AU60 Exam

underwriting guidelines (UW guide)

A written manual that communicates an insurer's underwriting policy and that specifies the attributes of an account that an insurer is willing to insure.

Insurer X has $8 million in incurred losses. Its earned exposure units are 200,000. The pure premium is Select one: A. $ 40. B. $ 80. C. $400. D. $800.

A. $ 40. The pure premium is $40, determined by $8 million / 200,000 = $40.

An underwriter is attempting to conduct ratio analysis on a company. The underwriter notices that the company has $12 million in total sales, $8 million in cash sales, $4 million in credit sales, and a $2 million accounts receivable balance. Based on these figures, what is the company's accounts receivable turnover ratio? Select one: A. 2 B. 3 C. 4 D. 6

A. 2 The company's accounts receivable turnover ratio is 2 ($4 million/$2 million).

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? Select one: A. A review of the financial statements helps John to determine XYZ's insurance needs. B. A review of the financial statements helps John to assess XYZ's compliance with loan covenants. C. A review of the financial statements helps John to determine XYZ's ability to pay upcoming insurance premiums. D. A review of the financial statements helps John to evaluate XYZ's ability to finance premiums.

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

Which one of the following is an example of an efficiency ratio? Select one: A. Accounts receivable turnover ratio B. Net profit margin C. Current ratio D. Debt-to-assets-ratio

A. Accounts receivable turnover ratio

Which one of the following statements is correct regarding wrap-ups? Select one: A. Activities covered by the wrap-up program should be excluded from the participating contractors' primary insurance policies. B. Contract bids for contractors participating in a wrap-up are usually higher than if the contractor were bidding the job independently. C. Participating contractors typically obtain wrap-up coverage from their own insurance producers. D. Wrap-ups increase the incentives for participating contractors to implement safety programs.

A. Activities covered by the wrap-up program should be excluded from the participating contractors' primary insurance policies.

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

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

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? Select one: A. Allowing producers exceptions in some cases B. Not applying new rates and rules to renewals C. Using guidelines for different programs that are not mutually exclusive D. Not using correct forms and rates

A. Allowing producers exceptions in some cases

Barbara is an experienced commercial property underwriter. She received a submission from a producer who currently insures the casualty lines for the account. In her initial communication with the producer, Barbara acknowledges that she knows that writing the property coverage will help the producer retain the casualty lines. She also states that the high property limits will require some extra time to secure reinsurance. All of the following are basics of effective communication used by Barbara, EXCEPT: Select one: A. Be aggressive, rather than assertive B. Know the audience C. Understand the purpose D. Introduce a timeline

A. Be aggressive, rather than assertive

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: Select one: A. Bea's Beauty Boutique, Inc., Inc. B. Beatrice Benson d/b/a Bea's Beauty Boutique C. Beatrice Benson t/a Bea's Beauty Boutique D. Beatrice Benson a/k/a Bea's Beauty Boutique

A. Bea's Beauty Boutique, Inc., Inc.

Which one of the following sources of underwriting information provides a hazard index by line of insurance for the various classifications? Select one: A. Best's Underwriting Guide B. North American Industrial Classification System C. Commercial Lines Manual D. United States Standard Industrial Classification system

A. Best's Underwriting Guide

Which one of the following statements regarding monthly report variations and quarterly reports used in reunderwriting is true? Select one: A. By the end of the third quarter, it may be too late to improve that year's operating results. B. Annual goals for the year must be apportioned evenly across the months. C. Corrective actions immediately impact the entire book of business. D. A catastrophe in a single month renders a monthly report for that month useless.

A. By the end of the third quarter, it may be too late to improve that year's operating results.

Which one of the following describes a section of the statement of cash flows? Select one: A. Cash flows from operating activities B. Cash flows from premium activities C. Cash flows from sales activities D. Cash flows from income activities

A. Cash flows from operating activities

Which one of the following insurer representatives often meets with the insured in difficult circumstances, but can provide the underwriter with valuable information? Select one: A. Claim representative B. Risk control representative C. Another underwriter D. Marketing representative

A. Claim representative

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

A. Competitive

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

A. Corporation

Organizations that sell products in brick-and-mortar locations and those that sell them online can share many of the same exposures. Which one of the following exposures is much greater for organizations that participate in e-commerce? Select one: A. Data breach liability B. Workers compensation C. Money and securities D. Products and completed operations liability

A. Data breach liability

Most insurers have some system for keeping previous applications for which they declined to write insurance. These files can be valuable in evaluating new business because they Select one: A. Document earlier decisions and can greatly reduce the amount of work the new application requires. B. Are indicative of material misrepresentation on the part of an applicant. C. Eliminate the need to re-underwrite the same account. D. Allow the underwriter to decline the account again without further review

A. Document earlier decisions and can greatly reduce the amount of work the new application requires.

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

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

One social criterion for ratemaking is simplicity. The requirement for simplicity arises out of the insurance industry's need to Select one: A. Explain and defend its system to the public. B. Make insurance accessible to those who want or need it. C. Base rates on factors that insureds have control over. D. Establish a ceiling on rates in order to make them affordable.

A. Explain and defend its system to the public.

An underwriter analyzing historical loss data for loss frequency trends must also evaluate historical Select one: A. Exposures. B. Financial statements. C. Premiums. D. Inflation rates.

A. Exposures.

An insurance company needs to hire an employee with knowledge of insurance policy forms and the ability to relate policy provisions to the loss exposures of individual policyholders. The person will also prepare premium quotes and process cancellations. Which one of the following employees would best suit the company's needs? Select one: A. Field underwriter B. Producer C. Corporate underwriter D. Premium auditor

A. Field underwriter

Which one the following statements is true regarding schedule rating and individual risk premium modification plans? Select one: A. Generally, those insureds that are eligible to use experience rating are also eligible to use schedule rating. B. Schedule rating plans have been filed for optional use primarily for personal auto liability insurance. 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.

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

Catherine is a commercial lines underwriter. She is reviewing a multi-lines submission for Haley Manufacturing, which is a manufacturer of appliances in the U.S. While evaluating the locations and scope of operations, she learned that over 75% of the electrical components for the appliances are manufactured in China. Catherine would likely be concerned about which one of the following types of threats to the operations and supply chain of Haley Manufacturing? Select one: A. Geopolitical environment B. Natural or man-made catastrophes C. Financial risks D. Information technology

A. Geopolitical environment

Gross profit is reported on the income statement. How is gross profit calculated? Select one: 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

Which one of the following statements is true? Select one: 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.

Insurer People's Protection raised its Country Estate policies' rate by three percent in a declining economic market, which created huge profits for People's Protection. The next year, hoping for additional profits, the insurer increased rates only two percent maintaining that a five percent increase over two years was reasonable, because country estate owners' insurance products were designed to protect a wealthier customer who could afford to pay higher premiums. In which one of the following ways would People's Protection's second set of rates at two percent be considered as excessive? Select one: A. If the rates generate an unreasonable profit for People's Protection C. If they do not equitably reflect the expected losses and expenses of the country estate insureds to whom they apply D. If the rates are sufficient to pay for incurred losses and the expenses associated with those losses

A. If the rates generate an unreasonable profit for People's Protection

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

A. Inconsistent claim practices

Which one of the following is a major purpose of the statement of cash flows? Select one: A. It is used to assess the ability to generate positive future cash flows. B. It is used by insurance agents to balance daily bank deposits. C. It is used in the cash allocation process by line managers. D. It is used by middle management to assess future resource needs.

A. It is used to assess the ability to generate positive future cash flows.

Which one of the following is a major purpose of the statement of cash flows? Select one: A. It is used to assess the ability to meet financial obligations. B. It is used in the cash allocation process by line managers. C. It is used by middle management to assess future resource needs. D. It is used by insurance producers to balance daily bank deposits.

A. It is used to assess the ability to meet financial obligations.

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

A. Leverage.

Jackson is a commercial lines underwriter. When evaluating an organization's location, one of the factors that he considers is how susceptible the organization is to social inflation. Social inflation is typically of greatest concern when underwriting which one of the following lines of business? Select one: A. Liability B. Property C. Auto D. Workers compensation

A. Liability

In financial statement analysis, what term refers to cash as well as short-term securities that can easily be converted to cash? Select one: A. Liquidity B. Capital adequacy C. Profitability D. Leverage

A. Liquidity

James is reviewing the insurance application for an organization and he is not familiar with the geographical area where the business is located. He is asking the agent questions about the local business climate, whether it is surrounded by water or woods, what other businesses are in the area, and how long it would take responders to get there. James is asking key questions related to which one of the following? Select one: A. Location based risk B. Regulatory risk C. Natural hazard and catastrophe risk D. Historical loss data

A. Location based risk

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? Select one: A. Makes it clear which business the insurer is providing coverage for, if the individual owns more than one business B. Provides broader coverage for the business operations C. Makes it easier to transfer the coverage to a new owner D. Provides better protection for the owner

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

Which one of the following types of government records do underwriters use as a source to predict future losses? Select one: A. Motor vehicle reports B. Real estate records C. Court records D. Securities and Exchange Commission 10-K

A. Motor vehicle reports

Which one of the following statements about the balance sheet is correct? Select one: A. 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. 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. The balance sheet contains important financial information about net worth and assets, both which indicate the source of an organization's funding.

