FIN 446 EXAM 1
Which one of the following is a major constraint of underwriting policy?
reinsurance
combined ratio formula
(incurred losses/earned premium)+(incurred uw expenses/written expenses)
Unfair claims settlement practices laws patterned after the NAIC Model Unfair Claims Settlement Practices Act typically prohibit which one of the following?
Failing to approve or deny a claim within a reasonable time after receipt of a proof-of-loss
Which one of the following is a constraint to the development of underwriting policy?
Financial capacity
An insurer decides to discontinue writing a class of workers compensation insureds because losses on the business have exceeded expectations. Instead, in an effort to maximize its return on equity, the insurer plans to use its resources to increase the volume of accounts in an area that offers more promising returns. This need to redirect the focus for desired business is an example of an underwriting constraint due to
Financial capacity.
Which one of the following statements is correct regarding internal constraints insurers face?
Financial constraints can affect insurers' ability to achieve profit goals.
Gulford Insurance Company is licensed in the state where it is incorporated. Gulford is also licensed in several other states. In these other states, Gulford is
Foreign insurer
To achieve profitability, the underwriting function serves which one of the following additional purposes?
Guarding against adverse selection
Which one of the following cases is an example of why insurance needs to be regulated to maintain insurer solvency?
Gulford Insurance Company goes out of business because it did not have enough surplus or reinsurance to cover its hurricane losses.
Which one of the following is the responsibility of the underwriting department of an insurer?
Helping the insurer avoid the problem of adverse selection
All states have property-casualty insurance guaranty funds that pay unpaid claims of insolvent insurers licensed in the particular state. Which one of the following types of claims is covered by all state funds?
Homeowners insurance claims
An important question for an insurer to ask when examining customers' needs and characteristics to select a distribution channel is
How quickly can inquiries and transactions be processed?
Readability legislation has influenced the drafting of commercial as well as personal insurance policies. However, readability tests do not necessarily measure
How well the policies can be understood
Claims departments use techniques such as network analysis and clustering to help them
Identify and prevent fraud.
Which one of the following statements is correct?
If rates are inadequate, an insurer might fail.
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.
Consider the following information reported by an insurance company: Incurred losses $8 million Incurred Underwriting Expenses $2 million Incurred Loss Adjustment Expenses $4 million Net Written Premiums $24 million Earned Premiums $16 million Which one of the following is the company's trade basis-combined ratio?
.833
Which one of the following statements is correct?
In the exclusive agent and direct writer marketing systems, insurers might assist producers with prospecting.
In addition to developing model laws, the National Association of Insurance Commissioners, in 1990, implemented an accreditation program to
Increase uniformity of insurer solvency regulation across the states
Given the complexity of commercial insurance, which one of the following is best suited for its distribution?
Independent agencies
William has decided to start a small architecture business. He has rented office space, purchased furnishings, and hired four employees. William knows that he needs to purchase insurance before he can open for business but is not sure what coverages and limits to purchase. Which one of the following insurance distribution systems is most appropriate for William?
Independent agent
Gulford Insurance Company (Gulford) is a direct writer of commercial insurance in Pennsylvania. The management team is frustrated by the continued lack of success in the more rural western part of the state. It is difficult to penetrate the market without a local presence, but the cost of assigning agents to this territory is not justified by the returns. Which one of the following distribution systems would best allow Gulford the local presence in a cost-effective manner?
Independent agents
Which one of the following is a well known insurance advisory organization?
Insurance Services Office (ISO)
The retention ratio as an underwriting performance measure is the percentage of
Insurance policies renewed.
Juan, sales and marketing manager for Millwright Insurance Company (Millwright), measures his sales department and customer satisfaction by the cancellation ratio and the retention ratio. Millwright renewed 5,000 auto policies which were due to expire at the beginning of 20X1. The total number of auto policies written at the beginning of 20X1 was 10,000. The number of policies lapsed during 20X1 was 1,000. Millwright's cancellation ratio is
10%
Argot Stock Insurance Company's (Argot) net income is $1,000,000 and its average owners' equity is $16,500,000. Argot's average policyholders' surplus is $20,000,000. Using the GAAP approach, which one of the following is Argot's return on equity?
6%
Martina, Cromley Insurance Company's (Cromley) underwriting manager, wants to know if her underwriting department has had a gain or loss. Cromley has homeowner losses of $1,000,000 and written premium of $3,000,000. Cromley has earned premiums of $2,000,000. The taxes, salaries, and building expense for Martina's underwriting department are $600,000. What is Cromley's combined ratio?
