Commercial Underwriting Principles Final Exam

Devon Company presented the following condensed financial information with its request for a premium payment plan. What is Devon's working capital?

$100,000. Working capital = Current assets - current liabilities; cash + inventory + receivables, - accts. payable - payroll taxes due - short-term debt. $325,000 - $225,000=$100,000

How many years of loss experience do most states require insurers to use for fire insurance ratemaking purposes?

5 years

Which one of the following statements is correct with respect to ratemaking for different types of insurance?

A five-year experience period is used almost universally for fire insurance because it is required by law in many states.

A building owner has hired a roofing contractor to replace the roof of a building located on a busy urban street. The building owner wants to be protected for any claims resulting from the roofing contractor's work on his property. Which one of the following methods would be most beneficial to the building owner?

A separate owners and contractors protective liability policy in the name of the building owner

Which one of the following statements is correct regarding wrap-ups?

Activities covered by the wrap-up program should be excluded from the participating contractors' primary insurance policies.

Which one of the following sources of underwriting information provides a hazard index by line of insurance for the various classifications?

Best's Underwriting Guide

Insurance coverage in which two or more types of property or locations are covered as a single location and subject to a single limit of insurance is known as:

Blanket insurance.

The North American Industry Classification System (NAICS) uses a six digit code structure to classify specific:

Business operations.

How do most insurers decrease their catastrophe exposure?

By purchasing reinsurance

Financial statements:

Can be used by agents and brokers to assess coverage needs.

Johanna is a commercial lines underwriter. She has received a new business application for Hallbinger Trucking (Hallbinger). The application indicates that the trucks travel a maximum radius of 100 miles. When she accesses Hallbinger's Web site, Johanna notices that they service areas that are over 100 miles away. Which one of the following would be a reliable external resource for Johanna to use to confirm Hallbinger's filings?

Central Analysis Bureau

Which one of the following financial reporting services focuses on the trucking industry?

Central Analysis Bureau

Specialty insurers such as those offering surety bonds, aviation insurance, and livestock mortality insurance usually:

Centralize underwriting authority.

Insurers do not have to perform mid-term pricing on composite-rated accounts because:

Changes in exposure will be discovered by premium audit at the end of the policy term.

Which one of the following negotiation styles focuses only on short term goals and does not support the goal of building a long term relationship?

Competing

Which one of the following statements is correct with respect to increased limits factors in liability insurance?

Data used in developing insurance rates for basic coverage limits include only losses associated with the basic coverage limit.

Which one of the following best describes why it is important to analyze leverage ratios?

Debt obligations need to be repaid regardless of a company's profit, which can lead to decreased distributions to shareholders.

All of the following are examples of efficiency ratios, EXCEPT:

Debt-to-equity ratio

Which one of the following is an example of a leverage ratio?

Debt-to-equity ratio

Which one of the following ratios can be used to assess the extent of an organization's debt financing compared to other organizations in the same industry?

Debt-to-equity ratio

Unlicensed teenage driver Bill applied for insurance on his automobile. Upon learning that Bill was not only unlicensed but that he intentionally misstated his age on the application, the insurer decided not to issue an auto policy for Bill. The action on the part of the insurer is known as:

Declination.

The common distinction between line underwriters and staff underwriters is that line underwriters:

Implement the steps in the underwriting process. Staff underwriters assist underwriting management with formulating underwriting policy.

While trend analysis can be used on various financial statements, it is most commonly applied to:

Income statements.

During a general market conduct examination of underwriting, examiners would look for evidence of all of the following, EXCEPT:

Inconsistent claim practices

An insurance company must have adequate policyholders' surplus if it wishes to:

Increase its written premium volume.

The credibility of the sender is an important consideration in the communication process. Which one of the following depends partly on the individual underwriter's reputation and experience, and partly on the perceived status of the underwriting profession?

Initial credibility

Which one of the following is an example of a noncurrent liability?

Long-term notes payable

Insurer B proudly pays 90 percent of its claims in 90 days. Besides the typical claim costs, Insurer B pays a substantial amount of salary dollars to in-house claims adjusters. These salary dollars are an example of:

Loss adjustment expenses.

