AU 60 Course flash cards

Question 1

Book of business

Answer 1

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.

Question 2

Underwriting

Answer 2

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

Question 3

Adverse selection

Answer 3

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

Question 4

Policyholders’ surplus

Answer 4

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

Question 5

Underwriting guidelines (underwriting guide)

Answer 5

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.

Question 6

Predictive modeling

Answer 6

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.

Question 7

Catastrophe model

Answer 7

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

Question 8

Telematics

Answer 8

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

Question 9

Capacity

Answer 9

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

Question 10

Manuscript policy or manuscript endorsement

Answer 10

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

Question 11

Big data

Answer 11

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

Question 12

Smart product

Answer 12

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.

Question 13

Internet of Things (IoT)

Answer 13

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

Question 14

Artificial intelligence (AI)

Answer 14

Computer processing or output that simulates human reasoning or knowledge.

Question 15

Machine learning

Answer 15

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

Question 16

Deep learning

Answer 16

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

Question 17

Data mining

Answer 17

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

Question 18

Unfair discrimination

Answer 18

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.

Question 19

Declination

Answer 19

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.

Question 20

Termination

Answer 20

An insurer’s cancellation of a policy during the policy term or nonrenewal of coverage at the end of a policy term.

Question 21

Notification requirements

Answer 21

Regulatory requirements relating to the timing and contents of an insurer’s notice to an insured of the declination, termination, and nonrenewal of insurance coverage.

Question 22

Market conduct examination

Answer 22

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

Question 23

Premium-to-surplus ratio, or capacity ratio

Answer 23

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

Question 24

Application

Answer 24

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

Question 25

Loss history

Answer 25

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.

Question 26

Experience rating plan

Answer 26

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.

Question 27

Fee for service company

Answer 27

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

Question 28

Actual cash value

Answer 28

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.

Question 29

Replacement cost

Answer 29

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

Question 30

Common-size statement

Answer 30

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

Question 31

Generally accepted accounting principles (GAAP)

Answer 31

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

Question 32

Fixed assets

Answer 32

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.

Question 33

DuPont identity

Answer 33

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

Question 34

Insurable interest

Answer 34

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.

Question 35

Named insured

Answer 35

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

Question 36

Sole proprietorship

Answer 36

A form of business in which one person owns the business assets and is personally liable for the business’s debts.

Question 37

Partnership

Answer 37

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.

Question 38

Corporation

Answer 38

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

Question 39

Shareholder

Answer 39

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

Question 40

Unincorporated association

Answer 40

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

Question 41

Wrap-up

Answer 41

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.

Question 42

Loss payee

Answer 42

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

Question 43

Vicarious liability

Answer 43

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

Question 44

Security interest

Answer 44

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.

Question 45

Risk management

Answer 45

The process of making and implementing decisions that enable an organization to optimize its level of risk.

Question 46

Enterprise risk management

Answer 46

An approach to managing all of an organization’s key business risks and opportunities with the intent of maximizing shareholder value. Also known as enterprise- wide risk management.

Question 47

Employee

Answer 47

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

Question 48

Consideration

Answer 48

Something of value or bargained for and exchanged by the parties to a contract.

Question 49

Contract of hire

Answer 49

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

Question 50

Professional employer organization (PEO)

Answer 50

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

Question 51

Independent contractor

Answer 51

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

Question 52

General contractor

Answer 52

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.

Question 53

Subcontractor (specialty contractor)

Answer 53

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.

Question 54

Cyber risk loss exposure

Answer 54

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.

Question 55

Pricing

Answer 55

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

Question 56

Rate

Answer 56

The price per exposure unit for insurance coverage.

Question 57

Loss costs

Answer 57

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

Question 58

Loss adjustment expense (LAE)

Answer 58

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

Question 59

Premium

Answer 59

The price of the insurance coverage provided for a specified period.

Question 60

Rate manual

Answer 60

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

Question 61

Endorsement

Answer 61

A document that amends an insurance policy.

Question 62

Class rate

Answer 62

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

Question 63

Pure premium method

Answer 63

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

Question 64

Pure premium

Answer 64

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.

Question 65

Loss ratio method

Answer 65

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

Question 66

Judgment ratemaking method

Answer 66

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.

Question 67

Retrospective rating plan

Answer 67

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.

Question 68

Experience modification factor

Answer 68

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

Question 69

Credibility factor

Answer 69

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.

Question 70

Paid loss retrospective rating plan

Answer 70

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.

Question 71

Schedule rating plan

Answer 71

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.

Question 72

Individual risk premium modification plan (IRPM)

Answer 72

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

Question 73

Expense modification

Answer 73

An insurance rating plan that modifies the expense portion of an insured’s rate to reflect the actual cost of providing coverage to that insured.

Question 74

Rebating

Answer 74

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.

Question 75

Large deductible plan

Answer 75

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

Question 76

Availability

Answer 76

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

Question 77

Affordability

Answer 77

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.

Question 78

Simplicity

Answer 78

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

Question 79

Underwriting audit

Answer 79

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

Question 80

Moral hazard

Answer 80

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

Question 81

Morale hazard (attitudinal hazard)

Answer 81

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

Question 82

Production underwriter

Answer 82

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.