70%
An insurer has the following year-end financial results: Written premiums $100,000,000 Earned premiums $ 95,000,000 Incurred underwriting expenses $ 40,000,000 Incurred losses (including LAE) $ 76,000,000 Based on this information, which one of the following is the insurer's loss ratio?
80 percent
Which one of the following statements is true? A. The situational analysis (SWOT) of a marketing plan includes strategies for determining the appropriate distribution channel for products and services. B. A comprehensive marketing plan is limited to marketing goals and marketing strategies. C. The product proposal and sales goals included in a marketing plan summarize the contractual relationship between producer and insurer. D. A marketing plan identifies the product or service to be promoted and the customers to be targeted.
A marketing plan identifies the product or service to be promoted and the customers to be targeted.
Argot Insurance Company (Argot) wants to be licensed in a certain state. The initial surplus has been derived mostly from its premium deposits paid by prospective policyholders. A portion of its initial surplus is going to be borrowed. Argot is
A mutual insurer
Which one of the following insurance customers would fit in the middle market group?
A one-location furniture manufacturer with a risk manager on staff
Which one of the following statements is correct with regard to an insurer's goals?
A proprietary insurer must earn competitive profits to raise the capital needed to operate.
Which one of the following sells insurance by representing customers rather than insurers?
A regional broker
A marketing plan for a typical insurance product includes
A situational (SWOT) analysis of the current marketplace.
A business manufactures a product that is harmful to the public if used improperly. More than three licensed insurance companies have refused to provide commercial general liability coverage for the business. The producer should contact which one of the following to attempt to arrange coverage?
A surplus lines broker
Pravalt Insurance Company, a proprietary insurer is concerned about meeting their insurer goal of earning a profit. CEO Emily has asked for suggestions from her management staff to meet this goal. Which one of the following suggestions from her staff will most effectively achieve this goal?
Actuarial Manager, Elin suggests their product be priced competitively in the market and appropriately for their risk.
Which one of the following statements is correct regarding insurance policy rules, regulations, and guidelines?
Administrative rules, regulations, and guidelines can be stated in informal circulars or bulletins from the state insurance departments to insurers.
A situation that occurs because people with the greatest probability of loss are the ones likely to purchase insurance is known as
Adverse selection.
Sofie and the members of her homeowner's association have homeowner's policies on their coastal dwellings. They have heard that there are 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
Adverse selection.
An agency in New Jersey has decided to market personal insurance to accountants. It is offering a 10% discount to all Certified Public Accountants in the state. This is an example of which one of the following types of group marketing?
Affinity marketing
Which one of the following statements about licensing insurers is correct?
Alien insurers must satisfy the requirements of domestic insurers and must usually establish a branch office and have funds on deposit in the U.S.
Guaranty funds mitigate the effects of insurer insolvency. Which one of the following statements is true regarding state guaranty funds?
All states have separate laws governing property-casualty insurance guaranty funds
Insurance policies are
Almost always drafted by insurers
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.
Which one of the following is a proprietary insurer?
American Lloyds
Insurer B is a small insurer that does not have a large enough policyholder base to provide adequate statistical data for rating purposes. An organization that could best provide Insurer B with data regarding rates or prospective loss costs, as well as file loss costs and policy forms with the state on behalf of Insurer B, is
An insurance advisory organization
Due to the possibility of an environmental pollution exposure resulting in extensive losses, several insurers in a particular state have joined together to insure the exposure. No single insurer was willing to insure the entire risk. This insurance arrangement is typical of
An insurance pool.
As a new insurer in the market, Benchmark Insurance is seeking an active voice in legislative matters. Which one of the following organizations would provide Benchmark with personnel for lobbying purposes or allow them to influence pending legislation?
An insurance trade association
Which one of the following statements is correct regarding considerations involved in the selection of insurance marketing systems and distribution channels?
An insurer can exercise the greatest control over producers in the direct writer system.
Every state insurance department is headed by an insurance commissioner, superintendent, or director. Most commissioners are
Appointed by the state governor
All corporations are obligated to promote the well-being of society. At the minimum, this obligation demands that the insurer should
Avoid causing any public harm.
Courts have rules in some cases that an insurer's improper claim handling constitutes not only a breach of contract or a violation of insurance regulations but also creates an independent tort which is the tort of
Bad faith
An insurer that targets large middle-market and national accounts would most likely use which one of the following distribution systems?
Broker
In which one of the following ways does the National Association of Insurance Commissioners (NAIC) have a profound effect upon the nature and uniformity of state regulation?
