AU 60 - Assignment 1 - Fundamentals of Underwriting
C. Develop and maintain a profitable book of business for the insurer.
The principal purpose of underwriting is to A. Insure only those applicants with minimal or no loss exposure. B. Decline to insure those applicants with a risk of incurring a severe loss. C. Develop and maintain a profitable book of business for the insurer. D. Educate producers regarding the insurer's underwriting guidelines.
True
(T/F) When dealing with property insurance, the underwriter must be alert for both overinsurance and underinsurance.
Morale Hazard
A ____ is a condition of carelessness or indifference that increases the frequency or severity of loss.
Legal Hazard
A ____ is a condition of the legal environment that increases loss frequency or severity. For example, people in some geographic areas are much more litigious than those elsewhere.
Moral Hazard
A ____ is a condition that increases the likelihood that a person will intentionally cause or exaggerate a loss.
Physical Hazard
A ____ is a tangible characteristic of property, persons, or operations to be insured that increases the frequency or severity of loss.
Certificate of insurance
A brief description of insurance coverage prepared by an insurer or its agent and commonly used by policyholders to provide evidence of insurance.
Hazard
A condition that increases the frequency or severity of a loss.
B. Moral hazard.
A condition that increases the likelihood of an intentional loss is a A. Physical hazard. B. Moral hazard. C. Morale hazard. D. Legal hazard.
Underwriting cycle
A cyclical pattern of insurance pricing in which a soft market (low rates, relaxed underwriting, and underwriting losses) is eventually followed by a hard market (high rates, restrictive underwriting, and underwriting gains) before the pattern again repeats itself.
Application
A legal document that provides information obtained directly from an applicant requesting insurance and that an insurer can use for underwriting and claims handling purposes.
A. Audit.
A management control tool used to determine whether line underwriters are properly implementing underwriting policy is known as an underwriting A. Audit. B. Guide. C. Regulation. D. Process.
Account underwriting
A method of underwriting in which all of the business from a particular applicant is evaluated as a whole.
Predictive modeling
A process in which historical data based on behaviors and events is blended with multiple variables and used to construct models of anticipated future outcomes.
Combined ratio
A profitability ratio that indicates whether an insurer has made an underwriting loss or gain.
Counteroffer
A proposal an offeree makes to an offeror that varies in some material way from the original offer, resulting in rejection of the original offer and constituting a new offer.
Retrospective rating
A ratemaking technique that adjusts the insured's premium for the current policy period based on the insured's loss experience during the current period; paid losses or incurred losses may be used to determine loss experience.
D. Schedule rating plan.
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) A. Financial rating plan. B. Retrospective rating plan. C. Experience rating plan. D. Schedule rating plan.
Experience rating
A rating plan that adjusts the premium for the current policy period to recognize the loss experience of the insured organization during past policy periods.
Schedule rating
A rating plan that awards debits and credits based on specific categories, such as the care and condition of the premises or the training and selection of employees, to modify the final premium to reflect factors that the class rate does not include.
Loss run
A report detailing an insured's history of claims that have occurred over a specific period, valued as of a specific date.
Underwriting audit
A review of underwriting files to ensure that individual underwriters are adhering to underwriting guidelines.
D. Underwriting authority reports
All of the following are principal sources of underwriting information, EXCEPT: A. Financial rating services B. Applications C. Producers D. Underwriting authority reports
A. Requiring loss control measures.
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 A. Requiring loss control measures. B. Using facultative reinsurance. C. Changing insurance rates, rating plans, or policy limits. D. Amending the policy terms and conditions.
Underwriter
An insurer employee who evaluates applicants for insurance, selects those that are acceptable to the insurer, prices coverage, and determines policy terms and conditions.
B. Morale
An underwriter is working with a loss control representative on a new opportunity. Given the complexity of the exposures, a physical survey is conducted by the loss control representative, and a formal report is prepared. The report reveals that the insured owns several unattended properties, and that they were unlocked when the loss control representative conducted the survey. This failure to properly secure an unattended building would be an indicator to the underwriter of which one of the following types of hazard? A. Legal B. Morale C. Moral D. Physical
A. Developing underwriting alternatives
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? A. Developing underwriting alternatives B. Monitoring underwriting decisions C. Evaluating the submission D. Implementing the underwriting decision
Loss exposure
Any condition or situation that presents a possibility of loss, whether or not an actual loss occurs.
