FIL 355: Chapter 4 Quiz Questions

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

A. A book of business.

Aaron, a senior producer for Blithe Insurance Company (Blithe) has over 15 years experience in the field. He knows Blithe's underwriting guidelines and is familiar with the type of business Blithe wants. He takes pride in the loss ratio produced by his office and also produced by Blithe as a company. He often trains new agents in his office because of his low rejection ratio of applications he writes. He is known as a front-line underwriter for Blithe. Which one of the following is a benefit of Aaron's field underwriting? Choose one answer. A. Saves Blithe from having to evaluate accounts that they will ultimately reject B. Save Blithe training time spent on new underwriters C. Serves as a resource for Blithe on marketing climate D. Provides feedback to Blithe on underwriting procedures

A. Saves Blithe from having to evaluate accounts that they will ultimately reject

Which one of the following is an underwriting evaluation tool that uses Global Positioning System (GPS) tracking to collect and analyze data regarding driver behavior and vehicle use? Choose one answer. A. Telematics B. Predictive analytics C. Predictive modeling D. Catastrophe modeling

A. Telematics

At year end, Omicron Insurance Company (OIC) posted these results: Premiums written - $10,000,000 Premiums earned - 9,500,000 Underwriting expenses incurred -$4,000,000 Loss and loss adjustment expenses incurred - 5,700,000 Based on this information, which one of the following represents OIC's trade basis combined ratio? Choose one answer. A. 97% B. 100% C. 102% D. 110%

B. 100%

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

B. Composition of the insurer's book of business

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

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

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

B. Trade secrets.

A management control tool used to determine whether line underwriters are properly implementing underwriting policy is known as an underwriting Choose one answer. A. Process. B. Regulation. C. Audit. D. Guide.

C. Audit.

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

C. Avoid duplication of effort

Which one of the following ratios is considered the accepted financial measure of an insurer's underwriting performance? A. Retention ratio B. Expense ratio C. Combined ratio D. Success ratio

C. Combined ratio

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

C. Encode underwriting guidelines.

The focus of a line underwriter is Choose one answer. A. Managing the risk selection process. B. Conducting education and training. C. Evaluating new submissions and renewal underwriting. D. Securing and maintaining treaty reinsurance.

C. Evaluating new submissions and renewal underwriting.

While developing goals for its book of business, an insurer's staff underwriter decides to increase its market share of workers compensation insurance in the construction industry. This type of underwriting activity is known as Choose one answer. A. Reviewing and revising rating plans. B. Developing underwriting guides. C. Formulating underwriting policy. D. Providing assistance to policyholders.

C. Formulating underwriting policy.

Staff underwriters share research of the market responsibilities with actuarial and marketing departments. Research includes an ongoing evaluation of which one of the following? Choose one answer. A. Revisions to coverage forms B. Average loss ratio for a book of business C. Optimal product mix in the book of business D. Positive effects of a hard market

C. Optimal product mix in the book of business

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

C. Reinsurance

Underwriting authority requirements are usually communicated to an underwriter through Choose one answer. A. Their underwriting supervisor. B. Their agent's manual. C. The underwriting guidelines. D. Their underwriting management.

C. The underwriting guidelines.

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

D. Adverse selection.

Underwriters can best minimize the effects of adverse selection by Choose one answer. A. Rejecting applicants who have had any prior losses. B. Choosing to insure only those risks with a high probability of loss. C. Accepting all applicants that are submitted by the producer. 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. Underwriting supervisor B. Staff underwriter C. Producer D. Line underwriter

D. Line underwriter

Which one of the following financial ratios is key for evaluating insurer solvency? Choose one answer. A. Retention ratio B. Loss ratio C. Expense ratio D. Premium to surplus ratio

D. Premium to surplus ratio

The percentage of insurance policies that an insurer has renewed is referred to as its Choose one answer. A. Success ratio. B. Hit ratio. C. Preservation ratio. D. Retention ratio.

D. Retention ratio.

The underwriter must evaluate each underwriting alternative carefully and select the optimal one under the circumstances. Which one of the following is true regarding the selection of an alternative? Choose one answer. A. Underwriters should avoid evaluating all lines of business from an applicant as a whole. B. Underwriters should look for reasons to reject submissions. C. Underwriters should decline accounts they expect will have losses. D. Underwriters should ensure that accepting a submission supports the insurer's goals for mix of business.