By providing a forum to develop uniform policy when appropriate
Which one of the following distribution channels is also an efficient way to handle claim reporting and billing inquiries?
Call centers
Domestic stock insurers must meet paid-in surplus requirements and
Capital Stock Requirements
Underwriters can best minimize the effects of adverse selection by
Carefully selecting the applicants whose loss exposures they are willing to insure.
Rating agencies are placing new demands when assessing insurers' financial health. While many other exposures can affect solvency, no single exposure can affect policyholder security more instantaneously than
Catastrophes
Specialty insurers such as those offering surety bonds, aviation insurance, and livestock mortality insurance usually
Centralize underwriting authority.
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.
Sofie, a property underwriter for Cintriell Insurance Company is reviewing a new homeowners application. Sofie has changed the protection class to unprotected, as the fire protection class listed by the producer is an eight and is incorrect. Which one of the following line underwriter activities is Sofie performing?
Classifying and pricing accounts
Which one of the following ratios is considered the accepted financial measure of an insurer's underwriting performance?
Combined Ratio
Once an underwriter has evaluated a submission, selected and applied any appropriate modifications, and determined the premium, the next step is to implement the underwriting decision. To implement the decision, the underwriter should first
Communicate the decision to the producer.
The principal method of determining a prospect's insurance needs is through
Completing a risk management review for the prospect.
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.
A producer is usually paid a fee for performing which one of the following functions?
Consulting
Which one of the following statements is true concerning the use of the Internet to market insurance products?
Consumers assume that insurance purchased over the Internet will be less expensive than the same product purchased from a producer.
Which one of the following cases illustrates how underwriting guidelines ensure that selection decisions provide uniformity and consistency by all the insurer's underwriters?
Cromley is training new underwriters and is using a work sample for a homeowner risk which has a unacceptable roof and an overgrown yard. New underwriters Erin and Filip check the guidelines and make the same underwriting decision to decline the risk. (because both check and come to same conclusion)
Jancy Insurance Company (Jancy) has been very successful at writing homeowners insurance for over 10 years. In an effort to grow its personal auto book, Jancy is offering all current homeowners policyholders a 15 percent discount on their personal auto premium. This is an example of which one of the following applications for predictive analytics?
Cross-selling
Juan received a phone call from an angry policyholder. The insured received a bill as a result of a workers compensation premium audit. The individual does not understand why premium has increased when his total payroll is lower than originally projected. Juan advises the insured that he will contact the auditor, review the audit, and call back with an explanation. Which one of the following producer functions is Juan performing?
Customer service
Rating agencies such as Dun & Bradstreet (D&B) provide
Data on the applicant's financial status.
Insurer advisory organizations provide valuable services to participants in the insurance markets, including which one of the following services?
Developing rating systems
An underwriter receives a renewal application for a property quote from his producer. The applicant has had a series of small losses in the recent past. The underwriter is debating whether to reject the submission or quote it with a property deductible of $5,000. During which one of the following steps in the underwriting process is the underwriter involved?
Developing underwriting alternatives
Which one of the following methods of premium collection is generally used for personal insurance policies and small commercial accounts?
Direct bill
Rhonda is a personal lines insurance producer. Under the terms of her agency contracts, the insurers forward policies promptly to Rhonda's customers and send a premium invoice with the policy. Insureds are instructed to remit premium payments to their insurer. The insurers calculate Rhonda's commissions and forward those commission payments to her monthly. Rhonda is operating under which one of the following payment procedures?
Direct bill basis
Which one of the following premium collection methods is used in the majority of personal insurance sales?
Direct bill process
Jose reads an advertisement in a national trade magazine for personal automobile insurance. The advertisement encourages the reader to call or to mail an attached postcard for a free quote. This distribution channel is known as the
Direct response channel.
Erin has recently graduated from college and relocated to Chicago. She has purchased a car and rented an apartment and now needs to purchase insurance. Erin is looking for minimum coverages and the lowest price available. Which one of the following is likely the best distribution system to meet Erin's needs?
Direct writer internet search
Which one of the following statements is correct regarding discrimination and insurance rating?
Discrimination is essential to insurance rating
T. Roy Insurance Company is selecting a distribution system and channel for its products. Which one of the following best describes the type of consideration that T. Roy should give to its operations?
Does it have the necessary financial resources?
When a firm is selecting a distribution channel, which one of the following is an important consideration with regard to its operations?
Does the selected channel capitalize on its core capabilities?