B. 6% ($1,000,000 / $16,500,000)
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? A. 5% B. 6% C. 18% D. 20%
B. 100% ($5.7M / $9.5M) + ($4M / $10) = 1.00
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? A. 97% B. 100% C. 102% D. 110%
B. Trade secrets.
Because underwriting guidelines usually specify the attributes of accounts that insurers are willing to insure, insurers consider them A. The level of authority. B. Trade secrets. C. The tool for training underwriters. D. The key to profitability.
Expert systems, or knowledge-based systems
Computer software programs that supplement the underwriting decision-making process. These systems ask for the information necessary to make an underwriting decision, ensuring that no information is overlooked.
D. Evaluating the submission
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? A. Determining underwriting alternatives B. Monitoring the loss exposures C. Implementing the underwriting decision D. Evaluating the submission
C. Written too few of the accounts it quoted for the agency.
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 A. Less restrictive underwriting selection criteria than other insurers the agency represents. B. Renewed too few of the accounts the agency wrote with IB in the past year. C. Written too few of the accounts it quoted for the agency. D. A higher-than-expected loss ratio with the agency.
Combined Ratio
Insurers typically track their underwriting results through the use of financial and nonfinancial measures. The most common financial measure of underwriting results over a specific time period—typically one year—is the insurer's ____.
Unfair trade practices
Methods of competition or advertising or procedures that tend to deprive the public of information necessary to make informed insurance decisions.
C. Removing a proposed deductible
Modifications for an unacceptable submission may include any of the following changes, EXCEPT: A. Loss control measures B. Rate changes C. Removing a proposed deductible D. Changing policy limits
B. That increases the likelihood that a person will intentionally cause or exaggerate a loss.
Paying close attention to hazards is an important consideration when reviewing an underwriting submission. An underwriter should recognize a moral hazard, which is a condition: A. Of carelessness or indifference that increases loss frequency or severity. B. That increases the likelihood that a person will intentionally cause or exaggerate a loss. C. Of property, persons, or operations to be insured that increases loss frequency or severity. D. That increases the likelihood that a person will break the law.
Production underwriting
Performing underwriting functions in an insurer's office as well as traveling to visit and maintain rapport with agents and sometimes clients.
Estimated loss potentials (ELP)
Rate development factors used for operations with unique characteristics or for which inadequate statistical experience exists. These are multiplied by loss cost multipliers to develop rates.
C. Data on credit ratings of businesses.
Rating agencies such as Dun & Bradstreet (D&B) provide A. Data on motor vehicle reports. B. Information about business operations' safety records. C. Data on credit ratings of businesses. D. Aggregate loss experience data.
Facultative reinsurance
Reinsurance of individual loss exposures in which the primary insurer chooses which loss exposures to submit to the reinsurer, and the reinsurer can accept or reject any loss exposures submitted.
A. Amending policy terms and conditions.
The Bakery, an applicant for commercial property insurance, has experienced a series of property losses over the past three years. In order to find this applicant viable, the underwriter agrees to increase the property deductible. This type of underwriting modification is known as A. Amending policy terms and conditions. B. Requiring loss control measures. C. Using facultative reinsurance. D. Using schedule rating modifications.
Retension
The ____ ratio is the percentage of expiring policies that an insurer renews. It can be measured by policy count, premium volume, or both.
Hit
The ____ ratio, sometimes called the "success ratio," is a nonfinancial measure used to determine how well underwriters (or the insurer as a whole) are meeting their sales goals.
Information efficiency
The balance that underwriters must maintain between the hazards presented by the account and the information needed to underwrite it.
B. Retention ratio.
The percentage of insurance policies that an insurer has renewed is referred to as its A. Hit ratio. B. Retention ratio. C. Preservation ratio. D. Success ratio.
(a) rated classification
The rate classifications provided by the ISO Commercial Lines Manual that describe operations with unique characteristics or for which inadequate statistical experience exists.
