AU 60 Missed Practice Test Questions

Devon Company presented the following condensed financial information with its request for a premium payment plan. What is Devon's working capital? Assets Liabilities and Equity Cash $175,000 Accts. Payable $150,000 Inventory $100,000 Payroll Tax Due $25,000 Accts. Receivable $50,000 Short-Term Debt $50,000 Equipment $100,000 Long-Term Debt $150,000 Goodwill $75,000 Capital Stock $25,000 Retained Earnings $100,000 A. $100,000 B. $125,000 C. $150,000 D. $175,000

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

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 Choose one answer. A. A book of business. B. A coverage pool. C. A line of business. D. A policy group.

A. A book of business.

Aaron is a property underwriter for Cromley Insurance Company (Cromley). He received a new business submission for a company that currently has auto coverage with Cromley. The producer is expecting Aaron to offer a quick proposal on the property coverage because he has access to the information in the auto file. Which one of the following important sources of property underwriting information would be missing from the auto file? Choose one answer. A. Appraisal of values B. Loss history C. Financial analysis D. Safety consciousness

A. Appraisal of values

The basic accounting equation on which the balance sheet is structured is Choose one answer. A. Assets = Liabilities + Net Worth B. Liabilities = Assets + Net Worth C. Net Worth = Liabilities + Assets D. Assets = Liabilities - Net Worth

A. Assets = Liabilities + Net Worth

An underwriter who has little concern either for obtaining the best outcome or for achieving rapport may be using which one of the following negotiation styles? Choose one answer. A. Avoiding B. Competing C. Insisting D. Acquiescing

A. Avoiding

Attempted communication where there is no understanding between the individuals communicating is referred to as Choose one answer. A. Bypassing. B. Polarized. C. Misinterpreting. D. Obstructed.

A. Bypassing.

When calculating the acid-test (quick) ratio, which one of the following groups of assets is measured against current liabilities? Choose one answer. A. Cash, marketable securities, and accounts receivable B. Total current assets, less cash C. Cash, accounts receivable, and inventory D. Total assets, less inventory

A. Cash, marketable securities, and accounts receivable When calculating the acid-test (quick) ratio, cash, marketable securities, and accounts receivable are measured against current liabilities.

An analyst is comparing the financial data of two companies that compete in the same industry, Company A and Company B. Each of the two companies has the same return on assets ratio (ROA), and the analyst wants to understand how each is using its resources to achieve this result. Further analysis reveals that Company A has a lower asset turnover ratio than Company B. This analysis indicates that A. Company B is generating a higher level of sales in proportion to its assets than Company A. B. Company A is generating a higher level of sales in proportion to its assets than Company B. C. Company B is retaining a higher level of net income relative to sales than Company A. D. Company A may or may not be retaining a higher level of net income relative to sales than Company B.

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

Which one of the following statements is correct with regard to underwriting guidelines? Choose one answer. A. Compliance with underwriting guidelines ensures selection of loss exposures commensurate with planned rate levels. B. The purpose of developing underwriting guidelines is to ensure that an insurer writes only above average accounts. C. One purpose underwriting guidelines serve is to provide for flexible and unstructured decisions. D. Once effective underwriting guidelines are established, they need not be evaluated or modified.

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

ABC Insurance is considering entering new states as part of its growth plan. The executives of ABC decide not to pursue new business in low-income areas of states and provide underwriters with a map indicating the areas from which they are not to accept applications. This position likely violates regulations that Choose one answer. A. Constrain insurers' ability to accept, modify, or decline loss exposures. B. Limit allowable classifications. C. Restrict the timing and conditions of coverage cancellations and nonrenewals. D. Specify policy terms and conditions.

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

The accounts receivable turnover ratio is calculated by taking Choose one answer. A. Credit sales divided by accounts receivable. B. Total sales divided by accounts receivable. C. Accounts receivable divided by total sales. D. Accounts receivable divided by credit sales.

A. Credit sales divided by accounts receivable. The accounts receivable turnover ratio is calculated by taking credit sales divided by accounts receivable.

Which one of the following best describes why it is important to analyze leverage ratios? Choose one answer. A. Debt obligations need to be repaid regardless of a company's profit, which can lead to decreased distributions to shareholders. B. Companies that are highly leveraged are not profitable because a large portion of their revenue is applied towards debt payments. C. Highly leveraged companies typically grow at a faster rate because they have more funds available to finance their expansion. D. Well-run companies should have low leverage and finance their operations by issuing shares.

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

Which one of the following statements is correct with respect to policy form laws? Choose one answer. A. Deemer provisions are intended to encourage a prompt review of submitted policy forms. B. Most states require DOI approval of policy forms, but not applications, binders, or endorsements. C. State form-filing rules must apply to all types of policies including manuscript policies. D. In states with no-file laws, insurers must use only those forms and rates developed by the DOI.

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

Experience rating plans use a credibility factor. Which one of the following statements regarding the use of credibility factors is true? Choose one answer. A. Experience rating plans use premium size at basic limits to determine a credibility factor. B. The smaller the premium size, the more credibility the account's loss experience receives. C. The experience modification credibility factor is not used for accounts with deteriorating loss experience. D. Data from the most recent policy term is included to reflect the insured's positive risk control efforts.

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

Gross profit is reported on the income statement. How is gross profit calculated? Choose one answer. A. Gross profit = sales - cost of goods sold B. Gross profit = sales - cost of goods sold - operating income C. Gross profit = sales - cost of goods sold + investment income D. Gross profit = sales - operating expenses

A. Gross profit = sales - cost of goods sold

Liability insurance coverage is provided at various limits of coverage. Which one of the following statements is true regarding charges to increase limits above the basic limit? Choose one answer. A. Higher limits can require a portion of the coverage to be reinsured, and the additional expense must be included in the rate. B. Charges to increase liability limits should not exceed 100 percent of the charge for basic coverage limits. C. Loss severity increases uniformly with increased coverage limits, and must be priced accordingly. D. There is less variability of losses in higher coverage layers than for the basic limit losses, allowing more credible pricing for higher limits.

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

Which one of the following statements is true? A. If a nonfinancial company has a debt-to-equity ratio greater than 100 percent, it indicates that the company is financed mostly by debt. B. A nonfinancial company with a low debt-to-equity ratio is considered to be highly leveraged. C. As profits increase, the amount of debt repayments decreases. D. Interest payments on debt are payable after profits have been returned to the company's owners.

A. If a nonfinancial company has a debt-to-equity ratio greater than 100 percent, it indicates that the company is financed mostly by debt. If a nonfinancial company has a debt-to-equity ratio greater than 100 percent, it indicates that the company is financed mostly by debt.

The table below shows the auto liability loss experience for Insurer B (IB). The losses are over a three-year period, with Year 1 being the earliest year and Year 3, the most recent year. Using the information in the table, and considering the fact that IB insured 100,000 cars each year during this three-year period, which one of the following statements is true? Auto Liability Loss Experience at Year 3 End(000s omitted) Year PaidLosses LossReserves Incurred Losses 1 $10,000 $0 $10,000 2 $ 7,500 $ 2,500 $10,000 3 $ 2,500 $7,500 $10,000 Total $20,000 $10,000 $30,000 Choose one answer. A. If this loss experience is used by IB to develop rates for a future period, any inadequacy in the loss reserves would make future rates inadequate. B. If IB uses the pure premium indicated by this loss experience to develop rates for a future period, the adequacy of loss reserves will not matter because loss reserves will be excluded from the analysis. C. Assuming the information in the table is accurate, IB needs a pure premium of $67 per car, per year, to pay its losses during this past three-year period. D. Assuming the information in the table is accurate, IB needs a pure premium of $300 per car, per year, to pay its losses during this past three-year period.