Insurer B knows that regulation exists to ensure insurance rates are fair, adequate, and not excessive. However, due to having many insurers in the state where Insurer B operates, the insurer decides to underprice its auto policy in order to increase its market share and entice customers away from its higher priced competitors. This practice by Insurer B could have the effect of
Driving down price levels in the entire auto insurance market in that state
Which one of the following insurer goals is most commonly associated with proprietary insurers?
Earn a profit
The demand for technology is a powerful factor in the insurance marketplace. For insurance producers and customers, which one of the following is the primary demand for technology in marketing applications?
Ease of use
Which one of the following situations would have the greatest impact on the profitability goal of Cintriell Insurance Company?
Emilia, the new workers compensation claims manager for Cintriell consistently underestimates indemnity loss reserves.
Under the insurance commissioner's direction, a state insurance department engages in a variety of regulatory activities that typically include all of the following, EXCEPT:
Enacting laws regulating the formation of insurers
Depending on the type of insurance, insurers use automated underwriting systems to
Encode underwriting guidelines.
Many states require that a policy be submitted for approval before it is used. However, if a specified period elapses and the policy has not been disapproved, the policy is considered approved. The purpose of such approval is to
Encourage prompt review of the policy
Tania receives an application for homeowner's insurance for a home valued at $500,000 from Patrick, the producer for Keithly Insurance Company. Since Tania's underwriting authority is $350,000 on property risks, she must refer it to Lachlan, her underwriting supervisor. Which one of the following additional functions for underwriting profitability does this case illustrate?
Enforcing underwriting guidelines
Underwriting guidelines include acceptable approaches to evaluating applicants and the overall desirability of a particular type of risk or class of business. Which one of the following purposes of underwriting guidelines is best served by inclusion of these acceptable approaches?
Ensure uniformity and consistency in risk selection
Julio, a producer for Argot's Insurance Company, submits an application for a 50-year-old residence to Mathilde, the underwriter. Julio wants to know why the homeowners rate is higher for his 50-year-old residence. Mathilde explains that the homeowners rate for the 50-year-old residence is not the same for a five-year-old residence because the exposures are different. Which one of the following underwriting profitability functions of Argot is Mathilde's explanation supporting?
Ensuring adequate policyholder's surplus
The focus of a line underwriter is
Evaluating new submissions and renewal underwriting.
During which one of the following steps in the underwriting process would an underwriter request a loss control visit to a prospective policyholder's location?
Evaluating the submission
Cancellation Ratio
# policies written/# policies lapsed
At year end, Omicron Insurance Company (OIC) posted these results: Premiums written $10,000,000 Premiums earned 9,500,000 Underwriting expenses incurred 4,000,000 Loss and loss adjustment expenses incurred 5,700,000 Based on this information, which one of the following represents OIC's trade basis combined ratio?
100%
Which one of the following is one of the best known insurer financial rating agencies?
AM Best Company
An insurer's core functions are marketing and distribution, underwriting, and
Claims
Which one of the following is a financial measure of underwriting performance?
Combined ratio
Activities of the legal and compliance function may include
Ensuring that organizational standards are met and the procedures are followed
Which marketing system would be most appropriate for an insurer that wants to be the only company represented by its agents but not have the agents as employees?
Exclusive agency
The percentage of insurance policies that an insurer has renewed is referred to as its
Retention ratio.
Loss Ratio
incurred losses (including LAE)/earned premiums
Insurer Y is small but has a speciality insurance market for high-value vehicles. In competing with a larger insurer with a broader market, Insurer Y is likely to have which one of the following advantages?
Insurer Y can be more nimble, allowing it to respond quickly to an emerging trend or change.
For underwriting to achieve its purpose,
Insurers must minimize the effects of adverse selection on the book of business.
Which one of the following statements is correct regarding the investment function within an insurer?
Investment income enables an insurer to reduce the premium that it must charge for the underwriting risks it assumes.
The difference between underwriting gain or loss and operating gain or loss is that operating gain or loss includes
Investment income.
Which one of the following statements is true? A. It is important when combining distribution systems and channels for an insurer to provide consistent messages about its products and services. B. Personal insurance requires more hands-on service than commercial insurance in a distribution system. C. It is not important for an insurer to consider the complexity of the product being sold when making decisions regarding distribution systems and channels. D. The exclusive agency system dominates the commercial insurance market.
It is important when combining distribution systems and channels for an insurer to provide consistent messages about its products and services.
Which one of the following is true concerning the direct response distribution channel to market insurance?
It relies heavily on advertising
When an insurer is selecting a market segment to target, which one of the following is an important factor of the external environment the insurer should consider?