Hit ratio
The ratio of insurance policies written to those that have been quoted to applicants for insurance.
A. Insurance policies renewed.
The retention ratio as an underwriting performance measure is the percentage of A. Insurance policies renewed. B. Policies written to policies quoted. C. Premium held for losses. D. Underwriting expenses to written premiums.
Predictive Modeling
Underwriters use ____ to identify applications that present lower underwriting risk. This incorporates underwriting thought processes with underwriting guidelines by assigning a rank or score to all of the variables presented by an account and its loss exposures. Predictive models function in this way:
C. Ensure uniformity and consistency in risk selection
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? A. Synthesize insights and experience B. Ensure proper policy issuance C. Ensure uniformity and consistency in risk selection D. Avoid duplication of effort
C. Provide rating criteria
Underwriting guidelines serve all of these purposes, EXCEPT: A. Avoid duplication of effort B. Ensure uniformity and consistency C. Provide rating criteria D. Support policy preparation
B. Avoid duplication of effort
Underwriting guidelines serve which one of the following purposes? A. Provide rates for individual risks B. Avoid duplication of effort C. Allow for the development of insights and experience D. Provide for flexible and unstructured decisions
Underwriting submission
Underwriting information for an initial application, or a substantive policy midterm or renewal change.
C. 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? A. Sales must submit business with a lower-than-average chance of loss. B. Claims must pay only covered losses and have low expenses. C. Underwriting practices must generate policy premiums that exceed losses and expenses. D. Research and development must create policies which are marketable.
B. 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.
Which one of the following cases illustrates how underwriting guidelines ensure that selection decisions provide uniformity and consistency by all the insurer's underwriters? A. Cromley's underwriter, Ciara uses predictive modeling to analyze her risks. She is underwriting Chloe's homeowner application and it falls within the acceptable scores the company has created. B. 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. C. Cromley's underwriting guidelines provide a section on insuring swimming pools, illustrating the principal considerations for such risks. New underwriter Pedro refers to this section of the quidelines. D. Ella, an experienced staff underwriter provides insight for Cromley's Insurance on amusement parks by authoring a section on amusement parks in the underwriting guidelines.
A. Chloe and Elin are underwriting identical homeowners risks for Cromley Insurance Company. The applicants have the same protection class, construction, and coverage amount. After checking the underwriting guidelines, they come to the same underwriting decision.
Which one of the following cases illustrates how underwriting guidelines ensure uniformity and consistency? A. Chloe and Elin are underwriting identical homeowners risks for Cromley Insurance Company. The applicants have the same protection class, construction, and coverage amount. After checking the underwriting guidelines, they come to the same underwriting decision. B. Cromley identifies applicants that present a lower underwriting risk by assigning a rank or score of all the variables presented by an account and its loss exposures. C. Furkan and Daniel have experience in underwriting workers compensation policies for Cromley Insurance Company. They have provided feedback and expertise in updating the current workers compensation guidelines in the underwriting manual. D. Cromley's contractor's equipment underwriting guidelines might indicate that equipment use is of paramount importance in determining acceptability and pricing.
