underwriting department.

When reviewing an insurer's underwriting department, examination teams focus on the underwriting functions regulated by law: declination, termination, disclosure, and unfair trade practices.