Laws and regulations
Which one of the following statements is correct with regard to the regulation of insurance policies?
Legislation might require that certain standard mandatory policy provisions appear in certain types of insurance policies
Which one of the following statements is correct with respect to line underwriters?
Line underwriters can offer valuable technical assistance to an insured's risk manager and to the producer responsible for the account.
Insurers sometimes grant underwriting authority to producers. This authority is usually granted based on all of the following, EXCEPT:
Location
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
One of the biggest problems in measuring insurer profitability arises from errors in estimating
Loss reserves.
The System for Electronic Rate and Form Filings is designed to improve the efficiency of the rate and form filing and approval process and to reduce the time and cost involved in
Making regulatory filings
Which one of the following statements is correct? When consulting services are provided, insurance premiums, commissions, and fees are billed together. Many producers offer consulting services for which they are paid on a fee basis. It is illegal for producers to reduce their consulting fees in recognition of commissions received. Producers are restricted to only providing services to their current insureds.
Many producers offer consulting services for which they are paid on a fee basis.
Which one of the following correctly describes a typical element of an insurance product marketing plan?
Marketing goals outline the proposed target market including detailed sales projections and how success will be measured.
The development of sales goals and projected outcomes is part of which one of the following marketing activities?
Marketing plan
Which one of the following cases illustrates an external constraint for meeting insurer goals?
Mellfor Insurance Company has lost income from a recent increase in workers compensation losses caused by fraud.
Which one of the following cases illustrates an internal constraint for meeting insurer goals?
Millwright Insurance Company's website is not interactive and does not provide rate quotes on line.
Insurers have become insolvent despite regulatory reviews. A goal of insurance regulation is to
Minimize the number of insolvencies
Alva, an underwriter with Worthley Insurance Company wants to write homeowners business in a new subdivision, Creek Flow. Worthley's rates are not competitive unless Alva uses a lower protection class code than the one currently indicated for the Creek Flow subdivision. Alva is
Misclassifying loss exposures
Which one of the following is considered an unfair underwriting practice under state regulation of insurance?
Misclassifying loss exposures
State insurer guaranty funds
Mitigates the effects of insurer insolvency
Regarding the selection role of the state insurance commissioner, which one of the following statements is true?
Most commissioners are appointed
Millwright Insurance Company is a small mutual insurer. Benjamin, the CEO of Millwright, has allocated funds for belonging to an insurance industry professional and trade organization. Which one of the following organizations would help Millwright by providing governmental affairs representation and analysis of pertinent information?
National Association of Mutual Insurance Companies
Daniel is an insurance producer with over 20 years of experience. He has placed insurance programs using reinsurance arrangements, retention plans, and various captive arrangements. He has negotiated broad coverage and high limits for his customers. With which one of the following customer groups is Daniel most likely working?
National accounts
Daniel is an insurance underwriter with over 20 years of experience. He has worked with reinsurers, surplus lines brokers, retention plans, and various captive arrangements. With which one of the following customer groups is Daniel most likely working?
National accounts
Which one of the following insurance consumer groups would have the most risk financing alternatives available to them?
National accounts
The National Association of Insurance Commissioners (NAIC) has
No regulatory authority
Which one of the following is a source of capital for cooperative insurers?
Policyholder premium
Some insurer insolvencies occur when an insurer is overexposed to losses resulting from a major insured catastrophe. Experts have identified many factors that frequently contribute to an insurer's insolvency. At the root of most of these factors is
Poor management
An insurer's marketing department is working with the underwriting department to determine what characteristics of middle market businesses result in the most profitable commercial insurance accounts. Which one of the following methods would be most effective in identifying these characteristics?
Predictive analytics
Which one of the following financial ratios is key for evaluating insurer solvency?
Premium surplus ratio
The insurance industry is regulated primarily to protect consumers, maintain insurer solvency, and to
Prevent destructive competition
The two major types of insurers by legal form of ownership are
Proprietary and cooperative.
Which one of the following functions is performed by virtually all insurance producers?
Prospecting
Though marketing plans are varied, they all serve the same fundamental purpose of
Providing the "roadmap" necessary to profitably and effectively acquaint sellers with potential buyers.
Anthony has been active in reforming seat belt laws and automobile safety laws. His activities and those of his group have had a major influence on many state insurance departments. Which one of the following groups does Anthony belong to?
Public citizen
An insurer whose financial rating is threatened can implement remedial measures. Which one of the following actions taken by an insurer could result in a financial rating improvement?