The expenses associated with adjusting claims are referred to as:

Loss adjustment expenses.

Which one of the following lists the financial components used to calculate a combined ratio?

Loss and loss adjustment expenses incurred, earned and written premiums, and underwriting expenses incurred

Heritage Planners Ltd is a consulting group that provides company cars to management. The fleet of vehicles was recently sold for a gain of $5,000. The gain should be classified on the income statement as:

Other income and expenses.

Which one of the following types of rating plans is used most commonly for workers compensation insurance?

Participating plan

Worthley Insurance Company's insurance rates are based on an expected loss ratio of 75 percent. Over the past three years, the actual loss ratio has been 70 percent. Application of the loss ratio method of ratemaking indicates that Worthley should:

Reduce its rates by approximately 6.7 percent.

Which one of the following describes underwriting regulations that limit allowable classifications?

Regulations requiring unisex rating in personal auto insurance

Sean is a general partner in a small employment business. The general public is unaware of Sean's interest as a partner. Sean is a:

Secret partner.

Which one of the following statements is correct with respect to market conduct examinations?

The Department of Insurance (DOI) may suspend or revoke the insurer's certificate of authority if it finds that an insurer has violated a law.

ABC Company purchased a building in Manhattan in 1935. There is no mortgage on the property. Which one of the following statements best describes a limitation of the financial statements when evaluating ABC's financial position?

The fair value of the building may be much higher than cost.

Which one of the following best describes the result of the four major financial statements all taken together?

The financial condition of the organization

Underwriting authority requirements are usually communicated to an underwriter through:

The underwriting guidelines.

Which one of the following statements is correct with regard to state regulation and the underwriting function?

Underwriters are affected by rate regulation, solvency regulation, and auto insurance laws.

Which one of the following types of analysis helps an underwriter identify abnormal values reported by an organization?

Vertical analysis

Sue is a personal lines underwriter at ABC Insurance. She is reviewing a homeowners application from a new producer. The value of the home is only slightly below the maximum value that ABC typically writes, but because it was just built, the producer has provided the actual cost of construction. On the application, the producer has neglected to provide any indication as to whether the home has any sort of alarm system. Given the value of the house, this is information that Sue feels is essential. Which one of the following emails would be most effective for Sue to send to the producer?

We have several discounts for different types of alarm systems. Please advise if there is an alarm system in the house and what type of system it is.

XYZ Corp. purchased blanket insurance to cover two of its buildings. Building A is valued at $1,000,000, and Building B is valued at $2,000,000. XYZ decides to purchase a blanket limit of $2,500,000. However, the underwriter decides to implement a 20 percent margin limit. Based on this information, if a covered loss occurred at Building A, what is the maximum amount of coverage that policy will provide?

$1,200,000

Auto Insurer B is calculating the pure premium based on insured losses of $8 million and earned-car years of 200,000. The pure premium is:

$40.

Excerpts from the consolidated balance sheet for AJD Retail, Inc. (AJD) are shown below. In its consolidated income statement for the same period, shown in thousands, AJD reports total sales of $23,000, consisting of cash sales of $18,000 and credit sales of $5,000. Cost of goods sold is shown at $16,000. Using this information, which one of the following is the inventory turnover ratio for AJD?

3.2. Inventory turnover ratio = Cost of goods sold ÷ inventory. $16,000 ÷ $5,000 = 3.2 times.

Argot Stock Insurance Company's (Argot) net income is $1,000,000 and its average owners' equity is $18,000,000. Argot's average policyholders' surplus is $20,000,000. Using the GAAP formula, which one of the following is Argot's return on equity?

5.56%. The GAAP basis ROE = Net income / Average Owners' Equity, or $1,000,000 / $18,000,000 = 5.56%.

Alpha Insurance Company (AIC) has incurred automobile insurance losses of $6 million and earned exposure units of 120,000 car-years. The company's expenses total $840,000. AIC's management wants to include a factor for profits and contingencies of five percent. Using the pure premium ratemaking method and rounding to the nearest whole dollar, which one of the following represents the rate per exposure unit that AIC needs to charge for automobile insurance?

