The Underwriting Process
begins and ends
A binder should also clearly state when coverage under the binder ____.
inspection report
A report, by an insurer or one of a number of inspection services available, assessing the moral, financial, and physical aspects of a risk.
dividing incurred losses by earned premiums
An insurer's loss ratio is calculated by ____.
95 percent (70 percent + 25 percent = 95 percent).
If an insurer has a 70 percent loss ratio and a 25 percent expense ratio, its combined ratio is ____.
specific rates
Individual rating AKA:
insurance premium
It generally equals the insurance rate times the number of exposure units.
agent's report
Some insurers require the producer to provide an ____ describing the agent's overall evaluation of the risk.
earned
While premiums are typically paid at the start of a policy period, they are ____ as the policy period progresses.
the insurer with which the coverage is bound the type of policy the amount of insurance the covered peril(s)
A written binder should clearly identify: (4)
expenses include commissions
An insurance company's ____ to its producers, employee salaries, office expenses, taxes, and other costs of doing business.
insurance rate times the number of exposure units
Insurance premiums are equal to the____; premiums are what policyholders actually pay for insurance coverage.
insurance per unit of exposure
Insurance rates are the cost of ___.
loss costs, regulators
Insurers add their expense and profit loadings to these loss costs to develop rates, which are then filed with ____.
loss ratio, expense ratio, and combined ratio
Monitoring underwriting results relies on three measures: ____.
combined ratio
The ____ indicates whether or not the insurer has made a profit from its underwriting activities.
loss costs expenses margin for profits and contingencies
The components of a property and casualty insurance rate include:
premium
The money that a property insurance policyholder pays for insurance covering his building is called a(n):
risk analysis by the producer
The property and casualty underwriting process generally involves all the following steps EXCEPT:
profits and contingencies
The third component of the insurance rate is an allowance for ____.
incurred losses and earned premiums
The two things that an insurance company's loss ratio compares are:
written premium
This is the premium registered on the books of an insurer or a reinsurer at the time a policy is issued and paid for.
loss ratio expense ratio combined ratio
Three ratios are especially important in evaluating the results of an insurance company's underwriting. These are the:
agency agency report loss history data and loss control report motor vehicle report (MVR) inspection report and credit information
Underwriter risk analysis: (5)
agency underwriting risk analysis by the home office underwriter making the underwriting decision implementing the decision regularly monitoring the results
Underwriting steps: (5)
his driving under the influence (DUI) conviction
Miles is told that his application for auto insurance was rejected based on information in his motor vehicle record (MVR). Which of the following is material underwriting information that might have appeared on Miles' MVR?
$1,000 ($10 × 100 exposure units).
Bob wants to insure the building for its full value. An underwriter has determined that the fire insurance rate for Bob (based on his and the building's risk profile) is $10 per unit of exposure. Therefore, the premium in this case would be ____.
insurance rate
An ____ is the price of insurance for each unit of exposure.
insurance premium
An ____ is what the policyholder pays to the insurance company in exchange for receiving insurance coverage.
adverse selection
An imbalance in an exposure group created when persons who perceive a high probability of loss for themselves seek to buy insurance to a much greater degree than those who perceive a low probability of loss.
incurred losses by its earned premiums
An insurance company's loss ratio is determined by dividing the insurer's:
25 ($25 million ÷ $100 million = 0.25, or 25 percent
If an insurer has written premiums of $100 million and incurred expenses of $25 million, the insurer's expense ratio during that period is ____ percent.
70 ($70 million ÷ $100 million = 0.70, or 70 percent).
If an insurer with earned premiums of $100 million has incurred losses of $70 million, the insurer has a ___ percent loss ratio
Individual rating
____ is used when every insured is unique and could not readily be placed into a class with other similar insureds.
loss control
A ____ report, describing what the applicant has done to reduce the possibility or severity of a major loss, is usually included with every inspection report.
loss report
A listing of reported claims providing such information as the date of occurrence, type of claim, amount paid, and amount reserved for each as of the report's valuation date.