Purchasing more reinsurance
If an insurer is insolvent, the state insurance department places the insurer in
Receivership
The only unincorporated insurers permitted in most states are
Reciprocal insurance exchanges.
Which one of the following methods of prospecting is more likely to be used by an experienced producer than a new insurance producer?
Referrals from present clients
Which one of the following groups is responsible for determining whether insurance rates are high enough to prevent destructive competition?
Regulators
Which one of the following is a stabilizing control that ensures the sustainability of insurance companies and their ability to provide compensation for insureds' losses?
Regulatory controls
Which one of the following is a supporting function of an insurance company?
Reinsurance
The most difficult time for an insurer to change distribution systems is when
Renewing an existing book of business.
Which one of the following is a method used by state regulators to ensure solvency of admitted insurers?
Requiring each insurer to meet minimum financial requirements
Because Janine has had many driving accidents due to her own carelessness, she has been unable to find private insurers willing to provide her with automobile insurance. In most states, Janine would be able to purchase auto liability insurance through a
Residual market plan
All states attempt to ensure that continuous auto insurance coverage is available to consumers by
Restricting the rights of insurers to cancel or nonrenew personal auto insurance policies.
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
Which one of the following tasks is the responsibility of a staff underwriter as opposed to a line underwriter?
Review and revise rating plans
A commercial insurer has historically targeted small businesses. It is considering expanding its market to middle market organizations. To succeed, the insurer will need to develop a level of expertise in which one of the following areas?
Risk Financing alternatives
A producer will generally review a company's loss run report while performing which one of the following functions?
Risk management review
Donna is an insurance producer. She makes an appointment with a potential policyholder to review the prospect's loss exposures. She asks the prospect to complete a questionnaire to assist her in this effort. Donna is conducting a
Risk management review
Aaron, a senior producer for Blithe Insurance Company (Blithe) has over 15 years experience in the field. He knows Blithe's underwriting guidelines and is familiar with the type of business Blithe wants. He takes pride in the loss ratio produced by his office and also produced by Blithe as a company. He often trains new agents in his office because of his low rejection ratio of applications he writes. He is known as a front-line underwriter for Blithe. Which one of the following is a benefit of Aaron's field underwriting?
Saves Blithe from having to evaluate accounts that they will ultimately reject
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.
Which one of the following statements is correct regarding nonfinancial measures of underwriting results?
Selection standards for underwriters usually support overall underwriting goals and are evaluated during audits.
Uniformity of approach to financial regulation has been facilitated by the NAIC accreditation program. As part of the peer review process, the program subjects state insurance regulators to a comprehensive review to determine whether the state has met minimum baseline standards of
Solvency regulation
Which one of the following statements regarding licensing of insurers or insurance personnel is true?
Some states permit the insurance commissioner to deny a license to an otherwise worthy applicant if the commissioner believes that no additional insurers are needed in the state.
Which one of the following statements is correct?
Some states require insurance consultants who give advice or opinions about polices to be licensed.
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
Which one of the following has legal authority to regulate insurers?
State and federal governments
State insurance departments enforce insurance laws enacted by the
State legislature
The major source of funding for state insurance departments comes from
State premium taxes
The combined ratio is the
Sum of an insurer's loss ratio and its expense ratio.
Every state insurance department is headed by a state insurance commissioner, a director, or by a
Superintendent
All of the following are underwriting activities typically performed by staff underwriters, EXCEPT: A. Formulate underwriting policy B. Research the market C. Support producers and insureds D. Conduct underwriting audits
Support producers and insureds
Which one of the following statements about insurance distribution systems and channels is true? A. Direct writer marketing systems use sales persons who are independent contractors. B. Exclusive agents are usually free to represent as many or as few insurers as they want. C. Managing general agents (MGAs) serve as employees of direct writer companies. D. Surplus lines brokers can place coverage that is not available through standard market insurers.
Surplus lines brokers can place coverage that is not available through standard market insurers.
A non-admitted insurer is typically a
Surplus lines insurer.
Which one of the following is an underwriting evaluation tool that uses Global Positioning System (GPS) tracking to collect and analyze data regarding driver behavior and vehicle use?
Telematics
Which one of the following statements is correct with respect to insurers' use of the Internet and insurance portals?
The Internet provides lead-generation and cross-selling opportunities for all products.
In recent years, speed to market for insurance products has become increasingly important to insurance regulators resulting in the National Association of Insurance Commissioners implementing a series of operational efficiencies. Which one of the following has dramatically improved the timeliness of product filings?