60. Pure premium = $6 million / 120,000 car years = $50. The expenses of $840,000 / 120,000 earned exposure units = $7. Then the rate per exposure with 5% profit and contingency factor = ($50+$7) / (1-0.05) = $60

Which one of the following statements is correct regarding frame of reference?

A person's frame of reference is based on his or her background, past experiences, culture, and expectations.

During the course of an underwriting market conduct examination, examiners review:

A statistically selected, random sample of policies.

Which one of the following statements is correct with respect to declination, termination, and disclosure laws?

After a policy renewal date, insurers can typically cancel coverage if there is a substantial increase in the risk insured.

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:

Amending policy terms and conditions.

Underwriters should occasionally order a credit report after the account has been accepted and a policy issued. A credit report may be used to indicate the existence of each of the following conditions, EXCEPT:

An account's propensity to report claims

Which one of the following statements is correct with regard to insurance ratemaking?

Any delay between when data are collected and when they are used tends to reduce rate accuracy.

Underwriting guidelines serve which one of the following purposes?

Avoid duplication of effort

Generally, the rate that is applied to individual accounts is determined primarily by the account's:

Classification.

Common size statements are frequently used during vertical analysis. Which one of the following is true regarding common size statements?

Common size statements are good for inter-company comparisons because they correct for differences in company size.

An analyst is comparing the financial data of two companies that compete in the same industry, Company A and Company B. Each of the two companies has the same return on assets ratio (ROA), and the analyst wants to understand how each is using its resources to achieve this result. Further analysis reveals that Company A has a lower asset turnover ratio than Company B. This analysis indicates that:

Company B is generating a higher level of sales in proportion to its assets than Company A.

Insurance rate regulatory objectives include all of the following, EXCEPT:

Competitive

Which one of the following is determined by a company's underwriting policy?

Composition of the insurer's book of business

Insurers sometimes use composite rating as an administrative convenience. Composite rating:

Converts several exposures to a single rate and a single rating basis.

The potential for hidden underwriting risks of associated insureds is greatest with which one of the following forms of ownership?

Corporation

The key to developing insurance rates that are adequate to pay future claims is:

Estimating the amount of losses for those claims.

Experience rating plans can be used to modify rates of individual accounts. Which one of the following is a benefit of experience rating plans?

Experience rating plans encourage the insured to implement risk control measures.

Randy is a personal lines underwriter at ABC Insurance. Wendy, a producer, has submitted a homeowners application. The home is frame, 120 years old, and the plumbing and wiring have not been updated since they were installed in the 1950s. Randy declines the application because it does not meet ABC's eligibility requirements. When Wendy receives the declination, she immediately telephones Randy. The applicant is a personal friend of hers and she is angry that Randy will not issue the policy. She insists that the risk is a good one and complains that she will be embarrassed if she has to tell her friend that ABC will not cover her house. Which one of the following should Randy do?

Explain why the age of the house, the plumbing, and the wiring make the risk unacceptable.

An underwriter analyzing historical loss data for loss frequency trends must also evaluate historical:

Exposures.

Underwriting pricing activities usually include all of the following, EXCEPT:

Forecasting

Which one of the following statements is correct with regard to the submission evaluation step in the underwriting process?

Government reports that provide underwriting information include motor vehicle reports, criminal records, and civil court records.

Insurance classification systems group risks that share similar characteristics and that usually:

Have the same likelihood of loss.

Liability insurance coverage is provided at various limits of coverage. Which one of the following statements is true regarding charges to increase limits above the basic limit?

Higher limits can require a portion of the coverage to be reinsured, and the additional expense must be included in the rate.

Which one of the following statements is true regarding loss trend analysis?

Historical loss frequency is usually a better indicator of future loss experience than severity.

Vincent has been a commercial lines underwriter for less than one year. He has received a new business application for Mellfor Manufacturing (Mellfor). Vincent is not familiar with the manufacturing process used by Mellfor and would like to order a physical inspection. Which one of the following would provide direction to Vincent on the use of resources for a physical inspection?

Insurer's underwriting guidelines

Which one of the following statements is correct with regard to loss estimates?