D. Market conduct examinations
Which one of the following describes the method that state regulators use to ensure that insurers adhere to filed classification and rating plans? A. Solvency testing B. Licensing requirements C. Premium-to-surplus ratios D. Market conduct examinations
B. Premium to surplus ratio
Which one of the following financial ratios is key for evaluating insurer solvency? A. Loss ratio B. Premium to surplus ratio C. Expense ratio D. Retention ratio
A. Moral hazard
Which one of the following is a condition that increases the likelihood that a person will intentionally cause or exaggerate a loss? A. Moral hazard B. Physical hazard C. Morale hazard D. Legal hazard
A. Financial capacity
Which one of the following is a constraint to the development of underwriting policy? A. Financial capacity B. Underwriting audits C. Underwriting guides D. Market research
D. Combined ratio
Which one of the following is a financial measure of underwriting performance? A. Retention ratio B. Hit ratio C. Line of business mix D. Combined ratio
D. Reinsurance
Which one of the following is a major constraint of underwriting policy? A. Economy B. Underwriting management C. Competition D. Reinsurance
A. Composition of the insurer's book of business
Which one of the following is determined by a company's underwriting policy? A. Composition of the insurer's book of business B. The rating organization to which the insurer will belong C. The market pursued by the insurer D. The underwriting authority the insurer grants its producers
D. Underwriting audits
Which one of the following is the insurer's quality control check for uniform application of the underwriting guidelines and for continuous improvement? A. Market conduct examinations B. Reinsurance treaty C. Predictive models D. Underwriting audits
A. Loss and loss adjustment expenses incurred, earned and written premiums, and underwriting expenses incurred
Which one of the following lists the financial components used to calculate a combined ratio? A. Loss and loss adjustment expenses incurred, earned and written premiums, and underwriting expenses incurred B. Loss and loss adjustment expenses incurred, IBNR losses, and earned and written premiums C. Loss and loss adjustment expenses incurred, investment earnings, and earned and written premiums D. Unearned premium reserves, earned and written premiums, and loss and loss adjustment expenses incurred
D. Combined ratio
Which one of the following ratios is considered the accepted financial measure of an insurer's underwriting performance? A. Retention ratio B. Success ratio C. Expense ratio D. Combined ratio
C. Retention ratio and hit ratio
Which one of the following represents two nonfinancial measures that are used to evaluate underwriting performance by focusing on underwriting actions? A. New business ratio and retention ratio B. Loss ratio and quote ratio C. Retention ratio and hit ratio D. Combined ratio and success ratio
A. Selection standards for underwriters usually support overall underwriting goals and are evaluated during audits.
Which one of the following statements is correct regarding nonfinancial measures of underwriting results? A. Selection standards for underwriters usually support overall underwriting goals and are evaluated during audits. B. Nonfinancial measures evaluate underwriters on their results rather than on their actions. C. A high hit ratio might indicate that underwriting selection criteria is too stringent. D. Underwriters are rarely held accountable for supporting an insurer's overall product or line of business mix goals.
B. Government reports that provide underwriting information include motor vehicle reports, criminal records, and civil court records.
Which one of the following statements is correct with regard to the submission evaluation step in the underwriting process? A. When an insurance application form is completed properly, an underwriter normally does not need any additional information. B. Government reports that provide underwriting information include motor vehicle reports, criminal records, and civil court records. C. While producers for direct writing and exclusive agency insurers perform field underwriting to screen applicants, independent agents and brokers generally do not. D. An applicant's financial status as indicated by a financial rating service is not an important piece of underwriting information for evaluating potential loss exposures.
C. Compliance with underwriting guidelines ensures selection of loss exposures commensurate with planned rate levels.
Which one of the following statements is correct with regard to underwriting guidelines? A. The purpose of developing underwriting guidelines is to ensure that an insurer writes only above average accounts. B. One purpose underwriting guidelines serve is to provide for flexible and unstructured decisions. C. Compliance with underwriting guidelines ensures selection of loss exposures commensurate with planned rate levels. D. Once effective underwriting guidelines are established, they need not be evaluated or modified.
B. Line underwriters can offer valuable technical assistance to an insured's risk manager and to the producer responsible for the account.
Which one of the following statements is correct with respect to line underwriters? A. Line underwriters formulate underwriting policy and develop underwriting guides. B. Line underwriters can offer valuable technical assistance to an insured's risk manager and to the producer responsible for the account. C. Line underwriters select and rate new business. They are not generally involved in the proposal or renewal process. D. Line underwriters focus on risk characteristics and need not be knowledgeable about policy forms and provisions.
D. Review and revise rating plans
Which one of the following tasks is the responsibility of a staff underwriter as opposed to a line underwriter? A. Prepare premium quotations B. Assist producers and insureds in determining appropriate coverage C. Verify policies are issued with appropriate forms and endorsements D. Review and revise rating plans
A. 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? A. Line underwriter B. Staff underwriter C. Underwriting supervisor D. Producer
D. Formulating underwriting policy.
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 A. Providing assistance to policyholders. B. Developing underwriting guides. C. Reviewing and revising rating plans. D. Formulating underwriting policy.
Staff Underwriters
____ develop underwriting guidelines, which distill underwriting policies into directions for line underwriters' policy selection. The guidelines describe the parameters of acceptable applicants for insurance for which the insurer has priced its insurance products.