The System for Electronic Rate and Forms Filings
After investing significant resources to develop a Web-based system, a personal lines insurer has decided to expand its territory by assuming the role of a direct writer and using the Internet as a distribution channel. What is the insurer's greatest concern with the existing book which used independent agents as the distribution system?
The agents own the expirations for the existing book
The selection of a distribution channel for an insurer's products and services depends, partly, on customer preferences. Which one of the following statements is true regarding customer preferences that should be considered when selecting a distribution channel?
The channel should be consistent with the customer's expectations for service.
The contract language contained in insurance policies is regulated through legislation. Legal disputes regarding the language can arise. All of the following statements are true regarding the regulation of insurance policies and the involvement of the courts, EXCEPT:
The courts do not become involved in the interpretation of confusing policy provisions
Which one of the following statements is correct with respect to insurance distribution systems?
The expertise of current staff and producers must be sufficient to manage the selected system.
All of the following statements are true regarding the factors affecting the formation of an insurer's underwriting policy, EXCEPT: A. Return-on-equity thresholds guide insurers in deciding where to allocate capital. B. The availability and cost of adequate reinsurance can influence underwriting policy. C. Insurers are subject to penalties from the states if they deviate from filed forms or rates. D. The higher an insurer's premium-to-surplus ratio, the greater its ability to expand premium writings.
The higher an insurer's premium-to-surplus ratio, the greater its ability to expand premium writings.
Diversifying risk is an emerging goal for property-casualty insurers because of
The increase in catastrophe losses that have occurred over the past decade.
Which one of the following statements is true concerning the use of alternative distribution channels to sell insurance? A. Most distribution channels do not allow insurers to contact customers directly. B. The increasing use of multiple distribution channels has been driven by technology and customer preferences. C. The introduction of new distribution channels has resulted in the elimination of traditional marketing systems. D. Most distribution channels are not yet available for customer service.
The increasing use of multiple distribution channels has been driven by technology and customer preferences.
Which one of the following statements is correct regarding considerations involved in the selection of insurance marketing systems and distribution channels? A. The direct writer system dominates the medium to large commercial insurance business. B. Small-business customers have not shown an interest in exploring various distribution channels. C. Personal insurance customers require the most direct involvement from the producer. D. The independent agency and brokerage system generally is the most flexible.
The independent agency and brokerage system generally is the most flexible.
Which one of the following is an external constraint that may prevent insurers from meeting their established goals?
The insurer's competition
Tobias, a successful producer with Barnley's Insurance Company, is struggling with an intricate quote on homeowners coverage for his insured, Hanna. Hanna not only has substantial collections of guns and silverware, but also has a small farm located at her premises. Which one of the following individuals from Barnley Insurance Company could provide assistance and support to Tobias?
The line underwriter
Which one of the following would likely be indicated by a notation next to a specific classification in an insurer's underwriting guidelines?
The need for the underwriter to get management approval before proceeding
Which one of the following statements is true with regard to distribution channels for selling insurance?
The objective of insurance portals is to deliver leads to the firms whose products they offer through their sites
Some consumer groups take an activist approach to confront issues and to work for change. The Consumer Federation of America (CFA) is an advocacy organization that provides information to consumers about auto insurance and works to improve
The safety of household products
Which one of the following statements is correct with respect to selecting a distribution channel?
The types of insurance products and services to be delivered by the insurer must fit the marketing channel selected.
The final, and ongoing, step in the underwriting process is monitoring underwriting decisions. Which one of the following statements is correct with respect to this process?
The underwriter is tasked with monitoring both individual policies and books of business to ensure that satisfactory results are achieved.
Which one of the following statements is correct with respect to marketing plans?
They identify target customers and the resources and strategies to be used to create, price, promote, and sell the product.
Which one of the following statements is correct regarding premium growth and an insurer's success?
To determine profitability, an insurer should consider how its premium growth is being achieved.
The overarching purpose of underwriting is
To develop and maintain a profitable book of business.
Because underwriting guidelines usually specify the attributes of accounts that insurers are willing to insure, insurers consider them
Trade secrets.
A number of unique factors shape the insurance marketplace. Which one of the following factors is most likely to lead to insurer insolvency, withdrawal from certain geographic markets, and reinsurance shortages?
Unanticipated catastrophic losses
The first step in the underwriting process is evaluating the submission. Which one of the following statements is correct with respect to that evaluation?
Underwriters must understand the activities, operations, and character of each applicant.
Which one of the following insurer functions has the responsibility of determining whether and under what conditions the insurer is willing to provide insurance products and services to potential customers?