A. 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.

JKL Insurance Company entered into a new state as part of an expansion strategy. Four independent agencies were appointed to market JKL coverages. JKL was unaware that many insurers had stopped writing workers compensation in the new state because of rate inadequacy. The new agents, needing a carrier that was accepting workers compensation, sold a large quantity of JKL workers compensation insurance. As workers compensation is a liability line, there was no early indication of any problem. The year-end results for this line, however, were horrendous. Which of the following sources of information could JKL have used to provide an early warning that there was a problem? Select one: A. New business review B. Special event review. C. Underwriting audit D. Quarterly report

A. New business review

Which one of the following Dun & Bradstreet report scores shows how promptly the company pays its bills relative to terms? Select one: A. Paydex B. Hazard index C. Financial stress class D. Credit score class

A. Paydex

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? Select one: A. Quicker response B. Independent opinion of risk C. Customized reports D. Customer contact

A. Quicker response

To effectively price insurance accounts, underwriters must be familiar with rate manuals. Which one of the following is true regarding rate manuals? Select one: A. Rate manuals provide information concerning the use of endorsements that amend the policy. B. Rate manuals always contain an appropriate class or rate for each account C. Underwriters typically use rate manuals to develop premiums for unique exposures for which there is no established rate. D. Underwriters can typically rely solely on rate manuals to determine premiums for individual accounts.

A. Rate manuals provide information concerning the use of endorsements that amend the policy.

To effectively price insurance accounts, underwriters must be familiar with rate manuals. Which one of the following is true regarding rate manuals? Select one: A. Rate manuals provide information concerning the use of endorsements that amend the policy. B. Rate manuals always contain an appropriate class or rate for each account. C. Underwriters typically use rate manuals to develop premiums for unique exposures for which there is no established rate. D. Underwriters can typically rely solely on rate manuals to determine premiums for individual accounts.

A. Rate manuals provide information concerning the use of endorsements that amend the policy.

Mortgageholders have a security interest in which one of the following types of property? Select one: A. Real property B. Personal property C. Trademarks and patents D. Intangible property

A. Real property

Which one of the following insurer employees would be best qualified to answer an underwriter's technical questions about an applicant's operations? Select one: A. Risk control representative B. Producer C. Premium auditor D. Claim representative

A. Risk control representative

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? Select one: A. Schedule rating plan B. Retrospective rating plan C. Experience rating plan D. Individual premium risk modification plan

A. Schedule rating plan

Ian is a recently trained commercial property underwriter at ABC Insurance. Bob is one of the brokers that have been assigned to Ian. Bob has been a commercial producer for over 20 years and is considered to be very knowledgeable. Subsequent to reviewing a claim for one of Bob's large, long-term accounts, Ian ordered a loss control report. The results indicate that the general maintenance, upkeep, and housekeeping at the insured's premises have deteriorated significantly since the last inspection. Ian is concerned but is unsure what to do. Which one of the following approaches would be best for Ian to take under the circumstances? Select one: A. Send a copy of the loss control report to Bob and call him to discuss how best to improve the situation. B. Call Bob, tell him that the premises are a mess, and that he will nonrenew if the insured does not clean up the premises. C. Pass the file to a more experienced underwriter who will have more credibility with Bob. D. Set the file to nonrenew and advise Bob that he has done so in writing.

A. Send a copy of the loss control report to Bob and call him to discuss how best to improve the situation.

Green Pastures Insurance Company insures farms and small businesses. The company also has some business auto policies that account for less than ten percent of written premiums. Green Pastures sold its auto insurance business to BusCar Insurance. BusCar Insurance immediately decided to reunderwrite these policies to determine the risk characteristics compared to the risk profile it expected. This reunderwriting is a(n) Select one: A. Special event review. B. Underwriting audit. C. Loss review. D. New business review.

A. Special event review.

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? Select one: A. Statutes in many states limit an insurer's right to cancel to a brief period of time. C. Competition has limited time to revise its proposal to the applicant. D. The applicant has time to decide if they want to correct any problems before the renewal.

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

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? Select one: A. Subcontractor B. Leased employee C. Employee D. General contractor

A. Subcontractor

Because underwriters must gather and process information efficiently, they should make the best possible use of the information immediately available. The two sources of information that are available as soon as the underwriter receives a submission are the producer and Select one: A. The application. B. The insured. C. Risk control reports. D. Motor vehicle reports (MVRs)

A. The application

Underwriters must be careful when comparing financial statements using trend analysis because false impressions about a company can be created. Which one of the following might cause an underwriter to have a false impression about a company's health because of an inventories increase on the financial statement? Select one: A. The inventory increase was caused by a change in the inventory valuation method. B. The inventory increase was caused by obsolete or damaged inventory. C. The inventory increase was caused by robust sales and growth. D. The inventory increase was caused by a decline in seasonal sales.

A. The inventory increase was caused by a change in the inventory valuation method.

Which one of the following statements is true regarding insurance ratemaking methods? Select one: A. The loss ratio ratemaking method cannot be used to determine rates for a new type of insurance. B. Insurers commonly use only the pure premium method or the loss ratio method. C. All ratemaking methods use an insurer's current rates in the calculation of new rates. D. There are many methods for adjusting an existing rate or for developing a new rate

A. The loss ratio ratemaking method cannot be used to determine rates for a new type of insurance.

Which one of the following statements about the reunderwriting process is true? Select one: A. The process is circular and begins and ends with monitoring activities. C. Although called a "process," there are no defined steps that are followed when reunderwriting. D. The process is linear and can only be applied at the end of the calendar year.

A. The process is circular and begins and ends with monitoring activities.

Thomas received a large multi-line submission from Lily, a producer that had recently been assigned to him. After sending an email to Lily requesting the addition information that he would need to make a decision on the account, Thomas received an angry phone call from the producer. Which one of the following is the best way for Thomas to attempt to resolve the conflict? Select one: A. Thomas should ask Lily about the challenges that would prevent her from getting the information to him. B. Thomas should remind Lily that it is his job to select good businesses and her job to submit complete information. C. Thomas tell Lily that every other producer is able to get the information for submissions to him, so she should also. D. Thomas should advise Lily that she will need to seek approval from the underwriting manager if she cannot get the requested information.

A. Thomas should ask Lily about the challenges that would prevent her from getting the information to him.

Nancy is an experienced commercial property underwriter. She works with accounts that own high-value locations throughout the U.S., and often works with reinsurers to help secure adequate limits. Nancy is starting to have difficulty getting reinsurance coverage for locations in certain parts of the country, or the coverage being offered excludes certain perils. She is able to add value to her organization by gaining a stronger understanding of which one of the following aspects of the property insurance market? Select one: A. Trends and changes B. Typical policy wording C. Product innovation D. Competitor's products and services

A. Trends and changes

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? Select one: A. Unfair discrimination B. Intimidation C. Boycott D. Exclusive underwriting

A. Unfair discrimination

In deciding which applicants they are willing to insure, insurance underwriters need to recognize the effects of adverse selection. Which of the following is the best example of adverse selection? A. after learning that a particularly active hurricane season is expected, several homeowners in a coastal community increase the limits on their windstorm coverage B. before buying his first motorboat, Luis purchases a watercraft insurance policy C. before installing an in-ground pool in her home's backyard, lucky increases the deductible on her homeowners policy D. After a neighbor's business is burglarized, Anna installs an alarm system in her store

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

Sofie, a property underwriter for Cintriell Insurance Company is reviewing a new homeowners application. Sofie has changed the protection class to unprotected, as the fire protection class listed by the producer is an eight and is incorrect. Which one of the following line underwriter activities is Sofie performing? A. classifying and pricing accounts B. selecting insureds C. recommending correct coverage D. coordinating with producer efforts

A. classifying and pricing accounts

Which one of the following is correct with respect to market conduct examinations? A. 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 B. the primary focus is on required fillings, and department of insurance (DOI) examiners focus the effort on failure to file or inaccurate filling of rates and forms C. The insurer under review is generally not permitted to discuss the preliminary examination report with the department of insurance (DOI) D. general examinations are conducted in response to specific complaints made against the insurer

A. 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

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 Select one: 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.

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? Select one: 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.) Select one: 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.

As the field of underwriting becomes more reliant on data analytics, which one of the following internal stakeholders serves as a bridge between underwriting and analytics? Select one: A. Claims representatives B. Actuaries C. Producers D. Auditors

B. Actuaries

Which one of the following best describes the components included in an insurance rate? Select one: A. Factors to cover projected future losses, loss adjustment expenses, and acquisition expenses B. Amounts to pay prospective loss costs, loss adjustment expenses, other expenses, and an amount for profits and contingencies C. Factors to pay current claims, current operating expenses, and current investment expenses D. An amount to pay future claims and loss reserves plus a factor for profits and contingencies

B. Amounts to pay prospective loss costs, loss adjustment expenses, other expenses, and an amount for profits and contingencies

Wrap-ups do not usually include which one of the following coverages? Select one: A. General liability B. Auto C. Workers compensation D. Builders risk

B. Auto

The North American Industry Classification System (NAICS) uses a six digit code structure to classify specific Select one: A. Construction classes. B. Business operations. C. Demographic sectors. D. Actuarial ratings.