Underwriting Audits
____ ensure that established underwriting standards are reasonably consistent and are the insurer's quality control check for uniform application of the underwriting guidelines and for continuous improvement.
Staff Underwriters
____ underwriters review and update rates and rating plans continually, subject to regulatory constraints, to respond to changes in loss experience, competition, and inflation.
Line Underwriters
____ underwriters select new and renewal accounts that meet the criteria established in underwriting guidelines.
Line Underwriters
____ underwriters support the producers and policyholders by inquiring about an insured's risk management program to ensure that they are using other risk management techniques to address gaps in insurance coverage.
Staff Underwriters
____ underwriters work closely with underwriting management to perform activities essential for profitable risk selection.
Staff Underwriters
____ underwriters work cooperatively with the actuarial and legal departments to develop new coverages and modify existing coverage forms developed by advisory organizations.
Staff Underwriters
____underwriters also monitor underwriting activity by analyzing statistical results by type of insurance, class of business, size of loss exposure, and territory.
Predictive modeling
a process in which historical data based on behaviors and events are blended with multiple variables and used to construct models of anticipated future outcomes
Catastrophe (CAT) modeling
a type of computer program that estimates losses from future potential catastrophic events
Schedule Rating
awards debits and credits to a submission based on categories of business characteristics, such as the care and condition of the premises and the selection and training of employees.
Retrospective Rating
is an individual rating plan that uses the current year as the experience period to develop the experience modification factor.
Predictive analytics
statistical and analytical techniques used to develop models that predict future events or behaviors
Telematics
the use of Global Positioning System (GPS) tracking to collect and analyze data regarding driver behavior and vehicle use
Experience Rating
uses the policyholder's past loss experience to develop a premium modification factor to adjust the manual rate upward or downward.
Premium-to-surplus ratio, or capacity ratio
A capacity ratio that indicates an insurer's financial strength by relating net written premiums to policyholders' surplus. It is considered too high when it exceeds 300 percent, or 3-to-1.
C. A book of business.
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. A policy group. B. A line of business. C. A book of business. D. A coverage pool.
Book of business
A group of policies with a common characteristic, such as territory or type of coverage, or all policies written by a particular insurer or agency.
Underwriting policy (underwriting philosophy)
A guide to individual and aggregate policy selection that supports an insurer's mission statement.
Return on equity (ROE)
A profitability ratio expressed as a percentage by dividing a company's net income by its net worth (book value). Depending on the context, net worth is sometimes called shareholders' equity, owners' equity, or policyholders' surplus.
Treaty reinsurance
A reinsurance agreement that covers an entire class or portfolio of loss exposures and provides that the primary insurer's individual loss exposures that fall within the treaty are automatically reinsured.
D. Adverse selection.
A situation that occurs because people with the greatest probability of loss are the ones likely to purchase insurance is known as A. Underwriting selection. B. Applicant "pre-qualification." C. Loss exposure evaluation. D. Adverse selection.
Trending
A statistical technique for analyzing environmental changes and projecting such changes into the future.
Underwriting guidelines (underwriting guide)
A written manual that communicates an insurer's underwriting policy and that specifies the attributes of an account that an insurer is willing to insure.
A. Saves Blithe from having to evaluate accounts that they will ultimately reject
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? A. Saves Blithe from having to evaluate accounts that they will ultimately reject B. Serves as a resource for Blithe on marketing climate C. Save Blithe training time spent on new underwriters D. Provides feedback to Blithe on underwriting procedures
Specialty market
Accounts that have unique needs, such as professional liability, that are not adequately addressed in the standard market
C. Support producers and insureds
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
A. The higher an insurer's premium-to-surplus ratio, the greater its ability to expand premium writings.
All of the following statements are true regarding the factors affecting the formation of an insurer's underwriting policy, EXCEPT: A. The higher an insurer's premium-to-surplus ratio, the greater its ability to expand premium writings. B. The availability and cost of adequate reinsurance can influence underwriting policy. C. Return-on-equity thresholds guide insurers in deciding where to allocate capital. D. Insurers are subject to penalties from the states if they deviate from filed forms or rates.
