AU 60 Test Qs Chpts. 1-4
The retention ratio as an underwriting performance measure is the percentage of
Insurance policies renewed.
Which one of the following statements is true regarding additional insureds?
Additional insured endorsements restrict coverage to those claims arising out of the named insureds operations.
Which one of the following statements is true regarding an organization's management?
An underwriter can assess important qualitative characteristics regarding the management of an organization from various reports, as well as from the producer and first-hand knowledge.
Beatrice Benson is the sole proprietor of a beauty supply shop. Beatrice could list her business in all of the following commonly acceptable ways, EXCEPT:
Bea's Beauty Boutique, Inc.
Which one of the following sources of underwriting information provides a hazard index by line of insurance for the various classifications?
Best's Underwriting Guide
The NAICS uses a six digit code structure to classify specific
Business operations.
Rating agencies such as Dun & Bradstreet (D&B) provide
Data on credit ratings of businesses.
Wrap-ups have proven to be a cost-effective and efficient approach to handling insurance needs for
Large construction projects.
BBT is a small company owned by Ed Snipes. BBT's liability as a company is similar to the liability granted to shareholders of a corporation. Ed and members of BBT pay taxes only on profits and have only limited liability for the organization's obligations and debts. BBT is a
Limited liability company.
Which one of the following statements is true regarding professional employer organizations (PEOs)?
Many small and medium-sized companies lease employees from PEOs to reduce costs
Mortgageholders have a security interest in which one of the following types of property?
Real property
William is a plumber. He has a contract with a home builder to install the bathrooms in a new housing development. William will supply the materials and equipment. He will be paid a fixed fee per house and must complete the job by an agreed deadline. Which one of the following best describes William's relationship to the home builder?
Subcontractor
Which one of the following statements is correct with regard to regulation and insurers' operations?
Underwriting regulation indirectly influences ratemaking and claim settlement.
Pauline is underwriting an account for a publicly traded company, Discovery Products. She is hoping to find extensive financial information as well as a detailed history of the company, description of current operations, and if possible, Discovery Products' plans for the future. Which one of the following sources of information would best provide Pauline with the information she is seeking?
10-K report
How many years of loss experience, not including the current year, are required by most experience rating plans?
3
Argot Stock Insurance Company's (Argot) net income is $1,000,000 and its average owners' equity is $16,500,000. Argot's average policyholders' surplus is $20,000,000. Using the GAAP approach, which one of the following is Argot's return on equity?
6% - 1M/16.5M
A group of policies with a common characteristic, such as a territory or type of coverage, or all policies written by a particular insurer, producer, or agency is referred to as
A book of business.
Which one of the following is an example of a producer acting as a front line underwriter?
A producer decides not to proceed with a prospective client after seeing the operations.
During the course of an underwriting market conduct examination, examiners review
A statistically selected, random sample of policies.
Angela has purchased a homeowners policy from ABC Insurance. The policy has been in force for six months when Angela submits a large theft claim. In investigating the loss, ABC's claim representative determines that the claim is fraudulent and notifies the underwriter who decides to cancel the policy. Considering state termination laws as well as National Association of Insurance Commissioners (NAIC) recommended time frames, which one of the following statements is true regarding ABC's termination options?
ABC can cancel the policy but must give Angela 30 days notice.
Which one of the following statements is correct with respect to declination, termination, and disclosure laws?
After a policy renewal date, insurers can typically cancel coverage if there is a substantial increase in the risk insured.
In deciding which applicants they are willing to insure, insurance underwriters need to recognize the effects of adverse selection. Which one of the following is the best example of adverse selection?
After learning that a particularly active hurricane season is expected, several homeowners in a coastal community increase the limits on their windstorm coverage.
For commercial property and inland marine insurance, the underwriter must verify the values of insured property for which of the following reasons?
All of the above (If the value shown on the application is too low, the underwriter will not receive sufficient premium./If the value on the application is too high, the insured will pay for coverage it does not need./If the policy limit exceeds the value of the property, the insured might be tempted to cause a loss intentionally or might not protect the property from loss.)
Which of the following statements regarding the role of the producer in underwriting an account is (are) true?
All of the above (With first-hand knowledge of the account, the producer can answer many questions for the underwriter./The extent of the producer's familiarity with the prospect influences the credibility of the information on the application./Producers should understand the type of accounts the insurer prefers, as well as the insurer's underwriting guidelines.)
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?
Allowing producers exceptions in some cases
Underwriters should occasionally order a credit report after the account has been accepted and a policy issued. A credit report may be used to indicate the existence of each of the following conditions, EXCEPT:
An account's propensity to report claims
Which one of the following should provide an underwriter with most of the essential information needed to arrive at a decision on a new business applicant?