A. If this loss experience is used by IB to develop rates for a future period, any inadequacy in the loss reserves would make future rates inadequate. If this loss experience is used by IB to develop rates for a future period, any inadequacy in the loss reserves would make future rates inadequate. Pure premium is losses divided by car years: $10 million (losses each year) ÷ 100,000 (insured cars each year) = $100.

Which one of the following external sources of underwriting information is more likely to be used by an underwriter in the pricing phase, than in risk-selection decisions? Choose one answer. A. Insurance advisory organizations B. Applicant's Web site C. Financial reporting services Incorrect. Insurance advisory organizations D. Government reports

A. Insurance advisory organizations

Vincent has been a commercial lines underwriter for less than one year. He has received a new business application for Mellfor Manufacturing (Mellfor). Vincent is not familiar with the manufacturing process used by Mellfor and would like to order a physical inspection. Which one of the following would provide direction to Vincent on the use of resources for a physical inspection? Choose one answer. A. Insurer's underwriting guidelines B. Predictive analytics C. Best's Underwriting Guide D. Mellfor's Web site

A. Insurer's underwriting guidelines

The residual markets for auto and property insurance influence underwriters in which one of the following ways? Choose one answer. A. Insurers often must accept risks at inadequate rates. B. Residual market risks pay the true costs of their coverage leaving underwriters with few underwriting decisions. C. Underwriting losses are decreased because residual-market risks can be correctly classified as high risk. D. Insurers can charge standard insureds less than the true cost for their protection.

A. Insurers often must accept risks at inadequate rates.

Vanessa is a commercial lines underwriter at ABC Insurance. Vanessa and one of her producers, Arpad, have been discussing the renewal of one of ABC's larger accounts. The frequency and severity of the insured's losses has increased over the past three years, and Vanessa wants to nonrenew the account. Arpad feels that Vanessa should be more flexible given the size and importance of the account. Vanessa and Arpad have a good working relationship. Together they work to define the problem rather than simply the symptoms. Then they jointly search for a solution to the problem and reach a decision together as to what to do with the account. This is an example of which one of the following types of conflict resolution? Choose one answer. A. Integrative bargaining B. Mediation C. Consensus building D. Joint arbitration

A. Integrative bargaining

Which one of the following items may not be fairly represented on an entity's financial statements due to the cost principle of accounting? Choose one answer. A. Inventory B. Accounts payable C. Treasury stock D. Reinsurance recoverables

A. Inventory

Which one of the following insurer employees is responsible for establishing goals for producers and training them in insurer policies and procedures? Choose one answer. A. Marketing representative B. Underwriter C. Human resources representative D. Premium auditor

A. Marketing representative

Which one of the following is the term used to refer to an established frame of mind based on previous experience that hinders comprehension of new information? Choose one answer. A. Mental set B. Projection C. Attribution D. Value system

A. Mental set

Underwriting regulations seek to ensure correct classification of insureds because Choose one answer. A. Misclassification can result in inadequate premiums and drain an insurer's surplus. B. Correct classification generally reduces an insurer's overall claims payments. C. Correct classification prevents unfair discrimination against insureds or applicants. D. It is impractical to attempt to regulate rates, rules or policy forms.

A. Misclassification can result in inadequate premiums and drain an insurer's surplus.

Pricing the insurance product is different from pricing most other products and services because the underlying costs of insurance products are Choose one answer. A. Not known before the sale. B. Variable. C. Dependent upon the exposure. D. Determined by actuaries.

A. Not known before the sale.

In the interest of complete disclosure in an organization's financial statements, in addition to the financial data, information is also provided in Choose one answer. A. Notes to the financial statements. B. The audit report of the accountant. C. A review report done by the accountant. D. An unqualified opinion with the statements.

A. Notes to the financial statements.

Les is a commercial lines underwriter at ABC Insurance. One of the producers he deals with is Dave. Les feels Dave is far more interested in earning commissions than in placing business appropriately. He carefully scrutinizes all of Dave's submissions and assumes that the business Dave sends him is generally unattractive. He is quick to decline Dave's submissions for reasons that would not cause him to decline submissions from other producers. Which one of the following is Les demonstrating? Choose one answer. A. Polarization B. Bypassing C. Stereotyping D. Differentiation

A. Polarization

Working capital is the excess of a company's current assets over its current liabilities. Most financially sound companies have a Choose one answer. A. Positive working capital. B. Negative working capital. C. Working capital equal to zero. D. Working capital less than one percent.

A. Positive working capital.

Which one of the following ratemaking methods is developed from past experience? Choose one answer. A. Pure premium method B. Loss ratio method C. Judgment method D. Retrospective rating method

A. Pure premium method

Which one of the following is true regarding ratio analysis? Choose one answer. A. Ratio analysis can be used to both analyze single companies and make inter-company comparisons. B. Underwriters should only look into ratio results that are below the industry average or benchmark. C. Ratio analysis is broken down into two main categories: profitability ratios and efficiency ratios. D. Ratio analysis does not require any benchmarks or baselines.

A. Ratio analysis can be used to both analyze single companies and make inter-company comparisons. Correct. Ratio analysis can be used to both analyze single companies and make inter-company comparisons.

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? Choose one answer. A. Saves Blithe from having to evaluate accounts that they will ultimately reject B. Save Blithe training time spent on new underwriters C. Serves as a resource for Blithe on marketing climate D. Provides feedback to Blithe on underwriting procedures

A. Saves Blithe from having to evaluate accounts that they will ultimately reject A result of Aaron's field underwriting is that it saves Blithe from having to evaluate accounts that they will ultimately reject.

Individual rating plans use different approaches to modify the rate for an account. Which one of the following types of individual rating plans is used to modify the premium of liability insurance policies based on risk characteristics such as condition of premises and equipment, and safety programs? Choose one answer. A. Schedule rating plan B. Retrospective rating plan C. Individual premium risk modification plan D. Experience rating plan

A. Schedule rating plan

An insurance rate developed by an ISO field representative through a physical visit to a particular property and development of an individual advisory loss cost is known as a Choose one answer. A. Specific fire rate. B. Class rate. C. Judgment rate. D. Experience rate.

A. Specific fire rate.

An underwriter is attempting to conduct ratio analysis on a company. The underwriter notices that the company has $2 million in cash, $1 million in marketable securities, $3 million in inventory, $2 million in accounts receivable, and $7 million in current liabilities. Which one of the following conclusions can the underwriter reach by calculating liquidity ratios? A. The company may not be able to meet its short term obligations because its acid test ratio is less than one.. B. The company may not be able to meet its short term obligations because its current ratio is less than one. C. The company should able to meet its short term obligations because its acid test ratio is greater than one. D. The company should be able to meet its short term obligations because its working capital ratio is greater than one.

A. The company may not be able to meet its short term obligations because its acid test ratio is less than one. Correct. The Current Ratio indicates assets match liabilities. But, the more conservative Acid-Test Ratio is less than 1.0 ($2 million + $1 million + $2 million, - $7 million), indicating that the company may not be able to meet its short term obligations.

Which one of the following accounting principles may cause a limitation in the use of financial statements to evaluate an organization? Choose one answer. A. The cost principle B. The matching principle C. The consistency principle D. The tax basis principle

A. The cost principle

Ike, as an underwriter for IIA Insurance Company, knew his rates needed to include loss expenses, as well as profits and contingencies. Ike also had to pay premium taxes, general expenses and licenses and fees paid to government, regulatory, and advisory organizations. These expenses are generally included in ratemaking as Choose one answer. A. The expense provision. B. The pure premium. C. The loss adjustment expenses. D. Allocated expenses.

