Assignment 5 - underwriting process

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 Select one: A. Requiring risk control measures. B. Amending the policy terms and conditions. C. Changing insurance rates, rating plans, or policy limits. D. Using facultative reinsurance.

A. Requiring risk control measures.

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

C. Support producers and insureds

Insured value ÷ Unit size =

Number of exposure units

Loss costs

The portion of the rate that covers projected claim payments and loss adjusting expenses.

Rate per unit × Number of units =

price

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

D. Underwriting authority reports

Rate per unit × Number of exposure units =

Premium

Government Records

Some government records provide underwriting information, such as motor vehicle reports; criminal court records; and civil court records, including records of suits filed, mortgages and liens, business licenses, property tax records, United States Securities and Exchange Commission filings, and bankruptcy filings.

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

A. $500

A type of individual rate that is used to develop a premium for a unique exposure for which there is no established rate is known as Select one: A. A judgment rate. B. An experience rate. C. A retrospective rate. D. A schedule rate.

A. A judgment rate.

rate

The price per exposure unit for insurance coverage.

Loss run

A report detailing an insured's history of claims that have occurred over a specific period, valued as of a specific date.

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.

Trending

A statistical technique for analyzing environmental changes and projecting such changes into the future.

Supporting business

A submission that is marginal by itself might be acceptable if the other insurance components of the applicant's account—the supporting business—are desirable.

Catastrophe model

A type of computer program that estimates losses from future potential catastrophic events.

Individual rate, or specific rate

A type of insurance rate that reflects the unique characteristics of an insured or the insured's property.

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.

Class of business

A poor loss ratio in a particular class of business can indicate inadequate pricing or a disproportionate number of high-hazard policyholders relative to the average loss exposure in the classification.

Substantive policy changes

Adding a new location to a property policy or a new driver to an auto policy can cause the underwriter to investigate whether the additions significantly change the loss exposures.

Underwriting authority

If the underwriter lacks the necessary authority to select an alternative, the submission must be referred to a higher underwriting authority.

Judgment rating

Rating used by underwriters to rate one-of-a-kind risks.

Final rate

The price per exposure unit determined by adjusting the prospective loss costs for expenses, profits, and contingencies.

Underwriting authority

The scope of decisions that an underwriter can make without receiving approval from someone at a higher level.

Staff underwriter

Underwriter who assists underwriting management with making and implementing underwriting policy.

An insurer's underwriting management has many responsibilities:

-Participating in the insurer's overall management -Arranging reinsurance -Delegating underwriting authority -Developing and enforcing underwriting guidelines -Monitoring underwriting results

Steps in the Underwriting Process

1.Evaluate the submission 2.Develop underwriting alternatives 3.Select an underwriting alternative 4.Determine an appropriate premium 5.Implement the underwriting decision 6.Monitor the underwriting decision

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.

Underwriting policy (underwriting philosophy)

A guide to individual and aggregate policy selection that supports an insurer's mission statement.

Law of large numbers

A mathematical principle stating that as the number of similar but independent exposure units increases, the relative accuracy of predictions about future outcomes (losses) also increases.

Significant and unique losses

A notice of loss provides the underwriter with another opportunity to review the account and to determine whether that loss is the type the underwriter expected. Summary information about the claim or a review of the claim file provides valuable information about the nature of the loss and the insured's operations.

Actuary

A person who uses mathematical methods to analyze insurance data for various purposes, such as to develop insurance rates or set claim reserves.

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.

Change insurance rates, rating plans, or policy limits

A rate increase compensates the insurer for potential increases in loss severity or frequency, while a decrease might prevent a desirable applicant from buying coverage from a competitor. Suggesting a change to an experience rating, a schedule rating, or a retrospective rating plan may also make a submission more acceptable. Changing policy limits may also make a borderline submission acceptable.

Class rating

A rating approach that uses rates reflecting the average probability of loss for businesses within large groups of similar risks; the predominant method used for rating commercial properties.

Retrospective rating plan

A rating plan 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.

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.

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? Select one: A. Classifying and pricing accounts B. Selecting insureds C. Recommending correct coverage D. Coordinating with producer efforts

A. Classifying and pricing accounts

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

A. Review and revise rating plans

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? Select one: A. The line underwriter B. Staff underwriter C. The actuary D. The claims representative

A. The line underwriter

Financial Rating Services

An applicant's financial status provides important underwriting information. Dun & Bradstreet, Standard & Poor's, and Experian are some of the major financial rating services that provide data on the credit ratings of individual businesses, together with industry averages for comparison.