Application
Which one of the following best describes what underwriting regulation seeks to prevent?
Applying different standards or methods of treatment to insureds who have the same basic characteristics and loss potential
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?
Appraisal of values
LMN Insurance Company has recently opened three new regional offices and has been growing rapidly. Because of the rapid growth in written premiums, LMN's premium-to-surplus ratio has risen to three to one. Which one of the following is the most viable option for LMN to improve its premium-to surplus ratio for regulatory purposes?
Arrange for reinsurance to free up surplus.
Underwriters, in conjunction with ratemakers, help achieve actuarial equity by
Assigning insureds with similar characteristics to the same rating class.
A management control tool used to determine whether line underwriters are properly implementing underwriting policy is known as an underwriting
Audit.
Underwriting guidelines serve which one of the following purposes?
Avoid duplication of effort
Alex has been a commercial underwriter for two years. He has received a multi-lines submission for a company in an industry that he is not very familiar with. Which one of the following external resources would give Alex a general description of the industry's operations and the level of hazard by line of insurance?
Best's Underwriting Guide
Rene Worthington is a commercial underwriter whose expertise is in underwriting retail exposures. Rene has been asked to underwrite an account for a business in the cosmetic industry with which she has little experience. Where may Rene find general information about the cosmetic industry?
Best's Underwriting Guide
An underwriter has been asked to review a commercial package application for a four-story apartment building. Which one of the following pieces of information would the underwriter consider essential?
Building construction
Johanna is a commercial lines underwriter. She has received a new business application for Hallbinger Trucking (Hallbinger). The application indicates that the trucks travel a maximum radius of 100 miles. When she accesses Hallbinger's Web site, Johanna notices that they service areas that are over 100 miles away. Which one of the following would be a reliable external resource for Johanna to use to confirm Hallbinger's filings?
Central Analysis Bureau
Specialty insurers such as those offering surety bonds, aviation insurance, and livestock mortality insurance usually
Centralize underwriting authority.
Which one of the following insurer representatives often meets with the insured in difficult circumstances, but can provide the underwriter with valuable information?
Claim representative
Sofie, a property underwriter for Cintriell Insurance Company is reviewing a new homeowners application. Sofie has changed the protection class to unprotected, as the fire protection class listed by the producer is an eight and is incorrect. Which one of the following line underwriter activities is Sofie performing?
Classifying and pricing accounts
Which one of the following is a financial measure of underwriting performance?
Combined ratio
Which one of the following is determined by a company's underwriting policy?
Composition of the insurer's book of business
ABC Insurance is considering entering new states as part of its growth plan. The executives of ABC decide not to pursue new business in low-income areas of states and provide underwriters with a map indicating the areas from which they are not to accept applications. This position likely violates regulations that
Constrain insurers' ability to accept, modify, or decline loss exposures.
Which one of the following cases illustrates how underwriting guidelines ensure that selection decisions provide uniformity and consistency by all the insurer's underwriters?
Cromley is training new underwriters and is using a work sample for a homeowner risk which has a unacceptable roof and an overgrown yard. New underwriters Erin and Filip check the guidelines and make the same underwriting decision to decline the risk.
Unlicensed teenage driver Bill applied for insurance on his automobile. Upon learning that Bill was not only unlicensed but that he intentionally misstated his age on the application, the insurer decided not to issue an auto policy for Bill. The action on the part of the insurer is known as
Declination.
Which one of the following statements is correct with respect to policy form laws?
Deemer provisions are intended to encourage a prompt review of submitted policy forms.
An underwriter receives a renewal application for a property quote from his producer. The applicant has had a series of small losses in the recent past. The underwriter is debating whether to reject the submission or quote it with a property deductible of $5,000. During which one of the following steps in the underwriting process is the underwriter involved?
Developing underwriting alternatives
It is most important for an underwriter to determine which one of the following about an organization's risk manager?
Does the risk manager have the authority to make changes?
Justin is part of a team performing a market conduct examination of XYZ Insurance Company's underwriting practices. He is reviewing the company's underwriting files. He verifies that each policy application has been completed and signed by the applicant. In addition, which one of the following should he also verify?
Each file contains information supporting the risk classification and premium rating.
Depending on the type of insurance, insurers use automated underwriting systems to
Encode underwriting guidelines.
The USA Patriot Act restricts United States firms, including those in the insurance industry, from
Engaging in business with persons and organizations on the Specifically Designated Nationals (SDN) list.