B. Business operations.

Charlie is a commercial insurance underwriter. After reviewing the applications and supporting data for JH Manufacturing, he advised the producer that he was declining the business due to concerns with the quality of work. Which one of the following sources of underwriting information most likely provided Charlie with his reason for concern? Select one: A. First-hand knowledge B. Claims files C. Financial records/audits D. Employee status data

B. Claims files

To effectively price insurance accounts, underwriters must be familiar with different types of rates. Which one of the following types of rates reflects the aggregate loss experience of a similar group of accounts? Select one: A. Judgment rate B. Class rate C. Specific fire rate D. Aggregate rate

B. Class rate

Millie's Gifts was a shop that primarily depended on walk-in business. As Millie's began to sell an increased volume of products online, the owner became concerned about securing her customers' personal information. Which one of the following cyber-related coverages would protect Millie's Gifts from liability resulting from a breach in which customers' personal information is stolen? Select one: A. Cyber extortion insurance B. Cyber and data breach liability coverage C. Cyber business interruption insurance D. Chargeback insurance

B. Cyber and data breach liability coverage

Which one of the following ratios can be used to analyze how the assets of a company are being financed? Select one: A. Debt-to-equity ratio B. Debt-to-assets ratio C. Asset turnover ratio D. Return on assets

B. Debt-to-assets ratio

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

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

An organization that considers both key business risks and opportunities when formulating its business strategies reflects its commitment to which one of the following? Select one: A. Employees B. Enterprise risk management C. Prudence of operations D. Operational authority

B. Enterprise risk management

Insurer People's Protection raised its Country Estate policies' rate by three percent in a declining economic market, which created huge profits for People's Protection. The next year, hoping for additional profits, the insurer increased rates only two percent maintaining that a five percent increase over two years was reasonable, because country estate owners' insurance products were designed to protect a wealthier customer who could afford to pay higher premiums. In which one of the following ways would People's Protection's second set of rates be considered as unfairly discriminatory? Select one: A. If the rates are sufficient to pay for incurred losses and the expenses associated with those losses B. If they do not equitably reflect the expected losses and expenses of the country estate insureds to whom they apply C. If the rates promote social injustice or are detrimental to most country estate owners D. If the rates generate an unreasonable profit for People's Protection

B. If they do not equitably reflect the expected losses and expenses of the country estate insureds to whom they apply

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

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

While reunderwriting its book of commercial property insurance, Property Insurance Company (PIC) learned that many of the buildings it insured are covered for far less than their replacement cost. Property Insurance Company believes the under-valuation may have been intentional to help the agents get the business. PIC ordered that upon renewal, each commercial property policy would include a provision requiring the property to be insured for 90 percent of its replacement value. If this requirement is not met, the settlement following a loss will be reduced. The policy provision that PIC will add to their policies is called a(n) Select one: A. Valued policy clause. B. Insurance-to-value provision. C. Agreed amount endorsement. D. Other insurance provision.

B. Insurance-to-value provision.

While specialized analytics and data-driven tools enhance the underwriter's risk selection process, which one of the following underwriting skills is required to evaluate the effect of a risk's poor attitude regarding safety and risk management? Select one: A. Communication B. Judgement C. Negotiation D. Mathematical

B. Judgement

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

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

CUL Insurance Company conducted a reunderwriting of its property insurance policies during an economic recession. As expected, the reunderwriting detected a large increase in losses that had been caused on purpose. Intentionally bringing about a loss in order to collect from an insurer is called Select one: A. Adverse selection. B. Moral hazard. C. Morale hazard. D. Information asymmetry.

B. Moral hazard.

ABC Insurance Company sells property insurance. The company is reunderwriting its book of business at midyear. The company hoped to retain 80 percent of policyowners. The retention rate is 82 percent and the loss ratio on the retained business is 62 percent. The company had hoped to write $2.5 million in premiums for the year, and the midyear value was $1.3 million in premiums written. The new policy goal for the year was 6,000 and 3,500 new policies had been written at midyear. The loss ratio goal for the year was 65 percent, and the loss ratio at midyear was 68 percent. Assuming premium writings and losses are distributed uniformly over the year, what should ABC Insurance Company conclude about its performance at midyear? Select one: A. It would have been better to have a lower percentage of business retained. B. New business is contributing negatively to the loss ratio. C. The new policies sold goal was overly optimistic. D. The premiums written goal was overly optimistic.

B. New business is contributing negatively to the loss ratio. As the overall loss ratio is 68 percent and the loss ratio on retained business is 62 percent, the new business must be contributing negatively to the loss ratio.

An underwriter seeking to gain insight into the activities that might be conducted by an applicant would use which one of the following resources? Select one: A. U.S. Standard Industrial Classification System B. North American Industry Classification System C. Commercial Lines Manual D. Premium Audit Advisory Service Guide

B. North American Industry Classification System

Molly is an underwriter for Stanton Insurance. She is working on an all-lines renewal with the producer, Dan. While gathering information for the renewal, Molly notices that the renewal payrolls and sales are almost 20 percent higher than the expiring policy. Dan confirms that the company is experiencing some significant growth, but has not expanded into any new products or territories. He also tells Molly that the company will be marketing its insurance business this renewal, so her pricing should be as aggressive as possible. Molly states that this is an important account to Stanton Insurance and arranges a meeting with Dan and the loss control representative on the account. She discusses some deductible and rating plan options that could help offset some of the premium growth and asks for Dan's feedback. They also discuss how the loss control representative could work with the insured during this period of growth. The team is in which one of the following stages of the renewal process? Select one: A. Bargaining stage B. Opening stage C. Closing stage D. Preparation stage

B. Opening stage

Which one of the following types of rating plans is used most commonly for workers compensation insurance? Select one: A. Composite rating plans B. Participating plan C. Rebate plan D. Individual risk premium modification plan

B. Participating plan

Which one of the following insurer representatives is most likely to meet with the insured, see their operations, and review their financial operations on an annual basis? Select one: A. Marketing representative B. Premium auditor C. Risk control representative D. Claim representative

B. Premium auditor

The underwriter's primary source of dependable information about an account is the Select one: A. Applicant. B. Producer. C. Current insurer D. Claims adjuster.

B. Producer

Pablo was reviewing Shelton Manufacturing's application for commercial insurance. While reviewing the risk control reports he learned that roughly 80% of the products are fed through the same line for packaging. Pablo considered this a major threat to operations and supply chains. Which one of the following types of threat would it be? Select one: A. Third-party suppliers B. Production bottleneck C. Infrastructure location D. Financial risks

B. Production bottleneck

Identifying and addressing different controlling interests under one policy is least complicated in Select one: A. Environmental insurance. B. Property insurance. C. Liability insurance. D. Workers compensation insurance

B. Property insurance

Which one of the following statements is correct? Select one: A. In ratemaking, the amount included to pay such things as future acquisition expenses, overhead, and premium taxes is referred to as the contingencies provision. B. Prospective loss costs are supplied by advisory organizations or developed by insurers with large enough pools of loss data. C. The only components of an insurance rate are an amount to pay future claims and loss reserves plus a factor for profits and contingencies. D. The rate component intended to pay future claims and loss adjustment expenses is referred to as the expense provision

B. Prospective loss costs are supplied by advisory organizations or developed by insurers with large enough pools of loss data.

Actuaries and underwriters both have roles in pricing insurance products. Which one of the following is actuaries' primary pricing role? Select one: A. Account classification B. Ratemaking. C. Individual account pricing D. Application of premium modification plans

B. Ratemaking.

All of the following are objectives of rate regulation, EXCEPT: Select one: A. Rates equitably reflect expected losses and expenses of the particular insured. B. Rates promote availability and affordability of insurance. C. Rates generate no more than a reasonable profit for the insurer. D. Rates are adequate to pay for incurred losses and expenses.

B. Rates promote availability and affordability of insurance.

The portion of net income that is held onto by a company and not distributed to stockholders is called Select one: A. Paid-in capital. B. Retained earnings. C. Dividends. D. Par value share

B. Retained earnings.

Which one of the following ratios is calculated by taking net income divided by total assets? Select one: A. Net profit margin B. Return on assets (ROA) C. Return on equity (ROE) D. Current ratio

B. Return on assets (ROA)

The process of analyzing the characteristics of policies within a book of business and the trends of those characteristics is known as Select one: A. Retrocession. B. Reunderwriting. C. Underwriting. D. Reinsurance

B. Reunderwriting.

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: Select one: A. Building or premises B. Selling or retail C. Contracting or servicing D. Manufacturing or processing

B. Selling or retail

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? Select one: A. The company may not be able to meet its short term obligations because its current ratio is less than one. B. The company may not be able to meet its short term obligations because its acid test 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

B. The company may not be able to meet its short term obligations because its acid test ratio is less than one.

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

B. The insurer's book of business.

Which one of the following statements is correct? Select one: A. The pure premium ratemaking method is the oldest ratemaking method. B. The judgment ratemaking method is used when limited data are available. C. The loss ratio ratemaking method does not factor in profits and contingencies. D. Insurers entering a new line of business use the loss ratio method to set their initial rates.