C. Revise pricing plans
All of these are line underwriting activities, EXCEPT: A. Manage a book of business B. Select insureds C. Revise pricing plans D. Recommend coverage
Market conduct examination
An analysis of an insurer's practices in four operational areas: sales and advertising, underwriting, ratemaking, and claim handling.
National Association of Insurance Commissioners (NAIC)
An association of insurance commissioners from the fifty U.S. states, the District of Columbia, and the five U.S. territories and possessions, whose purpose is to coordinate insurance regulation activities among the various state insurance departments.
Advisory organization
An independent organization that works with and on behalf of insurers that purchase or subscribe to its services.
Policyholders' Surplus
An insurance company must have adequate ____ if it wishes to increase its written premium volume.
D. Increase its written premium volume.
An insurance company must have adequate policyholders' surplus if it wishes to A. Generate premiums that exceed losses. B. Avoid adverse selection. C. Produce profitable business. D. Increase its written premium volume.
D. Line underwriter
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? A. Premium auditor B. Staff underwriter C. Producer D. Line underwriter
Manuscript policy
An insurance policy that is specifically drafted according to terms negotiated between a specific insured (or group of insureds) and an insurer.
C. 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 A. Adherence to underwriting guidelines. B. Regulation. C. Financial capacity. D. Audit compliance.
Capacity
An insurer's ____ is limited by regulatory guidelines and often by its own voluntary constraints, which are frequently more conservative than those imposed by regulators.
Financial Capacity
An insurer's ____ refers to the relationship between premiums written and the size of the policyholders' surplus, which is an insurer's net worth. That relationship is crucial in evaluating insurer solvency.
Underwriting Policy
An insurer's senior management formulates an ____ that guides individual and aggregate underwriting decisions. This determines the composition of the insurer's book of business, including the lines and classes of business that the insurer will offer, the amount of business the insurer is willing to write, the rating philosophy and forms the insurer will apply, and the territories to be developed.
B. 6%
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? A. 5% B. 6% C. 18% D. 20%
Standard market
Average to better-than-average accounts for which the standard premium is at least adequate
B. Encode underwriting guidelines.
Depending on the type of insurance, insurers use automated underwriting systems to A. Decide accounts with subjective factors. B. Encode underwriting guidelines. C. Price commercial accounts. D. Evaluate producers.
B. Insurers must minimize the effects of adverse selection on the book of business.
For underwriting to achieve its purpose, A. Underwriters must select applicants with legal hazards. B. Insurers must minimize the effects of adverse selection on the book of business. C. Underwriters must randomly select applicants to insure. D. Insurers must follow the steps in the underwriting process in strict sequence.
Nonstandard market
Higher-risk applicants who are charged a higher-than-average premium
Capacity
If an insurer's underwriting practices generate policy premiums that exceed losses and expenses, the policyholders' surplus will increase, thereby increasing ____.
A. After learning that a particularly active hurricane season is expected, several homeowners in a coastal community increase the limits on their windstorm coverage.
In deciding which applicants they are willing to insure, insurance underwriters need to recognize the effects of adverse selection. Which one of the following is the best example of adverse selection? A. After learning that a particularly active hurricane season is expected, several homeowners in a coastal community increase the limits on their windstorm coverage. B. Before installing an in-ground swimming pool in her home's back yard, Lucy increases the deductible on her homeowners policy. C. Before buying his first motorboat, Luis purchases a watercraft insurance policy. D. After a neighbor's business is burglarized, Anna installs an alarm system in her store.
Adverse selection
In general, the tendency for people with the greatest probability of loss to be the ones most likely to purchase insurance.
Return on Equity (ROE)
Insurers typically establish a ____ threshold against which capacity allocation proposals are evaluated. If, for example, the insurer wants a 10 percent return on equity and the sale of workers compensation insurance in a specific state is expected to generate a 12 percent return on equity, then the insurer should expand into this territory and line of business if no better opportunity is present.
D. Ensuring adequate policyholder's surplus
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? A. Protecting the homeowner rate B. Enforcing policy guidelines C. Guarding against adverse selection D. Ensuring adequate policyholder's surplus
Prospective loss costs
Loss data that are modified by loss development, trending, and credibility processes, but without considerations for profit and expenses.