Insurers are legally required to show loss reserves on their balance sheets.

The residual markets for auto and property insurance influence underwriters in which one of the following ways?

Insurers often must accept risks at inadequate rates.

Which one of the following is a good source of low-cost available information for underwriters?

Internet

Which one of the following statements is correct with respect to rate regulation?

It seeks to ensure that the rates for each class are adequate, fair, and not excessive.

Which one of the following types of individual rating plans can be used by medium to large insureds in combination with risk control and allows the insured to manage its cash flow by avoiding upfront payments?

Large deductible plan

With ratio analysis, ratios are grouped into the following broad categories: efficiency, liquidity, profitability, and:

Leverage.

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

One type of liquidity ratio that an underwriter may choose is an acid-test ratio. This ratio is a more conservative measure of liquidity than the current ratio because it includes:

Only cash, marketable securities, and accounts receivable in the numerator.

The most common forms of business ownership include sole proprietorships and:

Partnerships.

In developing insurance rates, which one of the following is generally used as a starting point to estimate future losses?

Past loss experience

When basing new rates on an experience period, a primary reason for an insurer to wait longer to start the ratemaking process is to:

Permit loss data to mature.

Various state declination, termination, and disclosure laws prohibit declination or policy cancellation based on specified considerations. Which one of the following is one of those considerations?

Previous declination or termination of the applicant or named insured

Which one of the following statements is correct?

Property losses are usually paid relatively quickly, while liability losses often are not paid until years after the losses occur.

Identifying and addressing different interests are less of a problem in property insurance than in liability insurance for which one of the following reasons?

Property policies describe property to which the coverage applies and limit recovery to each party's insurable interest.

Insurance payments in excess of the amount of the loss are unlikely under property policies because:

Property policies permit recovery only to the extent of each party's insurable interest.

To effectively price insurance accounts, underwriters must be familiar with rate manuals. Which one of the following is true regarding rate manuals?

Rate manuals provide information concerning the use of endorsements that amend the policy.

Which one of the following statements is correct with respect to estimating losses for use in the ratemaking process?

Rates are based on incomplete loss experience.

Mortgageholders have a security interest in which one of the following types of property?

Real property

Which one of the following represents two nonfinancial measures that are used to evaluate underwriting performance by focusing on underwriting actions?

Retention ratio and hit ratio

The percentage of insurance policies that an insurer has renewed is referred to as its:

Retention ratio.

Mega Steel Inc. is looking to purchase workers compensation coverage for its 10,000 employees. Despite having an inconsistent loss history, Mega Steel has recently implemented some risk control measures that it believes will lead to fewer losses in the upcoming policy period. Which one of the following individual rating plans would be best for Mega Steel?

Retrospective rating plan

Which one of the following insurer employees would be best qualified to answer an underwriter's technical questions about an applicant's operations?

Risk control representative

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):

Schedule rating plan.

Maja, who has 29 years of experience as a professional liability underwriter, works in the home office of Richley Insurance Company. Her primary responsibilities involve formulating underwriting policy and revising underwriting guides for various lines of professional liability insurance that will be used by personnel in the company's field offices. Maja is functioning as a:

Staff underwriter.

Because of the expense of risk control reports and the importance of making a quick decision on a new submission, underwriters sometimes approve a submission subject to a favorable risk control report. Why is it critical that the underwriter receive the report quickly after the policy's inception date?

Statutes in many states limit an insurer's right to cancel to a brief period of time.

Loss trending practices vary by type of insurance. A special trending problem unique to workers compensation insurance exists because:

Statutory benefits can change unexpectedly.

William is a plumber. He has a contract with a home builder to install the bathrooms in a new housing development. William will supply the materials and equipment. He will be paid a fixed fee per house and must complete the job by an agreed deadline. Which one of the following best describes William's relationship to the home builder?

Subcontractor

An underwriter is attempting to conduct ratio analysis on a company. The underwriter notices that the company has $12 million in total sales, $8 million in cash sales, $4 million in credit sales, and a $2 million accounts receivable balance. Based on these figures, what is the company's accounts receivable turnover ratio?