B. The judgment ratemaking method is used when limited data are available.

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? Select one: A. Inventories increased by two percent B. The percentage of inventories to total assets increased C. Percent of inventories changed with inflation D. Inventories fell by two percent

B. The percentage of inventories to total assets increased

Janice is an underwriter evaluating a new business submission for a general contractor. She needs additional information about the type of projects that the company usually is involved in and the contract wording that is typically used. Which one of the following stakeholders should Janice ask to assist her with this information? Select one: A. An information technology expert B. The producer C. An external construction expert D. The claims representative

B. The producer

Anita is an experienced insurance underwriter with a heavy workload. At times producers consider her behavior to be aggressive, rather than assertive. Which one of the following is an example of aggressive behavior? Select one: A. Refusing to offer higher property limits on a building due to the lack of reinsurance availability B. Threatening to decline an account because the producer did not provide all of the required information with the original submission C. Declining to quote an account based on its poor loss experience and declining financial conditions. D. Requiring up to 7 days to make a decision on an account after the necessary information has been received

B. Threatening to decline an account because the producer did not provide all of the required information with the original submission

If an account is experienced rated, for which of the following reasons might an underwriter have to contact the prior carrier? Select one: A. To establish a safety program for the account B. To confirm or update the loss history provided by the insured C. To appoint a risk manager for the account D. All the above

B. To confirm or update the loss history provided by the insured

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? Select one: A. To evaluate Sherman's liquidity position B. To screen the loan as acceptable or unacceptable C. To estimate Sherman's next year's total interest expense D. To forecast Sherman's upcoming year's net income or loss

B. To screen the loan as acceptable or unacceptable

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? Select one: A. We cannot issue policies if the application is incomplete. You neglected to complete the section on alarm systems. Please advise. B. 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. C. Can I assume that there is no alarm system in this house because you left that section of the application blank? D. Please advise whether there is any sort of alarm system in the home.

B. 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.

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 A. specify policy terms and conditions B. constrain insurers' ability to accept, modify, or decline loss exposures C. restrict the timing and conditions of coverage cancellations and nonrenewals D. limit allowable classifications

B. constrain insurers' ability to accept, modify, or decline loss exposures

Tobias, a successful producer with Barnley's Insurance Company, is struggling with an intricate quote on homeowners coverage for his insured, Hanna. Hanna not only has substantial collections of guns and silverware, but also has a small farm located at her premises. Which one of the following individuals from Barnley Insurance Company could provide assistance and support to Tobias? A. corporate underwriter B. field underwriter C. claims representative D. actuary

B. field underwriter

For underwriting to achieve its purpose, A. underwriter must select applicants with legal hazard B. insurers must minimize the effect of adverse selection of 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 effect of adverse selection of the book of business

Which of the following statements is correct with respect to rate regulation? A. it seeks to achieve actuarial equity, often to the detriment of social equity B. it seeks to ensure that the rates for each class are adequate , fair, and not excessive C. It generally will not influence underwriters' preferences in terms of risk selection. D. It allows using race, religion, and national origin as rating variables if loss experience differs based on these characteristics.

B. it seeks to ensure that the rates for each class are adequate , fair, and not excessive

An insurer receives two automobile insurance applications. The first applicant is safe 35, male, and has a clean driving record. The second applicant is age 35, female, has had three speeding violations and 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? A. the insurer must charge both applicants the same premium to remain compliant with regulations regarding unfair discrimination B. regulations allow the insurer to charge more for insureds with poor driving experience C. whether or not the insurer is unfairly discriminating depends on the type of vehicle each applicant drives D. the insurer is unfairly discriminating because it is charging different premium for males and females is the same age group

B. regulations allow the insurer to charge more for insureds with poor driving experience

Which one of the following statements is correct with respect to market conduct examinations? A. they analyze only the underwriting and claims aspects of an insurer's operations B. they protect both insurers and consumers from unfair insurer practices C. they are conducted only in response to a consumer complaint D. they are performed by the national association of insurance commissioners

B. they protect both insurers and consumers from unfair insurer practices

Joe Ableman claims that he was an employee of General Corporation and therefore entitled to workers compensation benefits from General Corporation and its insurer. General Corporation, however, claims that Joe Ableman was never an employee but was rather an independent contractor.Which of the following statements by Joe Ableman might enable him to make his case? Select one: A. "General Corporation was the company at which I did most of my work." B. "General Corporation did not try to supervise my activities but rather let me do what I thought was best to complete the job." C. "General Corporation sent me a paycheck every two weeks." D. "General Corporation once sued me for breach of contract when they were unsatisfied with my work."

C. "General Corporation sent me a paycheck every two weeks."

Alpha Insurance Company (AIC) has incurred automobile insurance losses of $6 million and earned exposure units of 120,000 car-years. The company's expenses total $840,000. AIC's management wants to include a factor for profits and contingencies of five percent. Using the pure premium ratemaking method and rounding to the nearest whole dollar, which one of the following represents the rate per exposure unit that AIC needs to charge for automobile insurance? Select one: A. $42 B. $55 C. $60 D. $77

C. $60. $60 represents the rate per exposure unit that AIC needs to charge for automobile insurance. Pure premium = $6 million / 120,000 car years = $50. The expenses of $840,000 / 120,000 earned exposure units = $7. Then the rate per exposure with 5% profit and contingency factor = ($50+$7) / (1-0.05) = $60

Insurance Company (IC) reports the information below for its automobile insurance line. Using the pure premium ratemaking method, which one of the following is the rate per exposure unit, rounded to the nearest dollar, for IC's automobile line of business? Incurred losses:$5 million Earned car-years:100,000 Expenses:$1.3 million Profit and contingencies factor:5% Earned premiums:$6.2 million Select one: A. $25 B. $49 C. $66 D. $81

C. $66 The rate per exposure unit for IC's automobile line of business is $66, calculated as ($5MM/100,000) plus (1,300,000/100,000) =$63; $63/(1-.05) = $66.

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% Select one: 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

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? Select one: 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.

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: Select one: A. Large buildup of inventory B. Lower rating than previous listing C. An account's propensity to report claims D. Debt in excess of net worth

C. An account's propensity to report claims

An insurance company decided to reunderwrite its book of homeowners insurance policies. The first step in the reunderwriting process is to Select one: A. Implement corrective actions. B. Select corrective actions. C. Analyze the book of business. D. Identify problems.

C. Analyze the book of business.

Amelia is a commercial property underwriter in Boston. She is working on a large new business submission with two locations in California. She decided to consult an external expert due to her concerns about wildfire exposure. Amelia can use the knowledge gained from the external wildfire expert to do all of the following, EXCEPT: Select one: A. Understand how the expert's information relates to her organization's objectives and concerns B. Translate the expert's concerns into language that can be understood by internal stakeholders C. Become an internal wildfire expert at her organization D. Decide if the information will affect the insurance policy and pricing

C. Become an internal wildfire expert at her organization

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? Select one: A. Dun & Bradstreet Report B. Fire Protection Handbook C. Best's Underwriting Guide D. Scopes Manual

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? Select one: A. Neither company is close to being profitable. B. Sandford Co. is more profitable than Burkhart Co. 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.

Prudence of operations indicates an organization's ability to Select one: A. Develop basic techniques and expertise. B. Perform services expected of a legitimate business organization. C. Conduct its operations within the limits of its capabilities. D. Accomplish its goals within a range of specific measurements.

C. Conduct its operations within the limits of its capabilities.

The purpose of reunderwriting is to Select one: A. Identify profitable opportunities in markets the company does not currently serve. B. Determine if insureds are making adequate use of loss control. C. Correct results in a book of business that are not achieving profitability goals. D. Measure the productivity of an insurer's underwriting department.

C. Correct results in a book of business that are not achieving profitability goals.

Lily is a large account underwriter for XYZ Insurance. The insurer is concerned about its exposure to emerging risks such as climate change, cyber risk, and resource management. Lily has been asked to be part of a team evaluating the exposures and reviewing policies written by XYZ Insurance to make sure that they are providing, or excluding, the exposures as intended. Lily's familiarity with which one of the following aspects of the insurance market would make her a valuable member of this team? Select one: A. Data analysis B. Risk management C. Coverages and the policy wording D. Market segmentation

C. Coverages and the policy wording

Which one of the following ratios can be used to assess the extent of an organization's debt financing compared to other organizations in the same industry? Select one: A. Debt-to-assets ratio B. Current ratio C. Debt-to-equity ratio D. Acid-test ratio

C. Debt-to-equity ratio

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 Select one: A. Disclosure. B. An insurance rescission. C. Declination D. An act of unfair discrimination

C. Declination

Josh received an all lines submission for a manufacturing risk that seemed to have severe exposure for multiple lines. He had limited knowledge of the industry, so he decided to consult with an external expert. After gaining additional knowledge from the subject-matter expert, Josh decided to decline the submission for all lines. This is an example of an underwriter using an external stakeholder to help do which one of the following? Select one: A. Forecast potential losses B. Translate concerns to internal shareholders C. Determine the appropriate treatment technique D. Provide data for predictive modeling

C. Determine the appropriate treatment technique

An underwriter concerned with an account's growth potential and ability to pay future premiums should use which one of the following external sources? Select one: A. Account's Web site B. Insurance Services Office's Premium Audit Advisory Service C. Dun & Bradstreet report D. Marshall & Swift evaluation

C. Dun & Bradstreet report

A proprietor of a small-scale operation proprietorship is Select one: A. Entitled to all the profits and responsible for a portion of liabilities. B. Entitled to all the profits and is not responsible for any liability. C. Entitled to all the profits and responsible for all liabilities. D. Entitled to a portion of the profits and responsible for all liabilities

C. Entitled to all the profits and responsible for all liabilities.

Underwriters closely examine loss frequency and severity. Which of the following statements is (are) true regarding frequency and severity? Select one: A. Severity refers to the number of losses over a particular period. B. Severity is usually a better indicator of future loss experience. C. Frequency is usually controllable. D. All of the above

C. Frequency is usually controllable.

Which one of the following external sources of underwriting information should be used to confirm information, rather than as a primary source of the underwriting decision? Select one: A. Dun & Bradstreet reports B. Motor vehicle reports C. Insureds' websites D. Court records

C. Insureds' websites

Which one of the following is a major purpose of the statement of cash flows? Select one: A. It is used by insurance brokers to balance daily bank deposits. B. It is used by middle management to assess future resource needs. C. It is used to assess an organization's need for additional financing. D. It is used in the cash allocation process by line managers

C. It is used to assess an organization's need for additional financing.

One of the types of rates used by underwriters to price insurance is judgment rates. Which one of the following is true regarding judgment rates? Select one: A. Judgment rates are typically used by property underwriters. B. Judgment rates are usually developed by ISO field representatives. C. Judgment rates are developed by reviewing individual account characteristics. D. Judgment rates are used to support exposures with substantial loss experience.

