Assignment 8 - Purpose of Underwriting

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 Select one: A. A book of business. B. A coverage pool. C. A policy group. D. A line of business.

A. A book of business.

Sofie and the members of her homeowner's association have homeowner's policies on their coastal dwellings. They have heard that there are 11 named hurricane storms predicted for their coastal area this year. Sofie and the homeowner association members plan to increase their homeowner's property coverage limits to handle their concern about the possible hurricane damage. Their action is known as Select one: A. Adverse selection. B. Misclassification. C. Increasing capacity. D. Managing the book of business.

A. Adverse selection.

Which one of the following is the term used to refer to a situation that occurs because people with the greatest probability of loss are the ones most likely to purchase insurance? Select one: A. Adverse selection B. Spread of risk C. Probable maximum loss D. Risk inconsistency

A. Adverse selection.

An insurance company must have adequate policyholders' surplus if it wishes to Select one: A. Increase its written premium volume. B. Generate premiums that exceed losses. C. Avoid adverse selection. D. Produce profitable business.

A. Increase its written premium volume.

The overarching purpose of underwriting is Select one: A. To develop and maintain a profitable book of business. B. Achieve the underwriting goals of the company. C. Add to policyholder surplus. D. Make and sustain a profit.

A. To develop and maintain a profitable book of business.

Underwriting guidelines reflect the levels of Select one: A. Underwriting authority. B. Written premium by type of insurance. C. Responsibility by job title. D. Rate modification.

A. Underwriting authority.

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? Select one: A. Before buying his first motorboat, Luis purchases a watercraft insurance policy. B. After learning that a particularly active hurricane season is expected, several homeowners in a coastal community increase the limits on their windstorm coverage. C. Before installing an in-ground swimming pool in her home's back yard, Lucy increases the deductible on her homeowners policy. D. After a neighbor's business is burglarized, Anna installs an alarm system in her store.

B. After learning that a particularly active hurricane season is expected, several homeowners in a coastal community increase the limits on their windstorm coverage.

The principal purpose of underwriting is to Select one: A. Insure only those applicants with minimal or no loss exposure. B. Develop and maintain a profitable book of business for the insurer. C. Decline to insure those applicants with a risk of incurring a severe loss. D. Educate producers regarding the insurer's underwriting guidelines.

B. Develop and maintain a profitable book of business for the insurer.

Tania receives an application for homeowner's insurance for a home valued at $500,000 from Patrick, the producer for Keithly Insurance Company. Since Tania's underwriting authority is $350,000 on property risks, she must refer it to Lachlan, her underwriting supervisor. Which one of the following additional functions for underwriting profitability does this case illustrate? Select one: A. Adequacy of trained staff B. Enforcing underwriting guidelines C. Guarding against adverse selection D. Prevention of errors and omissions

B. Enforcing underwriting guidelines

For underwriting to achieve its purpose, Select one: 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.

Underwriters can best minimize the effects of adverse selection by Select one: A. Choosing to insure only those risks with a high probability of loss. B. Accepting all applicants that are submitted by the producer. C. Carefully selecting the applicants whose loss exposures they are willing to insure. D. Rejecting applicants who have had any prior losses.

C. Carefully selecting the applicants whose loss exposures they are willing to insure.

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

C. Ensuring adequate policyholder's surplus

A situation that occurs because people with the greatest probability of loss are the ones likely to purchase insurance is known as Select one: A. Underwriting selection. B. Applicant "pre-qualification." C. Loss exposure evaluation. D. Adverse selection.

D. Adverse selection.

The purpose of underwriting is to Select one: A. "Pre-qualify" or field underwrite applicants. B. Compile information to develop a profile of loss exposures. C. Maximize the impact of adverse selection on the portfolio. D. Develop and maintain a profitable book of business for the insurer.

D. Develop and maintain a profitable book of business for the insurer.

To achieve profitability, the underwriting function serves which one of the following additional purposes? Select one: A. Transferring the risks of individuals and businesses B. Charging fair premiums for applications that are accepted C. Selecting accounts with a lower-than-average chance of loss D. Guarding against adverse selection

D. Guarding against adverse selection

Victor, the sales manager for Hallbinger's Insurance Company, wants the company to grow in written premium. He wants his agents to write more auto and homeowners business. In order to do so, the company must have adequate capacity. Which one of the following impacts Victor's agents and the company the most concerning surplus and capacity? Select one: A. Sales must submit business with a lower-than-average chance of loss. B. Research and development must create policies which are marketable. C. Claims must pay only covered losses and have low expenses. D. Underwriting practices must generate policy premiums that exceed losses and expenses.

D. Underwriting practices must generate policy premiums that exceed losses and expenses.