The company's accounts receivable turnover ratio is 2 ($4 million/$2 million).

Which one of the following accounting principles may cause a limitation in the use of financial statements to evaluate an organization?

The cost principle

In financial statement analysis, leverage ratios measure which one of the following?

The extent to which a company has borrowed money

Insureds frequently request coverage of property on a blanket basis. Which one of the following is the primary benefit of blanket insurance to the insured?

The insured can avoid being overinsured or underinsured for its various property exposures.

When it comes to insurance pricing, actuaries use mathematical techniques to establish insurance rates for:

The insurer's book of business.

James, a commercial lines underwriter, is reviewing an applicant with a large fleet of vehicles for auto coverage. The producer submitted a five year loss summary that includes the number of losses, the amount paid, and the amount reserved per year. James is concerned because both the number of losses and the amount incurred has increased each of the last three years. Which one of the following additional pieces of information would help James determine if losses are really trending upward?

The number of vehicles per year

When insuring a partnership, it is essential to identify which one of the following on the policy declaration page?

The partnership

An underwriter is conducting vertical analysis using a common-size balance sheet for the past two fiscal years. The underwriter notices the figure listed under "net receivables" is 11.5 percent for the current fiscal year compared to 9.5 percent for the prior fiscal year. These figures indicate that:

The percentage of net receivables to total assets increased by 2 percent.

Insurers differ in their approach to calculating each account's amount subject. Which one of the following is the objective in making this determination?

To determine potential loss severity

The overarching purpose of underwriting is:

To develop and maintain a profitable book of business.

Which one of the following is the primary reason that governments seek to prevent insurer insolvency through underwriting regulation?

To prevent insureds from being left without coverage and suffering great financial loss

Which one of the following statements is true regarding ratemaking in different types of insurance?

Trending of losses in fire insurance is generally restricted to claim severity.

All of the following are common profitability measures used in ratio analysis, EXCEPT:

Turnover of assets

Victor, the sales manager for Hallbinger's Insurance Company, wants the company to grow in written premium. He wants his agents to write more auto and homeowners 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?

Underwriting practices must generate policy premiums that exceed losses and expenses.

Liabilities are claims against the organization's assets. Which one of the following best describes a current liability?

Unpaid invoices from vendors

Which one of the following statements is true regarding cooperative relationships?

When producers and underwriters have cooperative relationships, less time is spent underwriting accounts that do not meet the insurer's requirements.

Properly classifying accounts is an important task for underwriters. The use of incorrect or random rate classifications:

Will result in rates that do not accurately reflect the future loss potential of the classes.

Which one of the following statements about the balance sheet is correct?

Net worth is positive whenever the value of assets exceeds the value of liabilities and negative if the value of liabilities exceeds the value of assets.

An underwriter seeking to gain insight into the activities that might be conducted by an applicant would use which one of the following resources?

North American Industry Classification System

Owners' equity represents the capital contributed by an organization's owners plus the organization's:

Retained earnings.

ABC Corp. is looking to insure two buildings under a blanket insurance policy. Each building has an insurable value of $1,000,000. The underwriter assigns the buildings a rating of $1.25 and $0.75 per $100 respectively. If the underwriter prices the insurance using blanket average rate, what should ABC Corp.'s premium be?

$20,000

Actuary Joe Smith is projecting a rate increase of 10 percent in the upcoming year. If the credibility factor is .25, how much of a rate increase would be taken?

2.5%

Which one of the following is an example of an efficiency ratio?

Accounts receivable turnover ratio

Which one of the following should provide an underwriter with most of the essential information needed to arrive at a decision on a new business applicant?

Application

The goal of actuaries and underwriters in designing a rating system is to make each class:

As homogeneous as possible without sacrificing the predictive accuracy that large numbers create.

A management control tool used to determine whether line underwriters are properly implementing underwriting policy is known as an underwriting:

Audit.

Wrap-ups do not usually include which one of the following coverages?

Auto

An underwriter concerned with an account's growth potential and ability to pay future premiums should use which one of the following external sources?