C. Judgment rates are developed by reviewing individual account characteristics.

Wrap-ups are risk management programs specifically designed for Select one: A. Financial conglomerates. B. Schools and municipalities. C. Large construction projects. D. Institutional exposures

C. Large construction projects.

Insurer B proudly pays 90 percent of its claims in 90 days. Besides the typical claim costs, Insurer B pays a substantial amount of salary dollars to in-house claims adjusters. These salary dollars are an example of Select one: A. Contingency loading. B. Pure premium expenses. C. Loss adjustment expenses. D. Loss cost components

C. Loss adjustment expenses.

Which one of the following types of organizations is most likely to experience the greatest risk of threats to operations and supply chains? Select one: A. Financial institutions B. Educational institutions C. Manufacturing organizations D. Health care providers

C. Manufacturing organizations

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 cost effective source of this information? Select one: A. Another underwriter B. Risk control representative C. Marketing representative D. Claims representative

C. Marketing representative

Michael has received an email from the underwriter requesting additional information for his recent new business submission for a contractor. Due to the hazardous nature of the operations, the underwriter has requested that Michael provide currently valued loss runs for the past 6 years. Michael has made numerous attempts, but is only able to secure general liability loss runs for the latest 4 years because the prior insurer is no longer in business Which one of the following is the best way for Michael to try to resolve the conflict with the underwriter? Select one: A. Michael should confront the underwriter and state that other underwriters only require 4 years of losses. B. Michael should promise that he will keep trying to get the loss runs even though he knows that they are not available. C. Michael should meet with the underwriter and explain the obstacle he is facing with the general liability loss runs. D. Michael should threaten the underwriter that he will not send any more submissions due to the unreasonable requests for information.

C. Michael should meet with the underwriter and explain the obstacle he is facing with the general liability loss runs.

In their reunderwriting of their businessowners policies (BOPs), LMN Insurance Company noted that many of their insureds exhibited a lax attitude towards loss control. The Vice President of Underwriting speculated that these insureds were indifferent to loss because if a loss occurred, the loss would be paid by LMN. This indifference to loss which increases the chance of loss is called Select one: A. Moral hazard. B. Adverse selection. C. Morale hazard. D. Information asymmetry.

C. Morale hazard.

Michelle is an underwriting manager for LI Insurance. When she is interviewing candidates for an underwriting position with her organization, she looks for certain core skills. Which one of the following skills will help an underwriter resolve issues to the benefit of everyone involved? Select one: A. Active listening B. Communication C. Negotiation D. Persuasion

C. Negotiation

Underwriters use insurance applicants' financial and credit analysis reports as indicators of all of the following, EXCEPT: Select one: A. Ability to pay premiums B. Moral and morale hazards C. Potential for future automobile accidents D. Financial strength and soundness of management

C. Potential for future automobile accidents

In ratemaking, the component included to pay future claims and loss adjustment expenses is referred to as Select one: A. Projected settlement expense. B. The claims and contingencies factor. C. Prospective loss costs. D. The expense provision.

C. Prospective loss costs.

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

C. Rate adequacy

Owners' equity represents the capital contributed by an organization's owners plus the organization's Select one: A. Treasury stock. B. Net worth. C. Retained earnings. D. Net assets.

C. Retained earnings.

Which one of the following statements about using nonrenewal as a reunderwriting corrective measure is true? Select one: A. Nonrenewal means that unprofitable policies are immediately canceled. B. Nonrenewal is an illegal market action in most states. C. State law may restrict or limit an insurer's ability to use nonrenewal. D. Ordering nonrenewal of a group of polices immediately curtails losses from these policies.

C. State law may restrict or limit an insurer's ability to use nonrenewal.

The amount needed to pay future claims and loss adjustment expenses is Select one: A. Determined collectively by all insurers within a market based on shared loss data. B. Specified by state insurance regulators based on accumulated data from all insurers operating in the state. C. Supplied by advisory organizations or developed by insurers with large enough pools of loss data. D. Easily determined by any insurer based on that insurer's claims costs for the previous year.

C. Supplied by advisory organizations or developed by insurers with large enough pools of loss data.

Once an insurance rate is calculated, it is multiplied by which one of the following to produce a premium? Select one: A. The expense factor. B. The desired policy limits. C. The appropriate number of exposure units. D. The pure premium.

C. The appropriate number of exposure units.

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? Select one: 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. Debt-to-equity ratio = Long-term debt ÷ shareholders' equity. $1.5 million ÷ $3 million = .50. The company is mostly financed by equity.

Which one of the following statements about an underwriting audit is true? Select one: A. An underwriting audit is usually conducted by an outside firm. B. As underwriting guidelines determine whether commercial applicants are accepted or rejected, the judgment of commercial underwriters is not examined as part of the audit. C. The performance of individual underwriters may be examined as part of the audit. D. Typically, every policy is reviewed as part of the audit.

C. The performance of individual underwriters may be examined as part of the audit.

Which one of the following statements regarding motor vehicle reports (MVRs) is true? Select one: A. They are primarily used in personal lines auto underwriting. B. They can be relied upon to be accurate and complete. C. They are particularly useful in predicting an account's future losses. D. They are not used as an outside source of information for contractors equipment.

C. They are particularly useful in predicting an account's future losses.

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

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

All of the following are reasons that an underwriter might want to obtain information in addition to the application, EXCEPT: Select one: A. To collect missing information B. To verify information C. To postpone a decision D. To investigate conflicting information

C. To postpone a decision

Philip received a new business submission from producer Jane. After reviewing the submission, Philip sent an email to Jane requesting the additional information that he will need to underwrite the account. Philip's email takes place in which one of the following phases of the communication process? Select one: A. Confrontation B. Interpretation C. Transmission D. Resolution

C. Transmission

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

C. Unrealized gains on securities available for sale.

All of the following are characteristics of independent contractors, EXCEPT: Select one: A. An independent contractor works under a contract in which one party promises a certain sum of money in return for the other party's performance of work. B. Independent contractors are not subject to direction and control regarding the details of the work. C. When an independent contractor's work is unsatisfactory, the usual recourse is to discharge the contractor. D. Independent contractors often provide a service involving some measure of specialization.

C. When an independent contractor's work is unsatisfactory, the usual recourse is to discharge the contractor.

Which one of the following factors would be an indication of an employer-employee relationship, rather than an independent contractor? Select one: A. Worker can hire others to complete the job B. Worker has ability to have profit or loss from job C. Worker receives benefits D. Worker invests in tools/equipment

C. Worker receives benefits

The most important thing a field underwriter does is A. managing the risk selection process B. securing and maintaining treaty reinsurance C. evaluating new submissions and renewal underwriting D. conducting education and training

C. evaluating new submissions and renewal underwriting

Which one of the following types of emerging technology allows risk management team to continuously monitor job sites, manufacturing facilities, vehicle performance, and employees' proximity to hazardous work areas? A. third-party databases B. machine learning C. sensors and telematics D. data mining

C. sensors and telematics

Joe Ableman claims that he was an employee of General Corporation and therefore entitled to workers compensation benefits from General Corporation and its insurer. General Corporation, however, claims that Joe Ableman was never an employee but was rather an independent contractor.Which of the following statements by General Corporation might enable it to make its case? Select one: A. "Ableman was paid regular wages because the work he performed was ongoing." B. "Ableman needed his work supervised so that he would achieve the results we wanted." C. "Ableman understood that we wanted him to work exclusively for us because we have a need for his skills." D. "Ableman was paid when the job was done and the work performed was satisfactory."