A. The expense provision.

James, a commercial lines underwriter, is reviewing an applicant with a large fleet of vehicles for auto coverage. The producer submitted a five year loss summary that includes the number of losses, the amount paid, and the amount reserved per year. James is concerned because both the number of losses and the amount incurred has increased each of the last three years. Which one of the following additional pieces of information would help James determine if losses are really trending upward? Choose one answer. A. The number of vehicles per year B. The name of the prior insurer for each year C. A break-down of liability and physical damage losses per year D. The drivers' motor vehicle records for each year

A. The number of vehicles per year

When insuring a partnership, it is essential to identify which one of the following on the policy declaration page? Choose one answer. A. The partnership B. All partners C. General partners only D. All partners and their share of the partnership

A. The partnership

Responsiveness is a desirable ratemaking characteristic. Because conditions are constantly changing, any delay between when data are collected and when they are used tends to reduce the accuracy of rates. The delay in reflecting loss experience in rates stems from several sources, including which one of the following? Choose one answer. A. Time period during which rates are in effect, usually a full year B. Delays in the payment of losses by insurers C. Time to receive investment income D. Delays in obtaining police reports as claim documentation

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

Sherman Industries, Inc. applied for a loan to finance a major equipment purchase. The loan officer calculated Sherman's debt-to-asset ratio as part of the loan approval process. What is the likely use of this ratio? Choose one answer. A. To screen the loan as acceptable or unacceptable B. To forecast Sherman's upcoming year's net income or loss C. To evaluate Sherman's liquidity position D. To estimate Sherman's next year's total interest expense

A. To screen the loan as acceptable or unacceptable

Which one of the following statements is correct with regard to regulation and insurers' operations? Choose one answer. A. Underwriting regulation indirectly influences ratemaking and claim settlement. B. Misclassification of current risks will not affect the accuracy of future rates. C. Regulation of underwriting practices helps insurers remain solvent but is not expected to minimize claims. D. Financial responsibility laws generally have no effect on the underwriting function.

A. Underwriting regulation indirectly influences ratemaking and claim settlement.

Insurer Y is using the pure premium ratemaking method in estimating expenses per exposure unit based on the insurer's past expenses. Insurer Y knows that incurred losses are $4 million including loss adjustment expenses of $500,000. All other expenses are $1.5 million. The earned-car years used in the calculations are 100,000. The expenses per exposure unit are Choose one answer. A. $10. B. $15. C. $17. D. $20.

B. $15. The expenses per exposure unit are $15, calculated by dividing all other expenses of $1.5 million by earned car year of 100,000.

Year-end balance sheet entries for We Make Things, Inc. (WMTI) appear below. Assets Cash $ 40 All other assets 500 Total assets $540 Liabilities and Owners' Equity Total liabilities $300 Owner's equity: Paid-in capital $210 Retained earnings 30 Total owners' equity $240 Liabilities and Owners' Equity $540 Which one of the following figures from WMTI's balance sheet, above, shows the same amount as the total cash in the statement of cash flows? Choose one answer. A. $30 B. $40 C. $210 D. $240

B. $40

Auto Insurer B, in calculating the pure premium for a rate, knows that incurred losses are $8 million while earned-car years are 200,000. Therefore, the pure premium is Choose one answer. A. $20. B. $40. C. $200. D. $400.

B. $40.

Insurance Company's actuary has calculated the pure premium for its automobile insurance line as $67. Fixed expenses for the line are $25 per exposure unit, and the loading for profit and contingencies is 7%. Using the pure premium ratemaking method and rounding to the nearest whole dollar, which one of the following is the rate per exposure unit? Choose one answer. A. $86 B. $99 C. $106 D. $115

B. $99 Using the pure premium ratemaking method, the rate per exposure unit equals the pure premium plus the expenses per exposure unit, divided by 1 minus the profit and contingencies factor. ($67 + $25)/(1 - 0.07) = $99

An underwriter is trying to determine how efficiently Company ABC is using its assets to generate sales. ABC's income statement provides that sales were $2 million. The balance sheet provides that total assets are $8 million, total current assets are $1.5 million, and accounts receivable are $1.0 million. What is ABC's asset turnover ratio? (Round to nearest hundredth.) Choose one answer. A. 0.13 B. 0.25. C. 0.66 D. 1.33

B. 0.25. ABC's asset turnover ratio is sales/total assets = $2 million/$8 million = 0.25.on=0.25.

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? Choose one answer. A. 5% B. 6% C. 18% D. 20%

B. 6% Argot's return on equity is 6 percent.

John is a risk management specialist for XYZ Company. John examines XYZ's financial statements on a quarterly basis. Which one of the following best describes a reason for this analysis? Choose one answer. A. A review of the financial statements helps John to determine XYZ's ability to pay upcoming insurance premiums. B. A review of the financial statements helps John to determine XYZ's insurance needs. C. A review of the financial statements helps Joe to assess XYZ's compliance with loan covenants. D. A review of the financial statements helps Joe to evaluate XYZ's ability to finance premiums.

B. A review of the financial statements helps John to determine XYZ's insurance needs.

A building owner has hired a roofing contractor to replace the roof of a building located on a busy urban street. The building owner wants to be protected for any claims resulting from the roofing contractor's work on his property. Which one of the following methods would be most beneficial to the building owner? A. Adding the roofing contractor as an additional insured to the building owner's liability policy B. A separate owners and contractors protective liability policy in the name of the building owner C. Adding the Building Owner Loss Payable provision to the building owner's property policy D. A separate owners and contractors protective liability policy in the name of the roofing contractor

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

Which one of the following important pieces of risk management information is found in the notes to the financial statement? Choose one answer. A. A disclaimer of opinion B. A summary of loss contingencies C. Changes in owner's equity D. An accounting equation

B. A summary of loss contingencies

In which one of the following do participants see negotiation as a contest between two opposing parties, each seeking to defeat the other, with each party's greatest concern being to obtain the best outcome for its side? Choose one answer. A. Collaborating B. Accommodating C. Competing D. Avoiding

B. Accommodating

The DuPont identity allows analysis of ROA by breaking it into component parts. Under this method, the component parts of ROA are Choose one answer. A. Return on equity and asset turnover. B. Asset turnover and net profit margin. C. Asset turnover and equity multiplier. D. Equity multiplier and net profit margin.

B. Asset turnover and net profit margin.

Financial statements Choose one answer. A. Are not useful to insurance professionals because of the limited nature of information provided. B. Can be used by agents and brokers to assess coverage needs. C. Are of no use to underwriters or claim representatives. D. Can be useful when read individually but fail to provide a comprehensive picture when viewed together.

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

Which one of the following describes a section of the statement of cash flows? Choose one answer. A. Cash flows from agency activities B. Cash flows from investing activities C. Cash flows from premium activities D. Cash flows from net income activities

B. Cash flows from investing activities

Insurers do not have to perform mid-term pricing on composite-rated accounts because Choose one answer. A. Loss modification factors are applied to the initial premium. B. Changes in exposure will be discovered by premium audit at the end of the policy term. C. A premium base in the rating manual is used to price the entire account. D. Composite rating is a paid loss retrospective plan.