Dun & Bradstreet report

As a financial analysis tool, common-size statements are most useful when comparing:

Financial statements of two or more different sized businesses.

Trending practices vary by type of insurance. Trending may be based on experience or external indices. Which one of the following statements regarding trending is accurate?

For liability insurance, separate trending of claim severity and claim frequency is common.

An earned exposure unit is an exposure unit:

For which the insurer has provided a full year of coverage.

The name of a corporation should appear on a policy declarations page because the corporation:

Has an identity that is separate from that of its owners.

Which one of the following statements is true regarding closed mindedness?

Having a closed mind is generally unacceptable in business.

Insurer People's Protection raised its Country Estate policies' rate by three percent in a declining economic market, which created huge profits for People's Protection. The next year, hoping for additional profits, the insurer increased rates only two percent maintaining that a five percent increase over two years was reasonable, because country estate owners' insurance products were designed to protect a wealthier customer who could afford to pay higher premiums. In which one of the following ways would People's Protection's second set of rates at two percent be considered as excessive?

If the rates generate an unreasonable profit for People's Protection

One of the objectives of insurance rate regulation is to ensure that rates are adequate. Which one of the following best describes why it is necessary for insurance rates to be "adequate?"

Insurers setting rates too low in order to win market share can lead to insolvency.

Which one of the following items may not be fairly represented on an entity's financial statements due to the cost principle of accounting?

Inventory

Liquidity ratios such as the acid-test ratio and the current ratio measure a company's ability to convert assets to cash in order to satisfy its obligations. The acid-test ratio is a more conservative measure of liquidity because:

It does not include inventory as an asset.

In which one of the following types of lines of insurance do underwriters usually have extreme flexibility in account pricing and are able to develop rates without actuarial intervention?

Marine insurance

Which one of the following types of government records do underwriters use most frequently?

Motor vehicle reports

Working capital is the excess of a company's current assets over its current liabilities. Most financially sound companies have a:

Positive working capital.

Which one of the following financial ratios is key for evaluating insurer solvency?

Premium to surplus ratio

All of the following are objectives of rate regulation, EXCEPT:

Rates promote availability and affordability of insurance.

Ratio analysis is a common technique used by underwriters to analyze an organization's financial statements. Each of the following is one of the four broad categories these ratios can be grouped into for this purpose, EXCEPT:

Solvency

An underwriter is conducting ratio analysis and determines that a company has a current ratio of 1.2. Which one of the following adjustments to the calculation should the underwriter make to ensure that the company is able to meet its short term obligations?

Subtract the value of the company's inventory from the calculation.

An underwriter is conducting ratio analysis and notices that a company has $1.5 million in long-term debt, $3 million in shareholder's equity, and $5 million in assets. Which one of the following statements is true based on the company's debt to equity ratio?

The debt to equity ratio is .50 and the company is mostly financed by equity.

All of the following statements are true regarding the factors affecting the formation of an insurer's underwriting policy, EXCEPT:

The higher an insurer's premium-to-surplus ratio, the greater its ability to expand premium writings.

A company's common-size statement lists two years, 20X3 and 20X4. In 20X3, the inventories line was five percent, and in 20X4 the inventories line was seven percent. Which one of the following could an underwriter infer from this information?

The percentage of inventories to total assets increased

For obtaining information regarding an account, upon which one of the following do underwriters most rely?

The producer

Which one of the following statements is correct with respect to market conduct examinations?

They protect both insurers and consumers from unfair insurer practices.

How many years of loss experience, not including the current year, are required by most experience rating plans?

Three

Responsiveness is a desirable ratemaking characteristic. Because conditions are constantly changing, any delay between when data are collected and when they are used tends to reduce the accuracy of rates. The delay in reflecting loss experience in rates stems from several sources, including which one of the following?

Time period during which rates are in effect, usually a full year

The primary purpose of financial statements is:

To communicate information about an organization's financial activities to decision makers.

Risk transfer through insurance allows members of a group or pool to exchange the:

Uncertainty of economic loss for the certainty of insurance premium payment.

Which one of the following statements is correct regarding underwriter and producer communication?

Understanding the attitudes of others is a necessary precondition to effective communication.