Julio, a producer for Argot's Insurance Company, submits an application for a 50-year-old residence to Mathilde, the underwriter. Julio wants to know why the homeowners rate is higher for his 50-year-old residence. Mathilde explains that the homeowners rate for the 50-year-old residence is not the same for a five-year-old residence because the exposures are different. Which one of the following underwriting profitability functions of Argot is Mathilde's explanation supporting?
Ensuring adequate policyholder's surplus
From an underwriting perspective, most of the information that is requested on a commercial application would be considered
Essential.
Tania, a commercial property underwriter, has received a new business application for Pravalt Properties (Pravalt). The producer is expecting a quick decision. Three of the properties owned by Pravalt have high values and are located in relatively rural areas. Tania has no specific concerns with the properties, but the underwriting guidelines require that she obtain risk control reports. Which one of the following would be the most timely and cost effective source of the reports?
Fee for service company
Underwriters closely examine loss frequency and severity. Which of the following statements is (are) true regarding frequency and severity?
Frequency is usually controllable.
Quality accounts usually have quality employees. Quality employees
Generally produce products that will satisfy the customer and that will be less likely to result in insurance claims
Information efficiency refers to
How the value of the information to underwriting decisions must be weighed relative to its expense and its timeliness.
The common distinction between line underwriters and staff underwriters is that line underwriters
Implement the steps in the underwriting process. Staff underwriters assist underwriting management with formulating underwriting policy.
During a general market conduct examination of underwriting, examiners would look for evidence of all of the following, EXCEPT:
Inconsistent claim practices
An insurance company must have adequate policyholders' surplus if it wishes to
Increase its written premium volume.
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?
Insurance advisory organizations
The residual markets for auto and property insurance influence underwriters in which one of the following ways?
Insurers often must accept risks at inadequate rates.
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
Is meeting the state's surplus requirement.
All of the following are true regarding termination of insurance coverage, EXCEPT:
It can be done at any time without notice to the insured.
Which one of the following statements is correct with respect to rate regulation?
It seeks to ensure that the rates for each class are adequate, fair, and not excessive.
Wrap-ups are risk management programs specifically designed for
Large construction projects
Which one of the following provisions gives the lender separate rights from those of the insured?
Lender's loss payable
Which one of the following alternative forms of business ownership provides owners with the limited liability of a corporation and the tax advantage of a partnership?
Limited liability company
Which one of the following will draft a manuscript policy or endorsement that is worded to address the specific needs of the insured?
Line underwriter
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?
Makes it clear which business the insurer is providing coverage for, if the individual owns more than one business
Which one of the following insurer employees is responsible for establishing goals for producers and training them in insurer policies and procedures?
Marketing representative
Underwriting regulations seek to ensure correct classification of insureds because
Misclassification can result in inadequate premiums and drain an insurer's surplus.
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?
Morale
Lucas is a commercial underwriter reviewing an automobile insurance application for Jancy Marketing (Jancy). Jancy provides its sales representatives with vehicles to use for business purposes only. The producer states that Jancy has a strong vehicle maintenance program and strict driver selection criteria. Lucas does not have the time or resources to order a risk control report. Which one of the following sources of underwriting information should Lucas use to confirm that Jancy's driver selection program is in place?
Motor vehicle reports
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?
Motor vehicle reports on drivers
All of the following are disadvantages of the partnership type of business ownership, EXCEPT:
Partners are taxed personally for partnership profits.
Which one of the following Dun & Bradstreet report scores shows how promptly the company pays its bills relative to terms?
Paydex
Emma is a workers compensation underwriter. She has been advised that one of her insureds is expanding its operations, and she is not sure how to classify the new payroll. Which one of the following of her fellow employees should Emma go to for help?
Premium auditor
Which one of the following financial ratios is key for evaluating insurer solvency?
Premium to surplus ratio
Various state declination, termination, and disclosure laws prohibit declination or policy cancellation based on specified considerations. Which one of the following is one of those considerations?
Previous declination or termination of the applicant or named insured
Cynthia is reviewing an ACORD commercial application for automobile insurance. The applicant responded "yes" to the question of whether coverage has been declined, canceled, or nonrenewed during the past three years. All of the following explanations for cancellation or nonrenewal would likely affect the desirability of the account from an underwriting standpoint, EXCEPT:
Prior insurer's withdrawal from the applicant's state of operations
Identifying and addressing different controlling interests under one policy is least complicated in
Property insurance.
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?