D. Underwriters should ensure that accepting a submission supports the insurer's goals for mix of business.

All of the following statements are true regarding the factors affecting the formation of an insurer's underwriting policy, EXCEPT: Choose one answer. A. The higher an insurer's premium-to-surplus ratio, the greater its ability to expand premium writings. B. Return-on-equity thresholds guide insurers in deciding where to allocate capital. C. Insurers are subject to penalties from the states if they deviate from filed forms or rates. D. The availability and cost of adequate reinsurance can influence underwriting policy

A. The higher an insurer's premium-to-surplus ratio, the greater its ability to expand premium writings.

An underwriter may accept a submission as is, reject the submission, or make a counteroffer to accept the submission subject to modifications. Which one of the following statements is correct with respect to these modifications? Choose one answer. A. Using a different rating plan can provide pricing flexibility so that the underwriter can properly price a submission based on its loss exposures. B. Because insurers are unable to verify whether or not an applicant has implemented risk control measures, counteroffers cannot require them. C. Treaty reinsurance is used by underwriters to reinsure classes of business with atypical loss exposures. D. Amendments to policy terms and conditions are prohibited by state regulation as a means for an insurer to make a counteroffer.

A. Using a different rating plan can provide pricing flexibility so that the underwriter can properly price a submission based on its loss exposures.

Insurer B (IB) notifies one of its independent agents that its agency contract will be terminated unless the agency improves its hit (or success) ratio during the next 90 days. This indicates that IB has Choose one answer. A. Written too few of the accounts it quoted for the agency. B. Renewed too few of the accounts the agency wrote with IB in the past year. C. A higher-than-expected loss ratio with the agency. D. Less restrictive underwriting selection criteria than other insurers the agency represents.

A. Written too few of the accounts it quoted for the agency.

Underwriting guidelines include acceptable approaches to evaluating applicants and the overall desirability of a particular type of risk or class of business. Which one of the following purposes of underwriting guidelines is best served by inclusion of these acceptable approaches? Choose one answer. A. Ensure proper policy issuance B. Ensure uniformity and consistency in risk selection C. Synthesize insights and experience D. Avoid duplication of effort

B. Ensure uniformity and consistency in risk selection

An insurance company must have adequate policyholders' surplus if it wishes to A. Avoid adverse selection. B. Increase its written premium volume. C. Purchase reinsurance. D. Diversify its book of business.

B. Increase its written premium volume.

The final, and ongoing, step in the underwriting process is monitoring underwriting decisions. Which one of the following statements is correct with respect to this process? Choose one answer. A. Because underwriters do not have the resources necessary for constant monitoring of all individual policies, existing policies are reviewed only upon renewal. B. The underwriter is tasked with monitoring both individual policies and books of business to ensure that satisfactory results are achieved. C. Renewal underwriting is typically more time-consuming than new business underwriting as claim reports and risk control reports must be reviewed. D. Underwriters will generally not concern themselves with changes in the nature of the insured's business when monitoring the insured's policy.

B. The underwriter is tasked with monitoring both individual policies and books of business to ensure that satisfactory results are achieved.

Which one of the following cases illustrates how underwriting guidelines ensure that selection decisions provide uniformity and consistency by all the insurer's underwriters? Choose one answer. A. Ella, an experienced staff underwriter provides insight for Cromley's Insurance on amusement parks by authoring a section on amusement parks in the underwriting guidelines. B. Cromley's underwriting guidelines provide a section on insuring swimming pools, illustrating the principal considerations for such risks. New underwriter Pedro refers to this section of the quidelines. C. Cromley is training new underwriters and is using a work sample for a homeowner risk which has a unacceptable roof and an overgrown yard. New underwriters Erin and Filip check the guidelines and make the same underwriting decision to decline the risk. D. Cromley's underwriter, Ciara uses predictive modeling to analyze her risks. She is underwriting Chloe's homeowner application and it falls within the acceptable scores the company has created.

C. Cromley is training new underwriters and is using a work sample for a homeowner risk which has a unacceptable roof and an overgrown yard. New underwriters Erin and Filip check the guidelines and make the same underwriting decision to decline the risk.

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

C. Guarding against adverse selection

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

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

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

D. Centralize underwriting authority.

Tania, an underwriting trainee for Keithly Insurance Company, has received a new homeowners application for Nanami. The home is to be insured for $150,000. It is a frame house with a swimming pool and trampoline in the back yard. The grass needs mowing and the shrubbery needs trimming. Nanami has a marginal credit score. What is Tania's first step in underwriting the policy for Nanami? Choose one answer. A. Determine whether the credit score is acceptable. B. Check the underwriting guidelines on the pool and trampoline. C. Contact the agent about the upkeep problem. D. Check to see if she has the underwriting authority to make the decision.

D. Check to see if she has the underwriting authority to make the decision.

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

D. Emma, the staff underwriter

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

D. Enforcing underwriting guidelines

An insurer decides to discontinue writing a class of workers compensation insureds because losses on the business have exceeded expectations. Instead, in an effort to maximize its return on equity, the insurer plans to use its resources to increase the volume of accounts in an area that offers more promising returns. This need to redirect the focus for desired business is an example of an underwriting constraint due to Choose one answer. A. Audit compliance. B. Regulation. C. Adherence to underwriting guidelines. D. Financial capacity.