Insurance underwriter Luis refuses to insure any teenage driver who appears to be discourteous or unkempt. Luis believes those behaviors will lead to greater losses under the policies he underwrites. Which one of the following practices, which underwriting regulations aim to prevent, is Luis using?

Unfair discrimination

Which one of the following statements is true regarding selling a decision?

When selling a decision to make changes to an account, highlighting a resulting benefit can help.

Which one of the following factors about an employers' compensation program could indicate that the insurer is receiving a lower premium relative to the exposure assumed?

Low wages

Which one of the following is the term used to refer to an established frame of mind based on previous experience that hinders comprehension of new information?

Mental set

Sofie and the members of her homeowner's association have homeowner's policies on their coastal dwellings. They have heard that there are 11 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:

Adverse selection.

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?

Check to see if she has the underwriting authority to make the decision.

Which one of the following insurer representatives often meets with the insured in difficult circumstances, but can provide the underwriter with valuable information?

Claim representative

Which one of the following negotiating styles should underwriters always try to adopt whenever possible?

Collaborating

Which one of the following statements is correct with regard to underwriting guidelines?

Compliance with underwriting guidelines ensures selection of loss exposures commensurate with planned rate levels.

Insurers will sometimes use composite rating when determining the premium on an account. Which one of the following is true regarding composite rating?

Composite rating is primarily used for its administrative convenience.

Prudence of operations indicates an organization's ability to:

Conduct its operations within the limits of its capabilities.

ABC Insurance is considering entering new states as part of its growth plan. The executives of ABC decide not to pursue new business in low-income areas of states and provide underwriters with a map indicating the areas from which they are not to accept applications. This position likely violates regulations that:

Constrain insurers' ability to accept, modify, or decline loss exposures.

Home builder Jerry Barton engaged an electrician to install overhead ceiling fans in many new homes. Jerry paid the electrician by the hour, supervised his work, and had the right to discharge him. Which one of the following terms best describes the employment status of the electrician?

Employee

Depending on the type of insurance, insurers use automated underwriting systems to:

Encode underwriting guidelines.

From an underwriting perspective, most of the information that is requested on a commercial application would be considered:

Essential.

The focus of a line underwriter is:

Evaluating new submissions and renewal underwriting.

One social criterion for ratemaking is simplicity. The requirement for simplicity arises out of the insurance industry's need to:

Explain and defend its system to the public.

Tania, a commercial property underwriter, has received a new business application for Pravalt Properties (Pravalt). The producer is expecting a quick decision. Three of the properties owned by Pravalt have high values and are located in relatively rural areas. Tania has no specific concerns with the properties, but the underwriting guidelines require that she obtain risk control reports. Which one of the following would be the most timely and cost effective source of the reports?

Fee for service company

NOP Corporation, a publicly traded company, has a $72 million public float. The company's fiscal year ends on December 31 of each calendar year. On April 30 of the current year, NOP Corporation agreed with certain counterparties to make minor amendments to the terms of two different derivative contracts. NOP Corporation would first report these transactions on:

Form 10-Q to the Securities and Exchange Commission.

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:

Formulating underwriting policy.

Quality accounts usually have quality employees. Quality employees:

Generally produce products that will satisfy the customer and that will be less likely to result in insurance claims.

One of the types of rates used by underwriters to price insurance is judgment rates. Which one of the following is true regarding judgment rates?

Judgment rates are developed by reviewing individual account characteristics.

Which one of the following provisions gives the lender separate rights from those of the insured?

Lender's loss payable

Besides ease of formation, what is the other primary reason for the popularity of sole proprietorships?

Limited capital requirements

In financial statement analysis, what term refers to cash as well as short-term securities that can easily be converted to cash?

Liquidity

Which one of the following statements is true regarding corporations?

Most corporate charters grant an unlimited life to corporations.

CES Brokers is considering purchasing several shares of Tylo Industries to diversify their investment portfolio. Prior to the purchase, CES would like detailed information on long-term debt issued by Tylo that is nearing maturity. CES should look for this information in the:

Notes to the financial statements.