Insurance advisory organization

An independent corporation that works with and on behalf of insurers that purchase or subscribe to their services, which include developing prospective loss costs and standard policy forms.

Policyholders' surplus

An insurer's assets minus its liabilities, which represents its net worth.

Use facultative reinsurance

An underwriter may be able to transfer a portion of an otherwise unacceptable liability for an applicant's loss exposure to a facultative reinsurer. An alternative to purchasing facultative reinsurance is to ask the producer to divide the insurance among several insurers—an approach sometimes called agency reinsurance.

Regulatory restrictions

An underwriter must be aware of state regulations that restrict underwriters' ability to accept or renew business. Additionally, federal and state privacy laws restrict the type and the amount of information about an applicant that an underwriter can obtain.

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

B. $2,000

ABC Company is a new business that provides Internet marketing services to commercial clients. ABC is applying for workers compensation insurance for its seven employees, who are classified as clerical employees. The manual rate is $0.30 per $100 of payroll. ABC's annual payroll is $500,000. Calculate the basic premium that would be charged for ABC's seven employees, ignoring any additional rating factors that might apply. a.$300 b.$3,000 c.$1,500 d.$10,500

Feedback: c. Rate × Exposure units = Premium. $0.30 × ($500,000 ÷ $100) = $1,500.

Inspection Reports

Independent inspections or risk control reports provide underwriting information about the property's physical condition, the business's safety record, and the policyholder's management.

Record information

Information about the policy and the applicant is recorded for policy issuance, accounting, statistical, and monitoring purposes.

Applications

Insurance applications provide general information required to process, rate, and underwrite the applicant's loss exposures.

Prospective loss costs

Loss data that are modified by loss development, trending, and credibility processes, but without considerations for profit and expenses.

Loss data

Loss data, such as that contained in loss runs, is a significant underwriting tool for predicting future losses. The loss experience of a commercial policyholder might be extensive enough to be statistically significant on its own.

Amend policy terms and conditions

Modifying a policy to exclude certain causes of loss, add or increase a deductible, or make another coverage change could ensure its acceptability. For example, increasing a deductible might make coverage more viable for a small commercial account with a large number of small losses that have caused unsatisfactory loss experience.

Territories or geographic areas

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

Premium Audits

Premium audits usually lag behind a renewal policy by several months. The audit report could disclose larger loss exposures than originally contemplated, unacceptable operations, new products, new operations, or financial problems.

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.

Information efficiency

The balance that underwriters must maintain between the hazards presented by the account and the information needed to underwrite it.

Loss development

The increase or decrease of incurred losses over time.

Producers

The producer's premium volume, policy retention, and loss ratio are evaluated both on an overall basis and by type and class of business. That evaluation should include the balance or mix of business desired between personal and commercial insurance and the projected growth factor. Key considerations are the goals that the insurer and producer established and the progress made toward achieving them.

Producer-underwriter relationships

The relationship between the underwriter and the producer should be based on mutually shared goals. Differences of opinion are common, particularly because some of the goals of producers and underwriters conflict when producers focus on production and underwriters focus on strict adherence to selection standards.

Mix of business

The underwriting policy determined by management and specified in the underwriting guidelines frequently indicates the insurer's mix-of-business goals.

Exposure unit (unit of exposure)

The unit of measure (for example, area, gross receipts, payroll) used to determine an insurance policy premium.

Line underwriter

Underwriter who is primarily responsible for implementing the steps in the underwriting process.

Require implementation of additional risk control measures

Whether they are relatively inexpensive and simple to implement or require considerable capital investment (such as fire detection and suppression systems), an underwriter's risk control recommendations should be well-reasoned and convincing.

Four major ways an underwriter can modify a submission through a counteroffer include all of the following changes, EXCEPT: a.Require implementation of additional risk control measures b.Change insurance rates c.Discourage use of facultative reinsurance d.Amend policy terms

c.Discourage use of facultative reinsurance

Predictive analytics

Statistical and analytical techniques used to develop models that predict future events or behaviors.

Contingencies

A provision in an insurance rate for losses that could not be anticipated in the loss data.

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.

rate manual

A resource for classifying accounts and developing premiums for given types of insurance; includes necessary rules, factors, and guidelines to apply those rates.

Underwriting audit

A review of underwriting files to ensure that individual underwriters are adhering to underwriting guidelines.