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

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

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

B. Classifying and pricing accounts Sofie is classifying and pricing accounts.

Which one of the following negotiation styles focuses only on short term goals and does not support the goal of building a long term relationship? Choose one answer. A. Avoiding B. Competing C. Insisting D. Confronting

B. Competing

Insurance rate regulatory objectives include all of the following, EXCEPT: Choose one answer. A. Not excessive B. Competitive C. Not unfairly discriminatory D. Adequate

B. Competitive

Which one of the following is determined by a company's underwriting policy? Choose one answer. A. The underwriting authority the insurer grants its producers B. Composition of the insurer's book of business C. The market pursued by the insurer D. The rating organization to which the insurer will belong

B. Composition of the insurer's book of business

Which one of the following is determined by a company's underwriting policy? Choose one answer. A. The underwriting authority the insurer grants its producers B. Composition of the insurer's book of business C. The market pursued by the insurer D. The rating organization to which the insurer will belong

B. Composition of the insurer's book of business Composition of the insurer's book of business is determined by a company's underwriting policy.

Which one of the following is determined by a company's underwriting policy? Choose one answer. A. The underwriting authority the insurer grants its producers B. Composition of the insurer's book of business C. The market pursued by the insurer D. The rating organization to which the insurer will belong

B. Composition of the insurer's book of business Composition of the insurer's book of business is determined by a company's underwriting policy.

Insurers sometimes use composite rating as an administrative convenience. Composite rating Choose one answer. A. Adjusts an insured's premium based on its past loss experience. B. Converts several exposures to a single rate and a single rating basis. C. Requires insured's to retain more risk and pay for losses as they occur. D. Gives a portion on the producer's commission to the insured as incentive to purchase the account.

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

A primary source of revenue for insurers is premiums earned. Another major source of revenue is Choose one answer. A. Recoverables from reinsurers. B. Coupon payments on fixed income securities. C. Subrogation proceeds. D. Amortized premium on bond investments.

B. Coupon payments on fixed income securities.

It is most important for an underwriter to determine which one of the following about an organization's risk manager? Choose one answer. A. Is the risk manager an employee of the organization? B. Does the risk manager have the authority to make changes? C. How many employees report to the risk manager? D. Does the risk manager follow the six-step process?

B. Does the risk manager have the authority to make changes?

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? Choose one answer. A. Ensure proper policy issuance B. Ensure uniformity and consistency in risk selection C. Synthesize insights and experience D. Avoid duplication of effort

B. Ensure uniformity and consistency in risk selection Guidelines facilitate uniformity because they include acceptable approaches to evaluating applicants and the overall desirability of a particular type of risk or class of business.

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? Choose one answer. A. Guarding against adverse selection B. Ensuring adequate policyholder's surplus C. Enforcing policy guidelines D. Protecting the homeowner rate

B. Ensuring adequate policyholder's surplus

Which one the following statements is true regarding schedule rating and individual risk premium modification plans? Choose one answer. A. Schedule rating plans have been filed for optional use primarily for personal auto liability insurance. B. Generally, those insureds that are eligible to use experience rating are also eligible to use schedule rating. C. As with class rating, schedule rating must be used on every account that qualifies. D. Both rating plans are used to modify final premium for liability insurance coverages.

B. Generally, those insureds that are eligible to use experience rating are also eligible to use schedule rating.

Insurance classification systems group risks that share similar characteristics and that usually Choose one answer. A. Have the same size exposure base. B. Have the same likelihood of loss. C. Generate similar rates and premiums. D. Are not subject to catastrophic loss.

B. Have the same likelihood of loss.

The credibility of the sender is an important consideration in the communication process. Which one of the following depends partly on the individual underwriter's reputation and experience, and partly on the perceived status of the underwriting profession? Choose one answer. A. Professional credibility B. Initial credibility C. Derived credibility D. Terminal credibility

B. Initial credibility

The retention ratio as an underwriting performance measure is the percentage of Choose one answer. A. Policies written to policies quoted. B. Insurance policies renewed. C. Premium held for losses. D. Underwriting expenses to written premiums.

B. Insurance policies renewed. The retention ratio as an underwriting performance measure is the percentage of insurance policies renewed.

For underwriting to achieve its purpose, Choose one answer. 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.

B. Insurers must minimize the effects of adverse selection on the book of business. For underwriting to achieve its purpose, insurers must minimize the effects of adverse selection on the book of business.

Ready Insurance Company, listed on the NASDAQ stock exchange as RINS, writes insurance in the states of Florida, Louisiana, Alabama, Texas, Nevada, and California. Because Ready Insurance Company writes insurance in areas prone to catastrophes such as earthquakes and hurricanes, the company segments its business between earthquake-prone states and hurricane-prone states. Ready Insurance Company. A. Chooses to disclose the business segment information through its financial notes as it is a publicly traded company. B. Is required to disclose the business segment information through its financial notes as it is a publicly traded company. C. Is required to disclose the business segment information through its 10-K report as it is a publicly traded company. D. Chooses to disclose the business segment information through its 10-K report as it is a publicly traded company.

B. Is required to disclose the business segment information through its financial notes as it is a publicly traded company.

Which one of the following types of individual rating plans can be used by medium to large insureds in combination with risk control and allows the insured to manage its cash flow by avoiding upfront payments? Choose one answer. A. Schedule rating plan B. Large deductible plan C. Individual risk premium modification plan D. Expense modification plan

B. Large deductible plan

Which one of the following is a benefit to listing both the name of the business and the name of the owner on the policy when insuring a sole proprietorship? Choose one answer. A. Provides better protection for the owner B. Makes it clear which business the insurer is providing coverage for, if the individual owns more than one business C. Provides broader coverage for the business operations D. Makes it easier to transfer the coverage to a new owner

B. Makes it clear which business the insurer is providing coverage for, if the individual owns more than one business

Samuel is a commercial accounts underwriter working on a new application with five buildings located within the same territory. Samuel would like a photo of each building, and some nontechnical information about the condition of the parking lots and the neighboring buildings. Which one of the following would be the most reliable and cost effective source of this information? Choose one answer. A. Another underwriter B. Marketing representative C. Claims representative D. Risk control representative

B. Marketing representative

Which one of the following is a condition that increases the likelihood that a person will intentionally cause or exaggerate a loss? Choose one answer. A. Physical hazard B. Moral hazard C. Morale hazard D. Legal hazard

B. Moral hazard Moral hazard is a condition that increases the likelihood that a person will intentionally cause or exaggerate a loss.

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? Choose one answer. A. Moral B. Morale C. Legal D. Physical

B. Morale This failure to properly secure an unattended building would be an indicator to the underwriter of a morale hazard.

Laura is reviewing a commercial auto application for a company that owns a large fleet of local delivery trucks. Which one of the following pieces of underwriting information would be desirable, but not essential? Choose one answer. A. List of vehicles to be insured B. Motor vehicle reports on drivers C. Three years of loss experience D. Coverage limits and deductibles

B. Motor vehicle reports on drivers

Which one of the following is the most important regulatory criterion? Choose one answer. A. Rate equity B. Rate adequacy C. Rate accuracy D. Rate reasonableness

B. Rate adequacy

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

B. Review and revise rating plans Reviewing and revising rating plans is the responsibility of a staff underwriter as opposed to a line underwriter.

Underwriters need to know exactly the type of work the insured performs. ISO's Commercial Lines Manual (CLM) classifications are categorized into all of the following business groups, EXCEPT: Choose one answer. A. Building or premises B. Selling or retail C. Contracting or servicing D. Manufacturing or processing

B. Selling or retail

Which one of the following statements is correct? Choose one answer. A. Insurers are prohibited from investing premiums collected as these funds must be available to pay claims as they occur. B. Some states require that investment income be considered explicitly in rate calculations. C. Traditionally, property-casualty insurers subtracted investment income from their expense loading when calculating insurance rates. D. Property-casualty insurers are prohibited from including investment returns when calculating insurance rates.

B. Some states require that investment income be considered explicitly in rate calculations.

Which one of the following groups of financial statements, when considered together, would best present an organization's financial condition? Choose one answer. A. The balance sheet and the statement of cash flow. B. The balance sheet, the income statement, the statement of change in shareholders' equity, and the statement of cash flow. C. The income statement and the statement of owners' equity. D. The balance sheet, the income statement, and the statement of cash flow.