B. Staff underwriter.
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 A. Chartered underwriter. B. Staff underwriter. C. Line underwriter. D. Field underwriter.
B. 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 A. Prevention of inadequate property limits. B. Adverse selection. C. Prevention of errors and omission claims. D. Property limits assessment.
C. Classifying and pricing accounts
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? A. Selecting insureds B. Coordinating with producer efforts C. Classifying and pricing accounts D. Recommending correct coverage
D. Centralize underwriting authority.
Specialty insurers such as those offering surety bonds, aviation insurance, and livestock mortality insurance usually A. Extend underwriting authority to producers. B. Use automated underwriting systems. C. Refer those lines to senior underwriters. D. Centralize underwriting authority.
C. Optimal product mix in the book of business
Staff underwriters share research of the market responsibilities with actuarial and marketing departments. Research includes an ongoing evaluation of which one of the following? A. Average loss ratio for a book of business B. Positive effects of a hard market C. Optimal product mix in the book of business D. Revisions to coverage forms
A. Enforcing underwriting guidelines
Tania receives an application for homeowner's insurance for a home valued at $500,000 from Patrick, the producer for Keithly Insurance Company. Since Tania's underwriting authority is $350,000 on property risks, she must refer it to Lachlan, her underwriting supervisor. Which one of the following additional functions for underwriting profitability does this case illustrate? A. Enforcing underwriting guidelines B. Prevention of errors and omissions C. Guarding against adverse selection D. Ensuring adequate policyholder surplus
Capacity
The amount of business an insurer is able to write, usually based on a comparison of the insurer's written premiums to its policyholders' surplus.
B. Check to see if she has the underwriting authority to make the decision.
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? A. Determine whether the credit score is acceptable. B. Check to see if she has the underwriting authority to make the decision. C. Check the underwriting guidelines on the pool and trampoline. D. Contact the agent about the upkeep problem.
National Association of Insurance Commissioners (NAIC)
The ____ has developed a series of financial ratios that it uses in conjunction with analytical evaluations to identify insurers that should receive additional solvency surveillance from regulators.
Statutory accounting principles (SAP)
The accounting principles and practices that are prescribed or permitted by an insurer's domiciliary state and that insurers must follow.
B. Implement the steps in the underwriting process. Staff underwriters assist underwriting management with formulating underwriting policy.
The common distinction between line underwriters and staff underwriters is that line underwriters A. Develop underwriting guides. Staff underwriters provide service to policyholders. B. Implement the steps in the underwriting process. Staff underwriters assist underwriting management with formulating underwriting policy. C. Research the market. Staff underwriters verify that policies are issued with the appropriate forms and endorsements. D. Conduct underwriting audits. Staff underwriters prepare files for the data entry department.
Line Underwriters
The focus of ____ underwriters is evaluating new submissions and renewal underwriting. These people work directly with insurance producers and applicants.
Staff Underwriters
The focus of ____ underwriters is managing the risk selection process. These people work with line underwriters and coordinate decisions with other departments to manage the insurance product, pricing, and guidelines.
A. Evaluating new submissions and renewal underwriting.
The focus of a line underwriter is A. Evaluating new submissions and renewal underwriting. B. Conducting education and training. C. Managing the risk selection process. D. Securing and maintaining treaty reinsurance.
Loss development
The increase or decrease of incurred losses over time.
Underwriting
The overarching purpose of ____ is to develop and maintain a profitable book of business for the insurer.
C. To develop and maintain a profitable book of business.
The overarching purpose of underwriting is A. Achieve the underwriting goals of the company. B. Make and sustain a profit. C. To develop and maintain a profitable book of business. D. Add to policyholder surplus.
D. Develop and maintain a profitable book of business for the insurer.
The purpose of underwriting is to A. Maximize the impact of adverse selection on the portfolio. B. "Pre-qualify" or field underwrite applicants. C. Compile information to develop a profile of loss exposures. D. Develop and maintain a profitable book of business for the insurer.
Underwriting authority
The scope of decisions that an underwriter can make without receiving approval from someone at a higher level.