Unusual rate fluctuations could result from occasional large losses, whether from large individual losses or from an accumulation of smaller losses from a single event. In liability insurance, these fluctuations are controlled by using:

Only basic limit losses.

All of the following are disadvantages of the partnership type of business ownership, EXCEPT:

Partners are taxed personally for partnership profits.

Identifying and addressing different controlling interests under one policy is least complicated in:

Property insurance.

When underwriters want someone other than the producer submitting an application to make a physical inspection of an account, they usually:

Request a risk control report.

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:

Requiring loss control measures.

Individual rating plans use different approaches to modify the rate for an account. Which one of the following types of individual rating plans is used to modify the premium of liability insurance policies based on risk characteristics such as condition of premises and equipment, and safety programs?

Schedule rating plan

Which one of the following statements is true regarding additional insureds in liability insurance?

Sometimes the existence of the particular party requesting to be added as an additional insured changes the account's underwriting acceptability.

An insurance rate developed by an ISO field representative through a physical visit to a particular property and development of an individual advisory loss cost is known as a:

Specific fire rate.

The four primary types of financial statements include the balance sheet, the income statement, the statement of cash flows, and the:

Statement of changes in shareholders' equity.

Anita is a commercial lines underwriter at ABC Insurance. Prior to entering the insurance industry, Anita had served overseas in the armed forces. A producer submits an application for a chain of retail clothing stores owned and operated by an immigrant family. The producer knows the family and feels this is an excellent account. Anita spent three years stationed in the country from which the applicants emigrated. She believes the business culture there differs significantly from that in the U.S. and that the applicants are most likely untrustworthy and likely to submit fraudulent claims. As a result, Anita declines the account. This is an example of which one of the following?

Stereotyping

If a company's inventory turnover ratio is higher than the industry benchmark, it indicates that:

The company is selling its inventory more quickly than its competitors.

Underwriters must be careful when comparing financial statements using trend analysis because false impressions about a company can be created. Which one of the following might cause an underwriter to have a false impression about a company's health because of an inventories increase on the financial statement?

The inventory increase was caused by a change in the inventory valuation method.

Liquidity ratios are used to determine a company's ability to pay off its short-term debts. Typically, the higher the value of the ratio:

The larger the margin of safety the company possesses to cover its short-term debts.

Which one of the following statements regarding partnerships is true?

Underwriters should clearly designate on the declarations page of a policy the name of the partnership to be insured.

All of the following are principal sources of underwriting information, EXCEPT:

Underwriting authority reports

Which one of the following statements is correct regarding underwriting relationships?

Underwriting communication involves risk for both producer and underwriter.

Which one the following is the most significant disadvantage of a sole proprietorship?

Unlimited liability

The Financial Accounting Standards Board (FASB) requires organizations to report comprehensive income. Comprehensive income includes an organization's net income and:

Unrealized gains on securities available for sale.

Ace Woodworking Company makes household furniture. Which one of the following best describes an expense that should be classified as an operating expense on Ace's income statement?

Utility charges for the manufacturing plant

All of the following are characteristics of independent contractors, EXCEPT:

When an independent contractor's work is unsatisfactory, the usual recourse is to discharge the contractor.

LMN Insurance Company has recently opened three new regional offices and has been growing rapidly. Because of the rapid growth in written premiums, LMN's premium-to-surplus ratio has risen to three to one. Which one of the following is the most viable option for LMN to improve its premium-to surplus ratio for regulatory purposes?

Arrange for reinsurance to free up surplus.

Which one of the following statements is correct with respect to policy form laws?

Deemer provisions are intended to encourage a prompt review of submitted policy forms.

Sarbanes-Oxley prompted the SEC to issue interpretive guidance for improved disclosure in the management discussion and analysis (MD&A) report of an organization. Which one of the following is an area of guidance from Sarbanes-Oxley?

Disclosure of certain trading activities

Experience rating plans use a credibility factor. Which one of the following statements regarding the use of credibility factors is true?

Experience rating plans use premium size at basic limits to determine a credibility factor.

Pricing the insurance product is different from pricing most other products and services because the underlying costs of insurance products are:

Not known before the sale.