B. The balance sheet, the income statement, the statement of change in shareholders' equity, and the statement of cash flow.

An underwriter is conducting vertical analysis using a common-size balance sheet for the past two fiscal years. The underwriter notices the figure listed under "net receivables" is 11.5 percent for the current fiscal year compared to 9.5 percent for the prior fiscal year. These figures indicate that Choose one answer. A. The balance of the company's net receivables increased by 2 percent. B. The percentage of net receivables to total assets increased by 2 percent. C. The company's net sales increased by 2 percent. D. The company efficiency has decreased by 2 percent.

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

Insurers differ in their approach to calculating each account's amount subject. Which one of the following is the objective in making this determination? Choose one answer. A. To determine potential loss frequency B. To determine potential loss severity C. To rate the property according to location D. To accurately estimate claim reserves

B. To determine potential loss severity

Which one of the following statements is true regarding ratemaking in different types of insurance? Choose one answer. A. Most losses from catastrophic events, such as hurricanes, are included in ratemaking data in the affected states. B. Trending of losses in fire insurance is generally restricted to claim severity. C. The experience period used for property causes of loss other than fire is usually five years or less. D. Applying loss development factors to data is critical when claims settle quickly and loss reserves are relatively small.

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

An underwriter is attempting to conduct ratio analysis on a company. The underwriter notices that the company has $8 million in sales, $5 million in gross profit, and $2 million in net income. Which one of the following conclusions can the underwriter reach by calculating the company's net profit margin? Choose one answer. A. Twenty-five percent of the company's sales is used to pay expenses. B. Twenty-five percent of the company's sales is left after all expenses are paid. C. Forty percent of the company's sales is used to pay expenses. D. Forty percent of the company's sales is left after all expenses are paid.

B. Twenty-five percent of the company's sales is left after all expenses are paid. Net profit margin = Net income ÷ sales. $2 million ÷ $3 million = .25. Twenty-five percent of the company's sales is left after all expenses are paid.

Which one of the following statements is correct regarding underwriting relationships? Choose one answer. A. Generally, underwriters should be cautious about trusting producers. B. Underwriting communication involves risk for both producer and underwriter. C. In a trusting relationship between underwriter and producer, disputes do not arise. D. Trust simply evolves in a relationship and it cannot be built by effort or intention.

B. Underwriting communication involves risk for both producer and underwriter.

An insurer must decide what provision for profit and contingencies should be included in the rate and should consider the overall desired rate of return, including likely returns from investment income versus Choose one answer. A. Policyholder surplus. B. Underwriting profit. C. Loss reserve amounts. D. Loss adjustment expenses.

B. Underwriting profit.

Which one of the following statements is correct with respect to communication? Choose one answer. A. An underwriter cannot evaluate whether the receiver has interpreted a message accurately. B. Verbal messages should have some demonstrable utility or relevance for the receiver. C. Nonverbal communication is far less effective in conveying meaning than verbal communication. D. Feelings and emotions are more accurately conveyed by verbal rather than nonverbal communication.

B. Verbal messages should have some demonstrable utility or relevance for the receiver.

ABC Corp. is looking to insure two buildings under a blanket insurance policy. Each building has an insurable value of $1,000,000. The underwriter assigns the buildings a rating of $1.25 and $0.75 per $100 respectively. If the underwriter prices the insurance using blanket average rate, what should ABC Corp.'s premium be? Choose one answer. A. $10,000 B. $12,500 C. $20,000 D. $25,000

C. $20,000 Correct. ABC Corp.'s premium should be $20,000 = (1,000,000 * 2 / 100) * (1.25 + 0.75) / 2

Given the following data and using the pure premium ratemaking method, calculate the insurance rate (rounded). Incurred losses $750,000 Earned exposure units 12,500 Fixed expenses per exposure unit $15 Profit and contingencies factor 4% Choose one answer. A. $58 B. $63 C. $78 D. $187

C. $78 The insurance rate is $78. The pure premium is $750,000/12,500 = $60. Then the insurance rate = ($60+$15) / (1-0.04) = 78

Ren is underwriting a property policy for XYZ, Inc. He is particularly concerned with how much inventory is on hand and how fast it can be sold. XYZ's income statement shows sales of $500,000 and cost of goods sold (COGS) of $350,000. The balance sheet shows inventory at $200,000 and cash of $150,000. Using the inventory turnover ratio, Ren finds that XYZ can convert inventory to sales A. 0.57 times. B. 0.75 times. C. 1.75 times. D. 2.50 times.

C. 1.75 times. Using the inventory turnover ratio (COGS/inventory), Ren finds that XYZ can convert inventory to sales 1.75 times.

An underwriter is trying to determine XYZ Manufacturing's efficiency using the accounts receivable (A/R) turnover ratio. XYZ's income statement shows $10 million in sales (half of which is attributable to credit sales) and the balance sheet shows $200,000 in A/R. What is XYZ's accounts receivable turnover ratio? Choose one answer. A. .02 times B. .04 times C. 25 times D. 50 times

C. 25 times The A/R turnover ratio uses the sales attributed to credit sales; thus, $5,000,000/$200,000 = 25 times.

Assets on the balance sheet are classified as current and noncurrent. Which one of the following is classified as a noncurrent asset? Choose one answer. A. A $10,000 corporate bond that matures in 15 months B. Inventory for sale that was purchased one year ago C. A copyright that expires in 10 months D. Marketable securities purchased 15 months ago

C. A copyright that expires in 10 months

Which one of the following statements is true regarding additional insureds? Choose one answer. A. Additional insureds granted coverage under a policy have the same rights and duties as named insureds. B. Property policies are often endorsed to cover additional insureds. C. Additional insured endorsements restrict coverage to those claims arising out of the named insureds operations. D. Most insurers charge adequate premium for additional insured endorsements to cover the added loss exposure and service demands.

C. Additional insured endorsements restrict coverage to those claims arising out of the named insureds operations.

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 Choose one answer. A. Requiring loss control measures. B. Using schedule rating modifications. C. Amending policy terms and conditions. D. Using facultative reinsurance.

C. Amending policy terms and conditions. This type of underwriting modification is known as amending policy limits and conditions.

What prevents an insurer's financial statements from reflecting the insurer's fair market value? Choose one answer. A. Reserves reduce policyholder surplus. B. The NAIC sets the value of insurer liabilities. C. Assets do not include capital gains. D. The cost principle of accounting overstates loss reserve liabilities.

C. Assets do not include capital gains.

The balance sheet provides a snapshot of an organization's financial condition Choose one answer. A. For at least two points in time for comparison purposes. B. Over one 12 month period. C. At a given point in time. D. At the start and end of a business day.

C. At a given point in time.

Which one of the following is a (SEC) required section of an organization's annual financial report? Choose one answer. A. Letter to shareholders B. Financial highlights C. Auditor's report D. Corporate message

C. Auditor's report

Underwriting guidelines serve which one of the following purposes? Choose one answer. A. Provide for flexible and unstructured decisions B. Allow for the development of insights and experience C. Avoid duplication of effort D. Provide rates for individual risks

C. Avoid duplication of effort One purpose underwriting guidelines serve is to avoid duplication of effort.

Vincent has been a commercial lines underwriter for less than one year. He has received a new business application for Mellfor Manufacturing (Mellfor). Vincent is not familiar with the manufacturing process used by Mellfor and would like to order a physical inspection. Which one of the following would provide Vincent with general information about the manufacturing process and might avoid the need for a physical inspection? Choose one answer. A. Insurer's underwriting guidelines B. Predictive analytics C. Best's Underwriting Guide D. Dun & Bradstreet report

C. Best's Underwriting Guide

Sandford Co. and Burkhart Co. are both general merchandise stores. Sanford Co. has $5,000 as net income and $150,000 in sales at the end of the year. Burkhart Co. has $8,000 in net income and $130,000 in sales. The benchmark for the industry is a 2.8 percent profit margin. Which one of the following is true? Choose one answer. A. Sandford Co. is more profitable than Burkhart Co. B. Neither company is close to being profitable. C. Burkhart Co. is more profitable than Sandford Co. D. We cannot determine profitability without knowing the companies' total assets.