D. Emma, the staff underwriter
The state advisory organization has developed a new homeowner's form which increases the personal property limits for guns, silverware, jewelry, and boats. Jancy Insurance Company is considering modifying the form for its own use. Which one of the following members of Jancy's staff would be involved in the research and development of this new form? A. Merve, the claims manager B. Antonia, the accounting manager C. Clara, the underwriting manager D. Emma, the staff underwriter
D. Guarding against adverse selection
To achieve profitability, the underwriting function serves which one of the following additional purposes? A. Transferring the risks of individuals and businesses B. Enforcing underwriting goals C. Adding to policyholder surplus D. Guarding against adverse selection
A. The line underwriter
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? A. The line underwriter B. The claims representative C. The actuary D. Staff underwriter
Policyholders' surplus
Under statutory accounting principles (SAP), an insurer's total admitted assets minus its total liabilities.
Line underwriter
Underwriter who is primarily responsible for implementing the steps in the underwriting process.
Staff underwriter
Underwriter who is usually located in the home office and who assists underwriting management with making and implementing underwriting policy.
A. Carefully selecting the applicants whose loss exposures they are willing to insure.
Underwriters can best minimize the effects of adverse selection by A. Carefully selecting the applicants whose loss exposures they are willing to insure. B. Accepting all applicants that are submitted by the producer. C. Rejecting applicants who have had any prior losses. D. Choosing to insure only those risks with a high probability of loss.
B. Experience
Underwriters gain underwriting authority with which one of the following: A. Grade level B. Experience C. Familiarity with local conditions D. Contractual arrangements
Adverse Selection
Underwriters minimize the effects of ____ by carefully selecting the applicants whose loss exposures they are willing to insure, charging appropriate premiums for the applicants that they do accept with premiums that accurately reflect the loss exposures, and monitoring applications and books of business for unusual patterns of policy growth or loss.
A. The underwriting guidelines.
Underwriting authority requirements are usually communicated to an underwriter through A. The underwriting guidelines. B. Their agent's manual. C. Their underwriting supervisor. D. Their underwriting management.
C. Underwriting authority.
Underwriting guidelines reflect the levels of A. Responsibility by job title. B. Loss exposure. C. Underwriting authority. D. Written premium by type of insurance.
C. Staff underwriters typically share responsibility for researching fundamental insurance issues with the actuarial and marketing departments.
Which one of the following statements regarding underwriter responsibilities is correct? A. Line underwriters often serve on industry committees that study standard policy forms and recommend changes. B. Staff underwriters offer valuable technical assistance to the insured's risk manager and the producer who is directly responsible for determining what coverage best meets the insured's needs. C. Staff underwriters typically share responsibility for researching fundamental insurance issues with the actuarial and marketing departments. D. Line underwriters are generally responsible for completing underwriting audits of the branch or region in which they work.
Insurance advisory organizations
____ have a significant role in the development of commonly used coverage forms. These coverage forms are usually developed by coverage experts who consider the scope of coverage being provided, coverage provided by other policies, and legal restrictions that apply to coverage-form development.
Account Classification
____ is the process of grouping accounts with similar attributes so that they can be priced appropriately.
Staff Underwriters
____ underwriters are responsible for securing and maintaining treaty reinsurance. Their responsibility includes determining the insurer's needs for reinsurance, selecting reinsurers, negotiating the terms and conditions of reinsurance treaties, and maintaining the insurer's relations with its treaty reinsurers.
Staff Underwriters
____ underwriters are usually responsible for revising underwriting guidelines so that they accurately reflect changes in underwriting policy and evaluate an insurer's loss experience to determine whether changes should be made in underwriting guidelines.
Line Underwriters
____ underwriters evaluate individual accounts for acceptability and execute underwriting policy by following practices and procedures outlined by staff underwriters.
Staff Underwriters
____ underwriters formulate and implement underwriting policy, which guides individual and aggregate decision making.
Line Underwriters
____ underwriters monitor accounts to ensure that they continue to be acceptable. This type of underwriter may cancel or nonrenew an account if risk control recommendations made at the policy's inception are not implemented or if the insured fails to take corrective action to control loss frequency.