$400 (i.e., $4 × 100) $320
Barbara pays a $720 premium for an auto policy that provides coverage for six months, which means about $4 of that premium is earned each day during the policy period. If the policy is cancelled after 100 days, the earned premium is ____, and the insurer will have to refund the unearned premium of ____.
evidence that Roofing Contractor has purchased certain types of insurance
Before permitting Roofing Contractor to work on his roof, Delmar asks Roofing Contractor to give him a certificate of insurance, which serves as:
PDQ had an underwriting loss last year
Last year, PDQ Insurance Company had a combined ratio of 105 percent, which means:
pure premium
Loss costs AKA:
past claims and estimated future claims
Loss costs, a key component of property and casualty insurance rates, reflect the insurer's:
adverse selection
One key job for an underwriter is to help guard against ____, which is the tendency of people at the most risk of loss to try and buy insurance.
adverse selection
One of the underwriter's key jobs is to watch for ____.
judgment, judgment rates
When there is no established rating method, an experienced underwriter bases the rate for a particular risk primarily on his or her ____. These are sometimes referred to as ____.
class rating
With ____, all insureds with similar characteristics are charged the same rates.
deposit premium or provisional premium
The premium paid at the beginning of the policy period (called a ____) is based on an estimate of the extent of operations that will be insured during the policy period.
100 exposure units
With fire insurance, each $1,000 of property value is a unit of exposure. Bob's building is valued at $100,000, and so it represents ____.
Class rating
____ is most commonly used with high-volume insurance coverages, such as auto and homeowners insurance.
genealogical records
Underwriters of property or casualty insurance policies commonly use all of the following sources of information when deciding to accept or reject a risk EXCEPT:
incurred losses
are counted when they are incurred, whether or not the insurer has yet paid any resulting claims.
individual rates
rates are used with property insurance on complex commercial buildings.
underwriting guidelines
A set of rules and requirements an insurer provides for its agents and underwriters.
binder
All the following are common sources of property and casualty insurance underwriting information EXCEPT:
neither an underwriting profit nor an underwriting loss
An insurer with a 100 percent combined ratio has ____.
underwriting loss
An insurer with a 105 percent combined ratio would have a 5 percent ____.
underwriting profit.
An insurer with a 95 percent combined ratio has a 5 percent ____
loss ratio
An insurer's ____ compares the insurer's incurred losses with its earned premiums over a certain period:
dividing incurred expenses by written premiums
An insurer's expense ratio is calculated by ____.
combined ratio (also known as the combined loss and expense ratio)
An insurer's profitability is determined by its ____, which is the sum of its loss ratio and expense ratio.
expense ratio
Another important measure of an insurer's financial health is its ____, which compares the insurer's incurred expenses with its written premium during a certain period.
underwriting
Between the time an applicant signs an insurance application and the policy is delivered, the application goes through a process called ____.
loss reserve
Between the time when a loss occurs and when it is paid, the insurer carries a ____ that reflects an estimate of the amount that it will eventually pay in settling the claim.
are based
Class rates____on the loss statistics of a large number of insureds that fall into the same rating class because they have approximately the same exposures to loss.
incurred expenses
Expenses paid plus reserves for expenses to be paid.
Dun and Bradstreet
For commercial lines accounts, credit reports by ____ are often ordered and can play an important role in the selection process and the insurance plan offered.
unearned premium
If the policy is canceled before the end of the period, the insurer will have to refund the ____.
competitors' rates
Property and casualty insurance rates are based on all the following components EXCEPT:
determined by placing the driver and vehicle into a class with other similar drivers and vehicles
QBS Insurance Company uses class rating to determine the premiums for its auto insurance policies, which means that the rate for every insured driver is:
higher rate
Rates vary by insured; those representing a higher risk will be assigned a ____ than lower-risk insureds.
premiums
With homeowners insurance, for example, all homeowners who occupy a home of frame construction within a particular geographic territory and have the same level of public fire protection might fall into the same rating class. Although the rates a given insurer charges would be the same, ____ would differ depending on the amount of insurance each homeowner purchases.
motor vehicle record (MVR)
____ is a report that provides details about an auto insurance applicant's driving history.
certificate of insurance
_____ is evidence that the party required to furnish the document does in fact have the required insurance.
underwriting
is the process by which an insurer reviews a completed application to determine whether the requested insurance will be issued and, if it is, at what premium.
binder
provides temporary coverage while supplication goes through underwriting process.
loss costs
reflect past claims (historical loss costs) and estimated future claims (prospective loss costs).