C. Burkhart Co. is more profitable than Sandford Co. Net profit margin=net income/sales. Sanford: $5,000/$150,000=3.3%. Burkhart: $8,000/$130,000=6.2%. Burkhart Co. is more profitable than Sandford Co.

The potential for hidden underwriting risks of associated insureds is greatest with which one of the following forms of ownership? Choose one answer. A. Partnership B. Joint venture C. Corporation D. Sole proprietorship

C. Corporation

Which one of the following cases illustrates how underwriting guidelines ensure that selection decisions provide uniformity and consistency by all the insurer's underwriters? Choose one answer. A. 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. B. 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 guidelines. C. 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. D. 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.

C. 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. 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 ratios indicates the adequacy of a company's working capital to meet its current financial obligations? Choose one answer. A. Debt-to-equity ratio B. Debt-to-assets ratio C. Current ratio D. Asset turnover ratio

C. Current ratio The current ratio indicates the adequacy of a company's working capital to meet its current financial obligations.

Which one of the following is an example of a leverage ratio? Choose one answer. A. DuPont identity B. Quick ratio C. Debt-to-equity ratio D. Inventory turnover ratio

C. Debt-to-equity ratio

Home builder Jerry Barton engaged an electrician to install overhead ceiling fans in many new homes. Jerry paid the electrician by the hour, supervised his work, and had the right to discharge him. Which one of the following terms best describes the employment status of the electrician? Choose one answer. A. General contractor B. Subcontractor C. Employee D. Dependent contractor

C. Employee

Depending on the type of insurance, insurers use automated underwriting systems to Choose one answer. A. Decide accounts with subjective factors. B. Price commercial accounts. C. Encode underwriting guidelines. D. Evaluate producers.

C. Encode underwriting guidelines. Depending on the type of insurance, insurers use automated underwriting systems to encode underwriting guidelines.

As a financial analysis tool, common-size statements are most useful when comparing Choose one answer. A. Trends for three or more businesses. B. Past performance to industry standards. C. Financial statements of two or more different sized businesses. D. Financial statements of more than three similarly sized organizations.

C. Financial statements of two or more different sized businesses.

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 Choose one answer. A. Reviewing and revising rating plans. B. Developing underwriting guides. C. Formulating underwriting policy. D. Providing assistance to policyholders.

C. Formulating underwriting policy. This type of underwriting activity is formulating an underwriting policy.

Heritage Planners Ltd is a consulting group that provides company cars to management. The fleet of vehicles was recently sold for a gain of $5,000. The gain should be classified on the income statement as Choose one answer. A. Revenue earned in the ordinary course of business. B. A reduction to other automobile expense. C. Other income and expenses. D. Other operating income in the trading section of the income statement.

C. Other income and expenses.

Contractors who subcontract all of their work to others are often referred to as Choose one answer. A. Independent contractors. B. Specialty contractors. C. Paper contractors. D. Common contractors.

C. Paper contractors.

Rating manuals used by underwriters and underwriting technicians for individual account pricing often use the term exposure basis interchangeably with Choose one answer. A. Rating units. B. Risk base. C. Premium base. D. Risk denomination.

C. Premium base.

Which one of the following describes underwriting regulations that limit allowable classifications? A. Regulations against declining auto liability exposures located in low-income neighborhoods B. Regulations specifying the number of days' notice required for policy cancellations C. Regulations requiring unisex rating in personal auto insurance D. Regulations prohibiting insurers from offering coverage that is financially risky

C. Regulations requiring unisex rating in personal auto insurance

Which one of the following is a major constraint of underwriting policy? Choose one answer. A. Economy B. Competition C. Reinsurance D. Underwriting management

C. Reinsurance Reinsurance is a major constraint of underwriting policy.

The four primary types of financial statements include the balance sheet, the income statement, the statement of cash flows, and the Choose one answer. A. Statement of retained earnings. B. Summary of accounting policies. C. Statement of changes in owners' equity. D. Schedule of contingencies.

C. Statement of changes in owners' equity.

Because of the expense of risk control reports and the importance of making a quick decision on a new submission, underwriters sometimes approve a submission subject to a favorable risk control report. Why is it critical that the underwriter receive the report quickly after the policy's inception date? Choose one answer. A. The applicant has time to decide if they want to correct any problems before the renewal. B. The underwriter can quickly revise the pricing and billing. C. Statutes in many states limit an insurer's right to cancel to a brief period of time. D. Competition has limited time to revise its proposal to the applicant.

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

Which one of the following statements is correct with respect to market conduct examinations? Choose one answer. A. General examinations are conducted in response to specific complaints made against the insurer. B. The insurer under review is generally not permitted to discuss the preliminary examination report with the Department of Insurance (DOI). C. The Department of Insurance (DOI) may suspend or revoke the insurer's certificate of authority if it finds that an insurer has violated a law. D. The primary focus is on required filings, and Department of Insurance (DOI) examiners focus the effort on failure to file or inaccurate filing of rates and forms.

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

If a company's inventory turnover ratio is higher than the industry benchmark, it indicates that Choose one answer. A. Its inventory is becoming obsolete compared to that of its competitors. B. The company is holding its inventory longer than its competitors. C. The company is selling its inventory more quickly than its competitors. D. The company's inventory is generating higher costs than that of its competitors.

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

An underwriter is attempting to conduct ratio analysis on a company. The underwriter notices that the company has $3 million in total assets, $1 million in current assets, $2 million in total liabilities, and $1 million in current liabilities. Which one of the following conclusions can the underwriter reach by calculating the company's debt-to-assets ratio? Choose one answer. A. The company's assets are financed mostly through shareholder's equity. B. The company has adequate working capital. C. The company's assets are financed mostly through debt. D. The company is very profitable.

C. The company's assets are financed mostly through debt. Correct. Debt-to-assets ratio = Total liabilities ÷ total assets. $2 million ÷ $3 million = .667. A ration over .5 indicates financing mostly by debt. The company's assets are financed mostly through debt.

An underwriter is conducting ratio analysis and notices that a company has $1.5 million in long-term debt, $3 million in shareholder's equity, and $5 million in assets. Which one of the following statements is true based on the company's debt to equity ratio? Choose one answer. A. The debt to equity ratio is .30 and the company is mostly financed by equity. B. The debt to equity ratio is .50 and the company is equally funded by long term debt and equity. C. The debt to equity ratio is .50 and the company is mostly financed by equity. D. The debt to equity ratio is .60 and the company is mostly financed by equity.

C. The debt to equity ratio is .50 and the company is mostly financed by equity. Correct. Debt-to-equity ratio = Long-term debt ÷ shareholders' equity. $1.5 million ÷ $3 million = .50. The company is mostly financed by equity.

Insurers sometimes use composite rating to price accounts. How does composite rating differ from other pricing methods? Choose one answer. A. Composite rating is only implemented on smaller accounts. B. The insured's "credibility factor" is given more weight when determining the composite rated premium. C. The insured receives no price advantage by being composite rated. D. The insurer uses a longer period of the insured's loss history when determining the composite rated premium.