D. "Ableman was paid when the job was done and the work performed was satisfactory."

Using the pure premium ratemaking method with a five percent profit and contingencies factor, Insurer C's pure premium is $45. Its cost of issuing a policy and collecting the premium, is $2.50 per car-year regardless of Insurer C's premium size, rating class, or rating territory. Its other underwriting expenses such as commissions and premium tax, vary by premium size. Insurer C's variable expense equal 10 percent of the final premium. The rate per exposure unit rounded to the nearest dollar would be Select one: A. $41. B. $45. C. $51. D. $56

D. $56 The rate per exposure unit rounded to the nearest dollar would be $56. The rate per exposure unit = (Pure Premium $45 + Fixed expenses per unit $2.50) / (1 - Variable expense percentage of 0.10 - Profit and contingencies of 0.05)

Given the following data and using the loss ratio ratemaking method, calculate the insurance rate change (rounded). Expected loss ratio 63% Actual loss ratio55% Incurred losses $600,000 Earned premium $1,250,000 Expenses45% Select one: A. 7% B. 15% C. -8% D. -13%

D. -13% The insurance rate change is -13 percent, equal to (the actual loss ratio - expected loss ratio) / expected loss ratio. (55-63)/63 = -13%

Due to poor loss experience in its product liability line of insurance, an insurer wants to adjust its current insurance rates. The insurer's actual loss ratio is 45 percent and the expected loss ratio is 40 percent. Using the loss ratio ratemaking method, which one of the following represents the indicated rate change? Select one: A. 12.5% decrease B. 5.0% decrease C. 5.0% increase D. 12.5% increase

D. 12.5% increase Using the expected loss ratio method, the indicated rate change is calculated by taking the actual loss ratio minus the expected loss ratio, and dividing the difference by the expected loss ratio. (45% - 40%) / 40% = 12.5%

Using trend analysis, an underwriter calculates the percentage change in certain items over time. If ABC Company's sales increased from $20 million in 20X5 to $35 million in 20X6, what is the percentage change? Select one: A. 18% B. 34% C. 43% D. 75%

D. 75% [(35-20)/20]*100 = 75%

Insurer A has calculated its actual loss ratio to be 54 percent. The expected loss ratio was 60 percent. Using the loss ratio ratemaking method, which one of the following statements is true? Select one: A. A 6 percent rate increase is indicated. B. A 10 percent increase in rates is indicated. C. A 6 percent rate decrease is indicated. D. A 10 percent decrease in rates is indicated.

D. A 10 percent decrease in rates is indicated. A 10 percent decrease in rates is indicated, calculated as the actual loss ratio minus the expected loss ratio, divided by the expected loss ratio.

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? Select one: A. Adding the Building Owner Loss Payable provision to the building owner's property policy B. Adding the roofing contractor as an additional insured to the building owner's liability policy C. A separate owners and contractors protective liability policy in the name of the roofing contractor D. A separate owners and contractors protective liability policy in the name of the building owner

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

One objective of a new business review as part of the reunderwriting process is to determine if those insureds who have the greatest probability of loss are those who have purchased insurance. This tendency, higher-than-average risks seeking insurance at the average price, is called Select one: A. Morale hazard. B. The underwriting cycle. C. Moral hazard. D. Adverse selection.

D. Adverse selection.

Which of the following statements regarding the role of the producer in underwriting an account is (are) true? Select one: A. With first-hand knowledge of the account, the producer can answer many questions for the underwriter. B. The extent of the producer's familiarity with the prospect influences the credibility of the information on the application. C. Producers should understand the type of accounts the insurer prefers, as well as the insurer's underwriting guidelines. D. All of the above

D. All of the above

All of the following are guidelines for effective communication, EXCEPT: Select one: A. Understand the purpose of the message B. Avoid using jargon C. Stick to the point and be concise D. Avoid setting timelines and deadlines

D. Avoid setting timelines and deadlines

Which one of the following describes a section of the statement of cash flows? Select one: A. Cash flows from net premium activities B. Cash flows from equity activities C. Cash flows from sales activities D. Cash flows from financing activities

D. Cash flows from financing activities

Generally, the rate that is applied to individual accounts is determined primarily by the account's Select one: A. Size. B. Premium base. C. Number of exposure units. D. Classification

D. Classification

Common size statements are frequently used during vertical analysis. Which one of the following is true regarding common size statements? Select one: A. Common size statements typically use a competitor's or industry average as the base amount for percentage calculations. B. Common size statements can be used to show percentage increases or decreases in figures over time. C. Common size statements are not able to account for inflation when analyzing figures over time. D. Common size statements are good for inter-company comparisons because they correct for differences in company size

D. Common size statements are good for inter-company comparisons because they correct for differences in company size

Cost of goods sold appears on the income statements of manufacturing and retail entities. Which one of the following statements best describes cost of goods sold? Select one: A. Cost of goods sold calculation adds ending inventory and subtracts beginning inventory from purchases. B. Cost of goods sold is equal to a percentage of purchases made by the entity during the year. C. Cost of goods sold expenses inventory evenly throughout the year. D. Cost of goods sold reports expenses after an inventory item is sold.

D. Cost of goods sold reports expenses after an inventory item is sold.

Lori is a commercial lines underwriter for BB Insurance. While the underwriting process has become increasingly automated, Lori tries to make an effort to ensure that businesses are properly classified. Proper classification affects Select one: A. Sales and commissions. B. Loss frequency and severity. C. Risk exposures and controls. D. Coverage and premiums.

D. Coverage and premiums.

The state advisory organization has developed a new homeowners form which increases the personal property limits for guns, silverware, jewelry, and boats. Jancy insurance company is considering modifying the form for its own use. Which one of the following members of Jancy's staff would be involved in the research and development of this new form? A. Herve, the claims manager B. Clara, the underwriting manager C. Antonia, the accounting manager D. Emma, the corporate underwriter

D. Emma, the corporate underwriter

A rating plan that adjusts the insured premium for savings in insurance company commissions is called Select one: A. Rebating. B. Experience. C. Participating. D. Expense modification

D. Expense modification

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

D. Guarding against adverse selection

Greg is a commercial underwriter for LMNO Insurance. He and Bill, a friend in the claims department, had been talking about how small retail business owners are always so surprised and upset when they learn that a loss they experienced is not covered. They decided to work with a data analyst to determine the most frequent coverage gaps experienced by this group. Greg is now working with a multi-departmental team to develop an insurance product for small retail businesses that will include some of these previously omitted coverages. This is an example of an underwriter adding value to his organization by doing which one of the following? Select one: A. Improving time management B. Evaluating competitors' products and services C. Taking on the role of a production underwriter D. Identifying market segments that are being underserved

D. Identifying market segments that are being underserved

Which one of the following skills/tools helps an underwriter add value to service provided to customers and insurers? Select one: A. Persuasion B. Communication C. Automation D. Innovation

D. Innovation

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? Select one: A. Applicant's Web site B. Financial reporting services C. Government reports D. Insurance advisory organizations

D. Insurance advisory organizations

An underwriter is reviewing an ACORD Commercial Insurance Application which indicates that coverage has been declined, canceled, or nonrenewed during the past three years. Which one of the following reasons would be least relevant to the current underwriting decision? Select one: A. Nonpayment of premium B. Loss experience C. Failure to implement risk control recommendations D. Insurer's withdrawal from state

D. Insurer's withdrawal from state

An underwriter's ratio analysis of a company reveals ratio results that are significantly better than expected. The underwriter believes that their results reflect a management decision to sacrifice long-term profitability and growth for short-term profitability. Which one of the following decisions would reflect such a sacrifice? Select one: A. Investment in strong employee training B. Investment in too many risk-free investments C. Investment in a strong employee benefits plan D. Investment in overly risky investments

D. Investment in overly risky investments

Wrap-ups have proven to be a cost-effective and efficient approach to handling insurance needs for Select one: A. Financial institutions. B. Government sponsored projects. C. Real estate management companies. D. Large construction projects.

D. Large construction projects.

The expenses associated with adjusting claims are referred to as Select one: A. Operating expenses. B. Prospective loss costs. C. Claims costs. D. Loss adjustment expenses.

D. Loss adjustment expenses.

The "bottom line" of an income statement shows the organization's Select one: A. Capital gains. B. Capital expenses. C. Net revenues. D. Net income.

D. Net income.

Insurance payments in excess of the amount of the loss are unlikely under property policies because Select one: A. Every property policy contains a limit of liability. B. Payment in excess of the loss would violate the principle of indemnity. C. Insureds generally do not file claims in excess of the amount of the loss. D. Property policies permit recovery only to the extent of each party's insurable interest

D. Property policies permit recovery only to the extent of each party's insurable interest

When underwriters want someone other than the producer submitting an application to make a physical inspection of an account, they usually Select one: 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

Mega Steel Inc. is looking to purchase workers compensation coverage for its 10,000 employees. Despite having an inconsistent loss history, Mega Steel has recently implemented some risk control measures that it believes will lead to fewer losses in the upcoming policy period. Which one of the following individual rating plans would be best for Mega Steel? Select one: A. Expense modification plan B. Experience rating plan C. Individual risk premium modification plan D. Retrospective rating plan

D. Retrospective rating plan

A deteriorating loss ratio led the Vice President of Underwriting at RST Insurance Company to order reunderwriting of RST property insurance policies. As part of the process, she ordered a report to analyze results of smaller segments of the business. This report is a snapshot at a given point in time that provides data on specific characteristics of the policies in the book of business. This report is called a(n) Select one: A. Special event review. B. Underwriting audit. C. New business review. D. Risk profile.

D. Risk profile.

Larry is a commercial lines producer at Regional Insurance Brokerage. For several years he has been trying to win a major local account, Omicron Industries. This year, the manager at Omicron has given Larry the opportunity to quote on the company's coverage. Larry knows what Omicron's current premiums are, and he feels he will need a premium that is at least five percent lower in order to win the account. Larry phones to present the account to Tanya, an underwriter at ABC Insurance. Tanya agrees that it is an attractive piece of business, but she feels that she cannot provide the same coverage that Omicron currently has at the five percent premium reduction Larry is looking for. Larry becomes frustrated, and the conversation begins to become confrontational. Which one of the following would be Tanya's best option under the circumstances? Select one: A. Tell Larry not to bother submitting an application since they clearly cannot agree on pricing the risk. B. Tell Larry that she will not continue to discuss the matter in a confrontational manner. C. Change her mind and write the policy at the lower premium level in order to maintain the relationship. D. Suggest deductible and coverage changes that would reduce the premium to the desired level.