Underwriting
Which one of the following is the insurer's quality control check for uniform application of the underwriting guidelines and for continuous improvement?
Underwriting audits
All of the following are principal sources of underwriting information, EXCEPT:
Underwriting authority reports
Victor, sales manager for Hallbinger's Insurance Company wants the company to grow in written premium. He wants his agents to write more auto and homeowner business. In order to do so, the company must have adequate capacity. Which one of the following impacts Victor's agents and the company the most concerning surplus and capacity?
Underwriting practices must generate policy premiums that exceed losses and expenses.
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.
Since Betty is the daughter of Perry's fiancé Rita, producer Perry has agreed to insure Betty even though he recently rejected an insurance applicant who had similar characteristics to Betty. He based this decision on the fact that he knew Betty's driving habits and felt Betty was more mature than the applicant he had previously refused to insure. Perry is guilty of which one of the following unfair trade practices?
Unfair discrimination
Which one of the following statements is correct regarding competition and insurance regulation?
When rate levels are inadequate, some insurers may stop writing new business
Anna is doing market research on the food industry. She has segmented the market into wholesale and retail operations, and further segmented the wholesale market into meats, fruit and vegetables, dairy, bakery, and non-perishables. Which one of the following would be considered the best example of a niche market?
Wholesale bakery
Leah decides to purchase her personal automobile insurance through a program offered by her employer. Leah's employer offers her a discounted premium which is deducted from her paycheck. Leah's employer is using which type of distribution channel?
Worksite marketing
Insurer B (IB) notifies one of its independent agents that its agency contract will be terminated unless the agency improves its hit (or success) ratio during the next 90 days. This indicates that IB has
Written too few of the accounts it quoted for the agency.
Worthley Insurance Company's board of directors wants information about Worthley's current financial position. Which one or the following individuals can best assist the board with evaluating Worthley's financial position?
Yusuf, manager of accounting and finance
A group of policies with a common characteristic, such as a territory or type of coverage, or all policies written by a particular insurer, producer, or agency is referred to as
a book of business
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?
adverse selection
State guaranty fund provisions vary by state. Which one of the following types of claims is covered by all state guaranty funds?
auto
Insurers face external constraints that might prevent them from meeting their goals. Which one of the following is an external constraint?
competition
One way state insurance regulators help to protect consumers is by reviewing insurance policy forms to determine whether they benefit consumers and
comply with state consumer protection laws
Samuelson Insurance has developed special programs to market personal insurance to members of college alumni and professional associations. This is an example of which one of the following types of market segmentation?
demographic
The principal purpose of underwriting is to
develop and maintain a profitable book of business for the insurer
Depending on the type of insurance, insurers use automated underwriting systems to
encode underwriting guidelines
An insurance company must have adequate policyholders' surplus if it wishes to
increase its written premium volume
Expense Ratio
incurred uw expenses/written premium
An insurance company needs to hire an employee with knowledge of insurance policy forms and the ability to relate policy provisions to the loss exposures of individual policyholders. The person will also prepare premium quotes and process cancellations. Which one of the following employees would best suit the company's needs?
line underwriter
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
In order to offer a large commercial business a less expensive general liability policy, underwriter Tom told the producer he would categorize the substandard exposure as a highly protected exposure. This would result in a premium credit and a lower rate. Tom has committed the unfair underwriting trade practice of
misclassifying loss exposures
Due to increased competition, an insurer deems it appropriate to decrease pricing on its commercial automobile line. The insurer submits the appropriate statistical data to the state insurance department, but continues to lose market share pending the department's response. The type of state rating law employed in this example is
prior approval law
Jancy Insurance Company's CEO Adam is researching Jancy's supporting functional areas for sources of additional income. He believes that certain services his company performs could be marketed as a stand-alone product to businesses which are not policyholders. Which one of the following functional areas provides services that insurers often market as a stand-alone product?
risk control
An agency bill process in which the producer is usually not required to pay the insurer until the premium is collected from the policyholder is known as
the item basis
Taunton Insurance Company files its new auto policy with the state insurance department in a state with a prior-approval law that includes a deemer provision. The new policy includes several revisions in definitions and policy provisions. Taunton does not hear from the insurance department for several months. Which one of the following is true regarding the outcome of the filing?
the policy is approved when it passes a specified period and it has not been disapproved
Insurer A is raising its auto rates in order to compete more effectively with other insurers in the state. Because of delays in creating the new rates, Insurer A used the new rates without state department of insurance approval but later filed the proper information that would be subject to regulatory review. Insurer A apparently operates in a state with
use-and-file laws