C. The insured receives no price advantage by being composite rated.

The amount included in the insurance rate to protect insurers against the possibility that actual claims or expenses will exceed projections is referred to as Choose one answer. A. The prospective loss costs. B. The expense factor. C. The loading for profits and contingencies. D. The claims and eventualities factor.

C. The loading for profits and contingencies.

A company's common-size statement lists two years, 20X3 and 20X4. In 20X3, the inventories line was five percent, and in 20X4 the inventories line was seven percent. Which one of the following could an underwriter infer from this information? A. Inventories fell by two percent B. Inventories increased by two percent C. The percentage of inventories to total assets increased D. Percent of inventories changed with inflation

C. The percentage of inventories to total assets increased Given the inventories percentages for two years, the underwriter can infer that the percentage of inventories to total assets increased.

For most accounts, the information provided on the application is sufficient to make an underwriting decision. An underwriter might want additional information for all of the following reasons, EXCEPT: Choose one answer. A. To handle complex accounts or ones that present a relatively high degree of risk B. To investigate conflicting information C. To actuarially develop a premium specific to the exposure D. To collect missing information

C. To actuarially develop a premium specific to the exposure

The Financial Accounting Standards Board (FASB) requires organizations to report comprehensive income. Comprehensive income includes an organization's net income and Choose one answer. A. Change in market value of stock issued by the organization. B. Additional capital contributions made by shareholders. C. Unrealized gains on securities available for sale. D. Write-down of goodwill due to impairment.

C. Unrealized gains on securities available for sale.

Sue is a personal lines underwriter at ABC Insurance. She is reviewing a homeowners application from a new producer. The value of the home is only slightly below the maximum value that ABC typically writes, but because it was just built, the producer has provided the actual cost of construction. On the application, the producer has neglected to provide any indication as to whether the home has any sort of alarm system. Given the value of the house, this is information that Sue feels is essential. Which one of the following emails would be most effective for Sue to send to the producer? Choose one answer. A. Can I assume that there is no alarm system in this house because you left that section of the application blank? B. Please advise whether there is any sort of alarm system in the home. C. We have several discounts for different types of alarm systems. Please advise if there is an alarm system in the house and what type of system it is. D. We cannot issue policies if the application is incomplete. You neglected to complete the section on alarm systems. Please advise.

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

How many years of loss experience do most states require insurers to use for fire insurance ratemaking purposes? Choose one answer. A. 1 year B. 1 - 3 years C. 3 - 5 years D. 5 years

D. 5 years

Adam is an analyst conducting a market conduct examination at DEF Insurance in response to a consumer complaint. During the course of his review, he discovers that DEF has failed to apply newly implemented underwriting and rating factors to renewals, failed to use mutually exclusive underwriting guidelines for the company's different programs, failed to use correct forms and rates, and failed to apply underwriting guidelines consistently by occasionally allowing producers exceptions. Which one of these practices will Adam most likely allow the insurer to continue? Choose one answer. A. Not applying new rates and rules to renewals B. Using guidelines for different programs that are not mutually exclusive C. Not using correct forms and rates D. Allowing producers exceptions in some cases

D. Allowing producers exceptions in some cases

Hugh, a commercial property underwriter, received a submission from a producer and elected to decline the business. Based on the application and Best's Underwriting Guide, Hugh determined that there was a higher-than-average fire risk associated with the applicant's operations. The producer has telephoned Hugh to discuss the file and to try to convince him to accept the business. While listening to the producer, which one of the following questions would Hugh be best to ask himself? A. Why does the producer not understand that the risk is unacceptable? B. What was it about my written correspondence that was unclear to the producer? C. How can I explain the fire hazards in a way the producer will understand? D. Am I really listening, or am I thinking about what I'll say next?

D. Am I really listening, or am I thinking about what I'll say next?

Allison is a commercial lines underwriter at ABC Insurance. She is meeting with a producer to discuss an insured's upcoming renewal. The account has suffered an increase in loss frequency over the past year, and Allison has several recommendations and requirements that she wants the producer to discuss with the insured prior to renewal. During the meeting, the producer keeps checking his watch and checking his cell phone. Allison becomes irritated, thinking that the producer is disinterested and does not appreciate the importance of the issues she wants to address. This is an example of which one of the following? Choose one answer. A. Stereotyping B. Halo effect C. Polarization D. Attribution

D. Attribution

Specialty insurers such as those offering surety bonds, aviation insurance, and livestock mortality insurance usually Choose one answer. A. Extend underwriting authority to producers. B. Refer those lines to senior underwriters. C. Use automated underwriting systems. D. Centralize underwriting authority.

D. Centralize underwriting authority. Specialty insurers such as those offering surety bonds, aviation insurance, and livestock mortality insurance usually centralize underwriting authority.

7. Marci is a personal lines producer at Regional Insurance Brokerage. One of her insureds has suffered three homeowners losses in the past year, and Marci is concerned that the insurer will decline to renew the policy. She calls the underwriter, John, to discuss the account. John had in fact set the file to nonrenew. Marci explains that this client is very influential in town and has referred many clients to her. She wants John to renew the account. After some discussion, John agrees to renew the account provided that Marci discusses the claims frequency with the insured and increases the deductible to $5,000. Marci agrees. This is an example of which one of the following negotiation styles? Choose one answer. A. Collaborating B. Competing C. Accommodating D. Compromising

D. Compromising

All of the following are examples of efficiency ratios, EXCEPT: Choose one answer. A. Inventory turnover B. Asset turnover C. Accounts receivable turnover D. Debt-to-equity ratio

D. Debt-to-equity ratio

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? Choose one answer. A. Merve, the claims manager B. Antonia, the accounting manager C. Clara, the underwriting manager D. Emma, the staff underwriter

D. Emma, the staff underwriter Emma, the staff underwriter, would be involved in the research and development of this new form.

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 Choose one answer. A. Audit compliance. B. Regulation. C. Adherence to underwriting guidelines. D. Financial capacity.

D. Financial capacity. This need to redirect the focus for desired business is an example of an underwriting constraint due to financial capacity.

Underwriting pricing activities usually include all of the following, EXCEPT: Choose one answer. A. Account classification B. Rating C. Application of premium modification plans D. Forecasting

D. Forecasting

Home Housewares Inc. is a retail store applying for commercial coverage with ABC Insurance. The underwriter requested a copy of Home Houseware's most recent financial statements. The underwriter will use the balance sheet to determine Choose one answer. A. Home Houseware's sources of cash as of the balance sheet date. B. Home Houseware's gross profit margin as of the balance sheet date. C. Dividend payments to shareholders as of the balance sheet date. D. Home Houseware's financial position as of the balance sheet date.

D. Home Houseware's financial position as of the balance sheet date.

While trend analysis can be used on various financial statements, it is most commonly applied to Choose one answer. A. Changes in equity statements. B. Cash flow statements. C. Balance sheets. D. Income statements.

D. Income statements. While trend analysis can be used on various financial statements, it is most commonly applied to income statements.

During a general market conduct examination of underwriting, examiners would look for evidence of all of the following, EXCEPT: Choose one answer. A. Misclassification of risk B. Inaccurate filing of rates and forms C. Improper cancellations D. Inconsistent claim practices

D. Inconsistent claim practices

A significant difference between the current ratio and the acid-test ratio is that Choose one answer. A. The current ratio uses balance sheet data in the calculation. B. The current ratio is a more conservative measure of liquidity. C. Cash is excluded from the calculation of the acid-test ratio. D. Inventory is excluded from the calculation of the acid-test ratio.