D. Financial capacity.

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

D. Loss and loss adjustment expenses incurred, earned and written premiums, and underwriting expenses incurred

Which one of the following statements regarding underwriter responsibilities is correct? Choose one answer. A. Line underwriters often serve on industry committees that study standard policy forms and recommend changes. B. Staff underwriters offer valuable technical assistance to the insured's risk manager and the producer who is directly responsible for determining what coverage best meets the insured's needs. C. Line underwriters are generally responsible for completing underwriting audits of the branch or region in which they work. D. Staff underwriters typically share responsibility for researching fundamental insurance issues with the actuarial and marketing departments.

D. Staff underwriters typically share responsibility for researching fundamental insurance issues with the actuarial and marketing departments.

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

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

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

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

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? Choose one answer. A. Line underwriter B. Staff underwriter C. Producer D. Premium auditor

A. Line underwriter

Which one of the following statements is correct with respect to line underwriters? Choose one answer. A. Line underwriters can offer valuable technical assistance to an insured's risk manager and to the producer responsible for the account. B. Line underwriters formulate underwriting policy and develop underwriting guides. C. Line underwriters select and rate new business. They are not generally involved in the proposal or renewal process. D. Line underwriters focus on risk characteristics and need not be knowledgeable about policy forms and provisions.

A. Line underwriters can offer valuable technical assistance to an insured's risk manager and to the producer responsible for the account.

Argot Stock Insurance Company's (Argot) net income is $1,000,000 and its average owners' equity is $16,500,000. Argot's average policyholders' surplus is $20,000,000. Using the GAAP approach, which one of the following is Argot's return on equity? Choose one answer. A. 5% B. 6% C. 18% D. 20%

B. 6%

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

B. Adverse selection.

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

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

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

B. Classifying and pricing accounts

An insurance company must have adequate policyholders' surplus if it wishes to Choose one answer. A. Avoid adverse selection. B. Increase its written premium volume. C. Purchase reinsurance. D. Diversify its book of business.

B. Increase its written premium volume.

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

B. Insurance policies renewed.

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

B. Insurance policies renewed.

For underwriting to achieve its purpose, Choose one answer. A. Underwriters must select applicants with legal hazards. B. Insurers must minimize the effects of adverse selection on the book of business. C. Underwriters must randomly select applicants to insure. D. Insurers must follow the steps in the underwriting process in strict sequence.

B. Insurers must minimize the effects of adverse selection on the book of business.

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

B. Review and revise rating plans

Which one of the following statements is correct regarding nonfinancial measures of underwriting results? Choose one answer. A. Nonfinancial measures evaluate underwriters on their results rather than on their actions. B. Selection standards for underwriters usually support overall underwriting goals and are evaluated during audits. C. Underwriters are rarely held accountable for supporting an insurer's overall product or line of business mix goals. D. A high hit ratio might indicate that underwriting selection criteria is too stringent.

B. Selection standards for underwriters usually support overall underwriting goals and are evaluated during audits.

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

B. Underwriting authority.

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? Choose one answer. A. Staff underwriter B. The actuary C. The line underwriter D. The claims representative

C. The line underwriter

The first step in the underwriting process is evaluating the submission. Which one of the following statements is correct with respect to that evaluation? Choose one answer. A. The goal is for underwriters to obtain as much information as possible about each submission they review. B. The application is the only principal source of underwriting information for most submissions. C. Underwriters must understand the activities, operations, and character of each applicant. D. Expert underwriting systems allow for automated decision making for all commercial lines submissions.

C. Underwriters must understand the activities, operations, and character of each applicant.

Underwriters can best minimize the effects of adverse selection by Choose one answer. A. Rejecting applicants who have had any prior losses. B. Choosing to insure only those risks with a high probability of loss. C. Accepting all applicants that are submitted by the producer. 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 is a financial measure of underwriting performance? Choose one answer. A. Line of business mix B. Retention ratio C. Hit ratio D. Combined ratio

D. Combined ratio

Once an underwriter has evaluated a submission, selected and applied any appropriate modifications, and determined the premium, the next step is to implement the underwriting decision. To implement the decision, the underwriter should first Choose one answer. A. Issue a binder and prepare certificates of insurance. B. Record data about the applicant and the policy. C. Prepare and issue an invoice to the insured. D. Communicate the decision to the producer.

D. Communicate the decision to the producer.

Which one of the following represents two nonfinancial measures that are used to evaluate underwriting performance by focusing on underwriting actions? Choose one answer. A. Loss ratio and quote ratio B. Combined ratio and success ratio C. New business ratio and retention ratio D. Retention ratio and hit ratio

D. Retention ratio and hit ratio

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. Chartered underwriter. B. Field underwriter. C. Line underwriter. D. Staff underwriter.

D. Staff underwriter.