Risk control and safety inspections

A risk control and safety inspection might have contained recommendations that were requirements for policy issuance. A follow-up investigation could reveal whether they were met.

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

A. Treaty reinsurance.

Procedures

An underwriter relies more on the producer than on any other source because the producer has personal contact with an applicant, has firsthand knowledge of the applicant's business operations, knows the applicant's reputation in the community, and has determined the applicant's coverage needs.P

Loss exposure

Any condition or situation that presents a possibility of loss, whether or not an actual loss occurs.

Machine learning

Artificial intelligence in which computers continually teach themselves to make better decisions based on previous results and new data.

Preparation for renewal

As a policy's expiration date approaches, an underwriter must determine whether any changes to the account have occurred and, if so, repeat the underwriting process.

Issue documents

In accepting a submission, an underwriter might need to issue a binder and prepare certificates of insurance.

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

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

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

B. Evaluating the submission

Prospective loss costs that have become adjusted for expenses, profits, and contingencies are Select one: A. Summary rates. B. Final rates. C. Class rates. D. Judgment rates.

B. Final rates.

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 Select one: A. Of property, persons, or operations to be insured that increases loss frequency or severity. B. That increases the likelihood that a person will intentionally cause or exaggerate a loss. C. Of carelessness or indifference that increases loss frequency or severity. D. That increases the likelihood that a person will break the law.

B. That increases the likelihood that a person will intentionally cause or exaggerate a loss.

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? Select one: A. Evaluating the submission B. Monitoring underwriting decisions C. Developing underwriting alternatives D. Implementing the underwriting decision

C. Developing underwriting alternatives

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

C. Exposure unit

Produce, such as apples or grapes, may be priced by the unit or by the pound. In insurance, these measures are similar to Select one: A. Premiums. B. Rates. C. Exposure units. D. Construction cost index.

C. Exposure units.

Which one of the following lines of business is most likely to be rated using judgment rates? Select one: A. Personal auto insurance. B. Homeowners insurance. C. Inland marine insurance. D. Workers Compensation insurance.

C. Inland marine insurance.

Claims files

Claims representatives typically accumulate a significant amount of underwriting information during their investigations and record it in claims files. When renewing existing policies, an underwriter can obtain insights into the policyholder's character by reviewing relevant claims files.

How do underwriting guidelines help an insurer achieve its goals? Select one: A. By creating a channel for communication for the insurer's vision, mission, and objectives B. By maintaining a consistently applied set of behavioral measurements against which an individual's performance will be measured C. By establishing the criteria required for treaty reinsurance to apply D. By providing rules that guide underwriters toward consistent decisions

D. By providing rules that guide underwriters toward consistent decisions

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

D. Commercial property.

Besides using the law of large numbers to predict the amount of future losses, insurers also rely on it to Select one: A. Select exposure units. B. Plan for catestrophic events. C. Select insureds. D. Determine average loss costs.

D. Determine average loss costs.

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

D. Insurers can lower premiums for better-than-average risks.

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

D. May participate in selecting the type of marketing system to be used

Underwriting guidelines help an insurer achieve its goals by Select one: A. Maintaining a consistently applied set of behavioral measurements against which an individual's performance will be measured B. Establishing the criteria required for treaty reinsurance to apply C. Creating a channel for communication for the insurer's vision, mission, and objectives D. Providing rules that guide underwriters toward consistent decisions

D. Providing rules that guide underwriters toward consistent decisions

Which one of the following is true regarding the delegation of underwriting authority by underwriting management? Select one: A. Highly centralized insurers restrict underwriting authority to both the home and field offices. B. Front-line underwriters operate primarily from the home office. C. Most insurers' underwriting decisions are either highly centralized or highly decentralized. D. The extent of underwriting authority granted to an agent generally depends on premium volume and loss experience.

D. The extent of underwriting authority granted to an agent generally depends on premium volume and loss experience.

Adverse selection

In general, the tendency for people with the greatest probability of loss to be the ones most likely to purchase insurance.

Communicate the decision

If the decision is to accept the submission with modifications, the reasons must be clearly communicated to the producer and applicant, and the applicant must agree to accept or implement any modifications made as a counteroffer. If the underwriter decides to reject the application, he or she should communicate the rejection to the producer in a positive way to preserve their long-term relationship.

Ratemaking

The process insurers use to calculate insurance rates, which are a premium component.