D. Suggest deductible and coverage changes that would reduce the premium to the desired level.

For which one of the following types of insurance would the judgment method of ratemaking most likely be used? Select one: A. Workers compensation coverage B. Crime coverage C. Professional liability coverage D. Terrorism coverage

D. Terrorism coverage

Bob's Manufacturing has been in business for one year. Which one of the following is true regarding Bob's year-end financial statements? Select one: A. Change in cash on the statement of cash flow will be $0. B. The fact that there are no prior year reports will have no impact on the financial statements. C. Cash on the balance sheet will be shown as $0. D. The beginning balance on the statement of changes in shareholders' equity will show as $0.

D. The beginning balance on the statement of changes in shareholders' equity will show as $0.

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? Select one: A. The company is very profitable. B. The company has adequate working capital. C. The company's assets are financed mostly through shareholder's equity. D. The company's assets are financed mostly through debt

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

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 Select one: A. The loss adjustment expenses. B. The pure premium. C. Modified premium expenses. D. The expense provision

D. The expense provision

In financial statement analysis, leverage ratios measure which one of the following? Select one: A. How well a company manages and uses its assets B. A company's ability to control costs and earn profits C. A company's ability to fund the liabilities it owes D. The extent to which a company has borrowed money

D. The extent to which a company has borrowed money

Liquidity ratios are used to determine a company's ability to pay off its short-term debts. Typically, the higher the value of the ratio, Select one: A. The smaller the margin of safety the company possesses to cover its short-term debts. B. The larger the amount of long-term debt the company has incurred. C. The smaller the amount of long-term debt the company has incurred. D. The larger the margin of safety the company possesses to cover its short-term debts.

D. The larger the margin of safety the company possesses to cover its short-term debts.

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 Select one: A. The balance of the company's net receivables increased by 2 percent. B. The company's net sales increased by 2 percent. C. The company efficiency has decreased by 2 percent. D. The percentage of net receivables to total assets increased by 2 percent

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

All of the following are common profitability measures used in ratio analysis, EXCEPT: Select one: A. Net profit margin B. Return on assets C. Return on equity D. Turnover of assets

D. Turnover of assets

Which one of the following statements is correct with regard to state regulation and the underwriting function? Select one: A. Insurance regulation is broad and general rather than being focused on specific operational functions. B. Underwriting regulation cannot ensure that underwriters do not adversely affect other insurer operations. C. Underwriting regulation generally has no impact on an insurer's other functional areas. D. Underwriters are affected by rate regulation, solvency regulation, and auto insurance laws.

D. Underwriters are affected by rate regulation, solvency regulation, and auto insurance laws.

In underwriting an account, all of the following statements are true, EXCEPT: Select one: A. Underwriters need to be familiar with the rating process for individual rating plans. B. Underwriters need to have a working knowledge of rates and rate levels for specified classes. C. Underwriters should ensure that each account is properly classified. D. Underwriters need to be familiar with the rate applicable to each classification.

D. Underwriters need to be familiar with the rate applicable to each classification.

An insurer's comprehensive income includes Select one: A. The insurer's completed balance sheet. B. Listings of salaries of key employees. C. Any dividends paid to stockholders. D. Unrealized gains and losses on securities.

D. Unrealized gains and losses on securities.

Which one of the following types of analysis helps an underwriter identify abnormal values reported by an organization? Select one: A. Ratio analysis B. Historical analysis C. Trend analysis D. Vertical analysis

D. Vertical analysis

A group of policies with common characteristic, such as a territory or type of coverage, or all policies written by a particular insurer, producer, or agency is referred to as A. a policy group B. a line of business C. a coverage pool D. a book of business

D. a book of business

As a commercial lines underwriter, William would spend many hours reviewing and summarizing the loss runs that were part of a new business application. He can now rely on a computer to digitalize and summarize those loss runs. This is an example of how underwriting has been transformed by which of the following advancements in technology? A. wireless sensor networks B. internet of things C. smart products D. machine learning

D. machine learning

rate

The price per exposure unit for insurance coverage

DuPont Indentity

an analysis of ROA and ROE by breaking them down into their component ratios

corporation

an entity organized under law and entitled to the same rights as a person, distinct from its owners

Subcontractor (specialty contractor)

an independent contractor who specializes in a particular kind of work and who is engaged by a general contractor to perform a particular portion of the general contractor's contract

shareholder

an individual owner whose liability is limited to his or her investment in the corporation

notification requirements

regulatory requirements relating to timing and contents of an insurers notice to an insured of the declination, termination and nonrenewal of insurance coverage

consideration

something of value of bargained for and exchanged by the parties to a contract

Premium-to-surplus ratio, or capacity ratio

A capacity ratio that indicates an insurer's financial strength by relating net written premiums to policyholders' surplus

Morale hazard (attitudinal hazard)

A condition of carelessness or indifference that increases the frequency or severity of loss.

moral hazard

A condition that increases the likelihood that a person will intentionally cause or exaggerate a loss.

endorsement

A document that amends an insurance policy.

Experience modification factor

A factor that tailors manual rates to an insured's experience based on the insured's payroll and loss record of certain prior years.

common-size statement

A financial statement in which amounts are reported as a percentage of a base figure

book of business

A group of policies with a common characteristic, such as territory or type of coverage, or all policies written by a particular insurer or agency.

application

A legal document that provides information obtained directly from an applicant requesting insurance and that an insurer can use for underwriting and claim handling purposes.

vicarious liability

A legal responsibility that occurs when one party is held liable for the actions of a subordinate or associate because of the relationship between the two parties.

loss history

A listing of past claims, including the date of occurrence, the line of business, the type or description of the claim, the date of the claim, the amount paid, the amount reserved, and the claim's current status.

loss ratio method

A method for determining insurance rates based on a comparison of actual and expected loss ratios

Judgement ratemaking method

A method for determining insurance rates that relies heavily on the experience and knowledge of an actuary or an underwriter who makes little or no use of loss experience data

Actual Cash Value

A method in valuing property that is calculated as the cost to replace or repair property minus depreciation, the fair market value, or a valuation determined by the broad evidence rule.

internet of things (IoT)

A network of objects that transmit data to each other and central hubs through the internet.

loss payee

A party entitled to share in whatever loss payment an insured receives.

employee

A person hired to perform services for another under the direction and control of the other party, called the employer.

named insured

A person, corporation, partnership, or other entity identified as an insured party in an insurance policy's declarations page.

predictive modeling

A process in which historical data based on behaviors and events is blended with multiple variables and used to construct models of anticipated future outcomes.

retrospective rating plan

A rating plan that adjusts the insured's premium for the current policy period based on the insured's loss experience during the current period; paid losses or incurred losses may be used to determine loss experience.

individual risk premium modification plan (IRPM)

A rating plan that allows underwriters to modify property premiums based upon specific risk characteristics not reflected in the class rate.

schedule rating plan

A rating plan that awards debits and credits based on specific categories, such as the care and condition of the premises or the training and selection of employees, to modify the final premium to reflect factors that the class rate does not include.

experience rating plan

A rating plan that increases or reduces the premium for a future period based on the insured's own loss experience for a period in the recent past.

Large deductible plan

A rating plan whereby the insured assumes a substantial per accident or per occurrence deductible, generally ranging from $100,000 up to $1 million.

rate manual

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

Paid loss retrospective rating plan

A retrospective rating plan in which the insured pays a deposit premium at the beginning of the policy period and makes additional payments, usually monthly, to reimburse the insurer for the insured's losses as they are paid and in which the total amount paid is subject to the minimum and maximum premium.

underwriting audit

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

wrap-up

A risk management program for large construction projects in which the sponsor selects coverages for all contractors and subcontractors working on the project, enabling participating contractors to reduce their bid by the cost of the coverage it provides.

affordability

A social goal of insurance that states that a ceiling placed on rates keeps coverage available so people can purchase it, that rates are determined so that they transfer a portion of the costs of coverage from high-risk insureds to the remaining insureds, or that a subsidy from outside the insurance mechanism offsets premiums that are deemed unaffordable.

catastrophe model

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

unincorporated association

A voluntary association of individuals acting together under a common name to accomplish a lawful purpose.

Market Conduct Examination

An analysis of an insurer's practices in four operational areas: sales and advertising, underwriting, ratemaking, and claim handling.

enterprise risk management

An approach to managing all of an organization's key business risks and opportunities with the intent of maximizing shareholder value.

general contractor

An independent contractor who obtains the primary contract for a project and either completes all the work or subcontracts portions (or all) of the work to other independent contractors who specialize in such work.

smart product

An innovative item that uses sensors; wireless sensor networks; and data collection, transmission, and analysis to further enable the item to be faster, more useful, or otherwise improved.

manuscript policy or manuscript endorsement

An insurance policy or endorsement that specifically drafted according to terms negotiated between a specific insured (or group of insureds) and an insurer.

termination

An insurer's cancellation of a policy during the policy term or nonrenewable of coverage at the end of a policy term.

declination

An insurer's refusal to provide coverage to an applicant who has made a written request to the insurer or its producer, or a producer's refusal to forward such a written request to an insurer.

security interest

An interest in property (real or personal) that allows the property to be sold on default to satisfy the debt for which the security interest was given.

insurable interest

An interest in the subject of an insurance policy that is not unduly remote and that would cause the interested party to suffer financial loss if an insured event occurred.