Quicker response
An insurer receives two automobile insurance applications. The first applicant is age 35, male, and has a clean driving record. The second applicant is age 35, female, has had three speeding violations and a prior accident. The insurer accepts both risks, but charges the second applicant a higher premium. Which one of the following statements about this scenario is correct?
Regulations allow the insurer to charge more for insureds with poor driving experience.
Which one of the following describes underwriting regulations that limit allowable classifications?
Regulations requiring unisex rating in personal auto insurance
An applicant for commercial property insurance is found unacceptable by an underwriter due to the nature of its operations and the construction of the building it occupies. If the applicant installs an automatic fire-extinguishing sprinkler system, the underwriter will approve the application. This type of underwriting modification is known as
Requiring loss control measures.
Which one of the following represents two nonfinancial measures that are used to evaluate underwriting performance by focusing on underwriting actions?
Retention ratio and hit ratio
Which one of the following insurer employees would be best qualified to answer an underwriter's technical questions about an applicant's operations?
Risk control representative
Aaron, a senior producer for Blithe Insurance Company (Blithe) has over 15 years experience in the field. He knows Blithe's underwriting guidelines and is familiar with the type of business Blithe wants. He takes pride in the loss ratio produced by his office and also produced by Blithe as a company. He often trains new agents in his office because of his low rejection ratio of applications he writes. He is known as a front-line underwriter for Blithe. Which one of the following is a benefit of Aaron's field underwriting?
Saves Blithe from having to evaluate accounts that they will ultimately reject
Patrick and Jeanie are business partners who own a pastry business. Patrick operates and manages the business. Jeanie is active in the business, but the public is unaware that Jeanie is a partner. Jeanie is a
Secret partner.
Which one of the following statements is correct regarding nonfinancial measures of underwriting results?
Selection standards for underwriters usually support overall underwriting goals and are evaluated during audits.
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:
Selling or retail
Because of the expense of risk control reports and the importance of making a quick decision on a new submission, underwriters sometimes approve a submission subject to a favorable risk control report. Why is it critical that the underwriter receive the report quickly after the policy's inception date?
Statutes in many states limit an insurer's right to cancel to a brief period of time.
Which one of the following statements is correct with respect to market conduct examinations?
The Department of Insurance (DOI) may suspend or revoke the insurer's certificate of authority if it finds that an insurer has violated a law.
Which one of the following contributes the most to the success or failure of an enterprise?
The employees
All of the following statements are true regarding the factors affecting the formation of an insurer's underwriting policy, EXCEPT:
The higher an insurer's premium-to-surplus ratio, the greater its ability to expand premium writings.
Tobias, a successful producer with Barnley's Insurance Company, is struggling with an intricate quote on homeowners coverage for his insured, Hanna. Hanna not only has substantial collections of guns and silverware, but also has a small farm located at her premises. Which one of the following individuals from Barnley Insurance Company could provide assistance and support to Tobias?
The line underwriter
Which one of the following is correct regarding named insureds?
The named insured whose name appears first on the declaration page usually has special responsibilities and duties.
James, a commercial lines underwriter, is reviewing an applicant with a large fleet of vehicles for auto coverage. The producer submitted a five year loss summary that includes the number of losses, the amount paid, and the amount reserved per year. James is concerned because both the number of losses and the amount incurred has increased each of the last three years. Which one of the following additional pieces of information would help James determine if losses are really trending upward?
The number of vehicles per year
Underwriting authority requirements are usually communicated to an underwriter through
The underwriting guidelines.
Which one of the following statements is correct with respect to market conduct examinations?
They protect both insurers and consumers from unfair insurer practices.
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:
To actuarially develop a premium specific to the exposure
Which one of the following is the primary reason that governments seek to prevent insurer insolvency through underwriting regulation?
To prevent insureds from being left without coverage and suffering great financial loss
Which one of the following types of unincorporated associations acts to foster the interests of their members through compiling and exchanging information, and lobbying legislators?
Trade association
Which one of the following statements is correct with regard to state regulation and the underwriting function?
Underwriters are affected by rate regulation, solvency regulation, and auto insurance laws.
Which one of the following is the insurer's quality control check for uniform application of the underwriting guidelines and for continuous improvement?
Underwriting audits
Insurance underwriter Luis refuses to insure any teenage driver who appears to be discourteous or unkempt. Luis believes those behaviors will lead to greater losses under the policies he underwrites. Which one of the following practices, which underwriting regulations aim to prevent, is Luis using?
Unfair discrimination
Which one the following is the most significant disadvantage of a sole proprietorship?
Unlimited liability
Commercial property and inland marine underwriters are most likely to use which one of the following external sources of information?
Valuation guides