D. Inventory is excluded from the calculation of the acid-test ratio. A significant difference between the current ratio and the acid-test ratio is that inventory is excluded from the calculation of the acid-test ratio.

An underwriter is reviewing the financial statements for a prospective insured. She has determined that the insured's current ratio is higher than the benchmark average for companies comparable in size and operations, and that its acid-test ratio is lower than the benchmark average. The underwriter should request further information because these results indicate that the prospective insured Choose one answer. A. Is collecting its receivables too frequently. B. Is carrying too much debt relative to its peers. C. Is not making efficient use of borrowing. D. Is carrying a higher level of inventory than its peers.

D. Is carrying a higher level of inventory than its peers. An acid-test ratio lower than the appropriate benchmark when the current ratio is equal to or higher than the benchmark indicates that a company is carrying a higher level of inventory than its peers.

ABC Insurance Company's ratio of premiums to surplus is 2 to 1. If the state requirement where ABC transacts business is 3 to 1, then ABC Choose one answer. A. Needs to issue more policies to be in compliance with state surplus requirements. B. Can no longer write new business in that state. C. Is likely to be the subject of a Department of Insurance market conduct examination due to its solvency indicators. D. Is meeting the state's surplus requirement.

D. Is meeting the state's surplus requirement.

Insurance rates are also based on the insurer's projected expenses. Expenses can change over time and when conditions change dramatically, rather than past expenses, it is sometimes more relevant for the insurer to use Choose one answer. A. Only incurred expenses. B. Only budgeted expenses. C. Budgeted but unallocated expenses. D. Judgment or budgeted expenses.

D. Judgment or budgeted expenses.

Which one of the following provisions gives the lender separate rights from those of the insured? Choose one answer. A. Loss payable B. Building owner loss payable C. Contract of sale D. Lender's loss payable

D. Lender's loss payable

With ratio analysis, ratios are grouped into the following broad categories: efficiency, liquidity, profitability, and Choose one answer. A. Operations. B. Income. C. Equity. D. Leverage.

D. Leverage. Correct. The four categories are efficiency, liquidity, profitability, and leverage.

Which one of the following will draft a manuscript policy or endorsement that is worded to address the specific needs of the insured? Choose one answer. A. Underwriting supervisor B. Staff underwriter C. Producer D. Line underwriter

D. Line underwriter The line underwriter will draft a manuscript policy or endorsement that is worded to address the specific needs of the insured.

Which one of the following lists the financial components used to calculate a combined ratio? Choose one answer. A. Loss and loss adjustment expenses incurred, investment earnings, and earned and written premiums B. Loss and loss adjustment expenses incurred, IBNR losses, and earned and written premiums C. Unearned premium reserves, earned and written premiums, and loss and loss adjustment expenses incurred D. Loss and loss adjustment expenses incurred, earned and written premiums, and underwriting expenses incurred

D. Loss and loss adjustment expenses incurred, earned and written premiums, and underwriting expenses incurred Loss and loss adjustment expenses incurred, earned and written premiums, and underwriting expenses incurred represent the financial components used to calculate a combined ratio.

Which one of the following statements about the balance sheet is correct? Choose one answer. A. The balance sheet contains important financial information about net worth and assets, both which indicate the source of an organization's funding. B. Change in asset and liability valuation from historical cost to fair value has no effect on the value of shareholders' equity. C. The balance sheet must always balance, but an exception is that the balance sheet will not balance if net worth is a negative number. D. Net worth is positive whenever the value of assets exceeds the value of liabilities and negative if the value of liabilities exceeds the value of assets.

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

Various state declination, termination, and disclosure laws prohibit declination or policy cancellation based on specified considerations. Which one of the following is one of those considerations? Choose one answer. A. Delinquent taxes of at least two years on the covered property B. Violation of local fire, safety, building, or construction regulations relating to the subject property C. Changes in circumstances that cause a substantial increase in the risk insured against D. Previous declination or termination of the applicant or named insured

D. Previous declination or termination of the applicant or named insured

Which one of the following is the primary benefit of using the services of an independent contractor who specializes in risk control work to inspect properties, rather than the insurer's risk control representative? Choose one answer. A. Independent opinion of risk B. Customer contact C. Customized reports D. Quicker response

D. Quicker response

When underwriters want someone other than the producer submitting an application to make a physical inspection of an account, they usually Choose one answer. A. Conduct the inspection or request that another underwriting team member conduct the inspection. B. Engage the services of a private inspection firm that reports on physical as well as financial aspects of the account. C. Request the records of the prior insurer. D. Request a risk control report.

D. Request a risk control report.

Which one of the following statements best describes the shareholders' equity section of the balance sheet? Choose one answer. A. Shareholders' equity is an asset of the business entity. B. Shareholders' equity is negative when the entity reports a net loss for the year. C. Shareholders' equity decreases by the amount of debt satisfied during the year. D. Shareholders' equity is negative when liabilities exceed assets.

D. Shareholders' equity is negative when liabilities exceed assets.

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 Choose one answer. A. Chartered underwriter. B. Field underwriter. C. Line underwriter. D. Staff underwriter.

D. Staff underwriter. Maja is functioning as a staff underwriter.

Which one of the following correctly describes the pure premium component of ratemaking? Choose one answer. A. The amount added to the rate for excessive losses or expenses B. The amount for which the insurer has provided a full year of coverage C. The amount included in the rate per exposure unit required for loss adjustment expenses D. The amount included in the rate per exposure unit required to pay losses

D. The amount included in the rate per exposure unit required to pay losses

Maria, a commercial lines underwriter, is reviewing an applicant with a large fleet of vehicles for auto coverage. The producer submitted a five year loss summary that includes the number of losses, the amount paid and the amount reserved by year. The loss summary also separates auto liability and physical damage losses. The number of vehicles insured has been consistent over the five year period. During her loss analysis Maria notes that the auto liability loss frequency and severity has been fairly consistent, but the average physical damage losses have been lower for the last three years. Maria's review of detailed loss runs could confirm that which one of the following changes is the most likely reason for the drop in physical damage losses? A. The vehicles are older and less expensive to repair. B. The applicant improved its driver training program. C. The applicant is doing its own repair work. D. The applicant purchased a higher physical damage deductible.

D. The applicant purchased a higher physical damage deductible.

The report of management is a report to the users of financial statements, required as part of the company annual report. Which one of the following is true regarding this report? Choose one answer. A. The company trading activities are explained in detail for investors. B. It summarizes relationships with persons that derive benefits from the company. C. It provides a narrative explanation of the company's financial statements. D. The chairman of the board signs it acknowledging the integrity of the report.

D. The chairman of the board signs it acknowledging the integrity of the report.

When it comes to insurance pricing, actuaries use mathematical techniques to establish insurance rates for Choose one answer. A. All lines of insurance except marine insurance. B. Individual accounts. C. Marine insurance accounts. D. The insurer's book of business.

D. The insurer's book of business.

Which one of the following is correct regarding named insureds? Choose one answer. A. Coverage is only provided to the individuals or organizations listed in an insurance policy's declaration page. B. Insurers are obligated to communicate with each insured listed in the policy. C. Individuals should not be listed as named insureds on the declaration page of a commercial insurance policy. D. The named insured whose name appears first on the declaration page usually has special responsibilities and duties.

D. The named insured whose name appears first on the declaration page usually has special responsibilities and duties.

Because underwriting guidelines usually specify the attributes of accounts that insurers are willing to insure, insurers consider them Choose one answer. A. The tool for training underwriters. B. Trade secrets. C. The key to profitability. D. The level of authority.

Trade Secrets Because underwriting guidelines usually specify the attributes of accounts that insurers are willing to insure, insurers consider them trade secrets.