Cyber risk loss exposure

Any condition that presents the possibility of financial loss to an organization from property, net income, or liability losses as a consequence of advanced technology transmissions, operations, maintenance, development, or support.

Maja, who has 29 years of experience as a professional liability underwriter, works in the home office of Richley Insurance Company. Her primary responsibilities involve formulating underwriting policy and revising underwriting guides for various lines of professional liability insurance that will be used by personnel in the company's field offices. Maja is functioning as a A. field underwriter B. corporate underwriter C. chartered underwriter D. line underwriter

B. corporate underwriter

the principle purpose of underwriting is to A. decline to insure those applicants with risk of incurring a severe loss B. develop and maintain a profitable book of business for the insurer C. educate producers regarding the insurer's underwriting guidelines D. insure only those applicants with minimal or no loss exposure

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

in an effort to control its loss exposures, Furlong distributing uses a network of objects that transmit data to each other and to central hubs through the internet. This network is known as A. social media B. the internet of things C. artificial intelligence D. a big data network

B. internet of things

Corporate underwriters share research of the market responsibilities with actuarial and marketing departments. Research included an ongoing evaluation of which one of the following? A. revision of coverage forms B. optimal product mix in the book of business C. average loss ratio for a book of business D. the hit ratios by underwriter

B. optimal product mix in the book of business

Which one of the following statements in correct with regard to regulation and insurers' operations? A. financial responsibility laws generally have no effect on the underwriting function B. solvency regulation indirectly influences underwriting by limiting new business for insurers C. misclassification of current risks will not affect the accuracy of future rates D. regulation of underwriting practices helps insurers remain solvent but is not expected to minimize claims

B. solvency regulation indirectly influences underwriting by limiting new business for insurers

Which one of the following is the primary reason that governments seek to prevent insurer insolvency through underwriting regulation? A. to encourage competition thereby preventing any single insured from becoming too large B. to prevent insureds from being left without coverage and suffer great financial loss C. to ensure that insurers pay all required state taxes and fees D. to protect the financial security of insurers' investors and shareholders

B. to prevent insureds from being left without coverage and suffer great financial loss

While developing goals for its book of business, an insurer's corporate underwriter decides to increase its market share of workers compensation insurance in the construction industry. This type of underwriting activity in known as A. developing underwriting guides B. reviewing and revising rating plans C. formulating underwriting policy D. providing assistance to policyholders

C. formulating underwriting policy

With advancements in technology, underwriting data is becoming increasing abundant and more reliable. These technological advancements changed underwriting in which one of the following ways? A. underwriters are spending less time cultivating relationships and trust with insureds B. insurers are ceding more business to reinsurers C. more insurers are turning to automated systems D. underwriters are spending more time collecting and evaluating data

C. more insurers are turning to automated systems

during a mid-year review of one of her large accounts, Annette noticed that the frequency and severity of auto losses had been trending downward over the past 18 months. When she consulted with the account's risk management team, she learned that the insured had installed telematics devices in many of their vehicles. This information would help support Annette's decision to A. propose a premium increase at renewal time B. add a special endorsement to the policy C. propose a premium reduction at renewal time D. increase the physical damage deductible

C. propose a premium reduction at renewal time

Which one of the following is the most common use of predictive modeling in the underwriting of small commercial accounts? A. risk analysis B. risk selection C. rating D. coverage proposal

C. rating

Which one of the following tasks is the responsibility of a corporate underwriter as opposed to a field underwriter? A. prepare premium quotes B. verify policies are issued with appropriate forms and endorsements C. review and revise rating plans D. assist producers and insureds in determining appropriate coverage

C. review and revise rating plans

artificial intelligence (AI)

Computer processing or output that simulates human reasoning or knowledge

Which one of the following is the term used to refer to a situation that occurs because people with the greatest profitability of loss are the ones most likely to purchase insurance A. probable maximum loss B. spread of risk C. risk inconsistency D. adverse selection

D. adverse selection

Underwriters, in conjunction with ratemakers, help achieve actuarial equity by A. ensuring that all consumers have equal access to insurance at affordable rate B. ensuring that rates are consistent and vary little amount insurers C. charing similar premiums for all risks that they agree to insure D. assigning insureds with similar characteristics to the same rating class

D. assigning insureds with similar characteristics to the same rating class

underwriters can best minimize the effects of adverse selection by A. accepting all applicants that are submitted by the producer B. choosing to insure only those risks with a high profitability of loss C. rejecting applicants who have had prior losses D. carefully selecting the applicants whose loss exposures they are willing to insure

D. carefully selecting the applicants whose loss exposures they are willing to insure

which one of the following will draft a manuscript policy or endorsement that is worded to address the specific needs of the insured? A. producer B. field underwriter C. underwriting supervisor D. corporate underwriter

D. corporate underwriter

Jane is regional manager for Goshen Mutual. The retention rate for her region's commercial auto book has dropped by 10% over the last 18 months. Jane has asked an IT specialist to help her determine common characteristics among the accounts that are renewing, those that are not renewing, and those that are most profitable. She is also trying to determine if there is a common reason wby accounts are not renewing. Which one of the following forms of analysis will the IT specialist use to help Jane focus on improving her auto retention? A. internet of things B. smart products C. predictive modeling D. data mining

D. data mining

An insurance company must have adequate policyholders' surplus if it wishes to A. avoid adverse selection B. generate premiums that exceed losses C. produce profitable business D. increase its written premium volume

D. increase its written premium volume

Victor, the sales manager for Hallbinger's Insurance Company, wants the company to grow in written premium. He wants his agents to write more auto and homeowners business. In order to do so, the company must have adequate capacity. Which one of the following impacts Victor's agents and the company the most concerning surplus and capacity? A. sales must submit business with 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

adverse selection

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

Deep Learning

Insights into data use and processing gained by combining artificial intelligence and machine learning. It is based on algorithms derived from artificial neural networks.

fixed assets

Resources that cannot be expected to be sold or consumed within the business's normal operating cycle and that are usually considered to be long lived.

big data

Sets of data that are too large to be gathered and analyzed by traditional methods.

capacity

The amount of business an insure is able to write, usually based on a comparison of the insurer's written premiums to its policyholder's surplus.

data mining

The analysis of large amounts of data to find new relationships and patterns that will assist in developing business solutions.

replacement cost

The cost to repair or replace property using new materials of like kind and quality with no deduction for depreciation.

Loss adjustment expense (LAE)

The expense that an insurer incurs to investigate, defend, and settle claims according to the terms specified in the insurance policy.

rebating

The practice of giving a portion of the producer's commission or some other financial advantage to an individual as an inducement to purchase the policy

underwriting

The process of selecting insureds, pricing coverage, determining insurance policy terms and conditions, and then monitoring the underwriting decisions made.

telematics

The use of technological devices to transmit data via wireless communication and GPS tracking.

policyholders' surplus

Under statutory accounting principles (SAP), an insurer's total admitted assets minus its total liabilities.

Professional Employer Organization (PEO)

a company that leases workers to small or medium sized client companies to supply the clients permanent workforce, making the client an indirect employer; these relationships create insurance implications related to employee status

partnership

a for-profit business entity jointly owned by two or more persons who share ownership and profits (or losses), although not necessarily on an equal basis

Sole Proprietorship

a form of business in which one person own the business assets and is personally liable for the business debts

Pure Premium Method

a method for calculating insurance rates using estimates of future losses and expenses, including a profit and contingencies factor

Independant Contractor

a person (or organization) hired to perform services without being subject to the hirer's direction and control regarding work details

simplicity

a social goal of insurance stating that a rate must be reasonably simple to develop and modify

availability

a social goal of insurance that states insurance is accessible to those who want or need it

class rate

a type of insurance rate that applies to all insureds in the same rating category or rating class

fee for service company

an independent contractor who specializes in loss control work and who is paid for each loss control survey performed

Expense modification

an insurance rating plan that modifies the expense portion of an insureds rate to reflect the actual cost of providing coverage to that insured

production underwriter

an insurer employee who works in the insurer's office in an underwriting position but also travels to visit and maintain rapport with agents and sometimes clients

Unfair Discrimination

applying different standards or methods of treatment to insureds who have the same basic characteristics and loss potential, such as charging higher-than-normal rates for an auto insurance applicant based solely on the applicant's race, religion, or ethnic background

Machine learning

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

contract of hire

the agreement between an employers and employee to assume an employment relationship from which both parties reasonably expect to derive some benefit; may be express or implied

pure premium

the average amount of money an insurer must charge per exposure unit in order to be able to cover the total anticipated losses for that line of business

General Accepted Accounting Principles (GAAP)

the common set of standards and procedures used in the preparation of financial statements to ensure consistency of presentation and reported results

Credibility Factor

the factor applied in ratemaking to adjust for the predictive value of loss data and used to minimize the variations in the rates that result from purely chance variations in losses

loss costs

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

premium

the price of the insurance coverage provided for a specified period

risk management

the process of making an implementing decisions that enable an organization to optimize its level of risk

pricing

the process of setting a price for a product or service and establishing the terms and conditions for the insurance agreement