Chapter 2

Question 1

What are three advantages of using a fact-finding survey?

Answer 1

i) Assists brokers when identifying potential losses
ii) Assists brokers not to sell coverages client does not need
iii) Assists brokers in collecting information needed by insurance companies

Question 2

What are three benefits of commercial property checklists and which is most important to brokers?

Answer 2

i) Assists brokers when identifying potential losses
ii) Assists brokers to make sure coverages are not overlooked
iii) Assists brokers in reducing errors and omission losses

Question 3

Explain characteristics of the following construction classes: Fire Resistive / Non-Combustible

Answer 3

a) Fire Resistive: This means that building has achieved standard set in hours to remain structurally sound when attacked by fires.
b) Non-Combustible: These buildings are slightly below standard of resistive structures.

Question 4

What are five areas insurers request additional information when buildings are over 25 years old? (WHORP)

Answer 4

i) Wiring
ii) Heating
iii) Over-current protection
iv) Roof
v) Plumbing

Question 5

What are five hazards common to commercial buildings? (HOPED)

Answer 5

i) Heating
ii) Occupancy
iii) Protection
iv) Electrical services
v) Detachment

Question 6

What type of wiring provides the best protection?

Answer 6

Copper

Question 7

What type of over current protection provides the best protection?

Answer 7

Automatic circuit breakers

Question 8

What is detachment?

Answer 8

This is the distance of insured building (or property) to commercially rated buildings.

Question 9

Describe the two types of protection?

Answer 9

i) Private protection: These are steps insured has taken within buildings to reduce frequency and severity of losses such as sprinkler systems or fire extinguishers.
ii) Public protection: This refers to protection methods used by municipalities, or outside steps, such as fire departments.

Question 10

When buildings have no protection from local fire departments, what term is often used to describe these buildings?

Answer 10

Unprotected

Question 11

Define “adverse selection”

Answer 11

This happens when only those accounts exposed to certain perils are the accounts applying for coverage, such as those near rivers, are the only accounts applying for flood coverage.

Question 12

What are four functions performed by underwriters?

Answer 12

i) Risk selection
ii) Risk classification
iii) Rating and rate making
iv) Policyholder’s services

Question 13

Define “risk classification”.

Answer 13

Taking all accounts similar to each other and placing them in categories based on their likelihood for loss.

Question 14

What is the main advantage of risk classification?

Answer 14

This allows insurers to calculate proper premiums to charge

Question 15

Identify an internal source underwriters utilize when rate making.

Answer 15

Staff inspectors

Question 16

Identify an external source underwriters utilize when rate making.

Answer 16

Insurer’s Advisory Organization (IAO)

Question 17

What are two influences which cause premiums to change from year to year?

Answer 17

i) Increasing claims paid due to inflation
ii) Rates of return on insurance company’s investments

Question 18

What are characteristics of soft markets?

Answer 18

Heavy competition among insurers as well as lower premiums.

Question 19

What are characteristics of hard markets?

Answer 19

Underwriting standards become more strict and premiums rise.

Question 20

What is a physical hazard?

Answer 20

These are hazards which arise from the use of insured property which cause perils to occur.

Question 21

List six types of physical hazards common to all commercial risks and provide an example of each. (PET HOG)

Answer 21

i) Protection: Example: Fire extinguishers
ii) External Exposures: Example: Being next to restaurants
iii) Type of Building Construction: Example: Fire resistive vs. Frame construction
iv) Housekeeping: Example: Presence of waste materials or general cleanliness.
v) Occupancy: Example: Library vs. Welding shop
vi) Geography: Example: Access to old urban buildings may be restricted

Question 22

What is a moral hazard?

Answer 22

These are subjective characteristics of clients which may cause losses to occur.

Question 23

List three moral hazards and provide an example of each. (FAM)

Answer 23

1) Financial Condition: Example: Clients experiencing financial difficulty may be tempted to cause losses.
2) Associates: Example: Clients having relationships with known criminals.
3) Moral Character: Example: Often having authorities questioning actions of clients.

Question 24

What is accommodation business?

Answer 24

Poor accounts underwriters agree to insure as favor to broker.

Question 25

What are four factors underwriters will review when considering accommodation business?

Answer 25

i) Loss ratio of brokerage
ii) Amount of business brokerage has with insurer
iii) Class of business mix brokerage has with insurer
iv) Length of time brokerage and insurer have done business