Chapter 4

Question 1

The Underwriting Function

Answer 1

• Profitability really depends on the quality of the underwriting
• Guarding against adverse selection
• Ensuring adequate policyholders’ surplus
• Enforcing underwriting guidelines

Question 2

examples of adverse selection

Answer 2

• Some property owners in areas prone to coastal storms purchase windstorm coverage or increase their limits only before a hurricane season when they expect severe losses
• A disproportionate percentage of property owners in an earthquake prone zone purchase earthquake insurance as compared to property owners in areas less prone to earthquakes

Question 3

Policyholders’ surplus:

Answer 3

under statutory accounting principles an insurer’s total admitted assets minus its total liabilities

Question 4

Capacity:

Answer 4

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

Question 5

Underwriting authority:

Answer 5

the scope of decisions that an underwriter can make without receiving approval from someone at a higher level

Question 6

Line underwriter

Answer 6

• underwriter who is primarily responsible for implementing the steps in the underwriting process
• Work directly with insurance producers and applicants

Question 7

Staff underwriter

Answer 7

• underwriter who is usually located in the home office and who assists underwriting management with making and implementing underwriting policy
• Work closely with underwriting management to perform activities essential for profitable risk selection

Question 8

treaty insurance

Answer 8

A reinsurance agreement that covers an entire class or portfolio of loss exposures and provides that the primary insurers individual loss exposures that fall within the treaty are automatically reinsured

Question 9

Manuscript policy

Answer 9

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

Question 10

constraints of underwriting policy

Answer 10

• financial capacity
• regulation
• reinsurance
• personnel

Question 11

Premium-to-surplus ratio:

Answer 11

(capacity ratio) a ratio that indicates an insurer’s financial strength by relating net written premiums to policyholders’ surplus

Question 12

Statutory accounting principles:

Answer 12

the accounting principles and practices that are prescribed or permitted by an insurer’s domiciliary state and that insurers must follow

Question 13

Purposes of underwriting audits:

Answer 13

• To check on line underwriters’ adherence to guidelines
• To monitor statistics for books of business
• Provides staff underwriters with info on the effectiveness of the underwriting guidelines

Question 14

Application

Answer 14

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

Question 15

Underwriter

Answer 15

an insurer employee who evaluates applicants for insurance, selects those that are acceptable to the insurer, prices coverage, and determines policy terms and conditions

Question 16

Underwriting submission

Answer 16

underwriting info for an initial app, or a substantive policy midterm or renewal change

Question 17

info efficiency

Answer 17

the balance that underwriters must maintain btw the hazards presented by the account and the info needed to underwrite it

Question 18

Premium audit reports

Answer 18

Methodical examination of policyholders’ operations, records, and books of account to determine the actual exposure units and premium for insurance coverages already provided

Question 19

Underwriting profit

Answer 19

income an insurer earns from premiums paid by policyholders minus incurred losses and underwriting expenses

Question 20

Counteroffer

Answer 20

a proposal an offeree makes to an offeror that varies in some material way from the original offer, resulting in rejection of the original offer and constituting a new offer

Question 21

Rating plan

Answer 21

a set of directions that specify criteria of the exposure base, the exposure unit, and rate per exposure unit to determine premiums for a particular line of insurance

Question 22

Experience rating

Answer 22

a rating plan that adjusts the premium for the current policy period to recognize the loss experience of the insured org during past policy periods

Question 23

Schedule rating

Answer 23

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 inc

Question 24

Retrospective rating

Answer 24

a ratemaking technique 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 25

Facultative reinsurance:

Answer 25

reinsurance of individual loss exposures in which the primary insurer chooses which loss exposures to submit to the reinsurer and the reinsurer can accept or reject any loss exposures submitted

Question 26

Mix of business

Answer 26

the distribution of individual policies that compose the book of business of a producer, territory state, or region among the various lines and classifications

Question 27

teps in the Underwriting Process

Answer 27

• Evaluate the submission
• Develop Underwriting Alternatives
• Select an underwriting alternative
• Determine and appropriate premium
• Implement the Underwriting Decision
• Monitor underwriting decisions

Question 28

Binder

Answer 28

a temporary written or oral agreement to provide insurance coverage until a formal written policy is issues

Question 29

Certificate of insurance

Answer 29

a brief description of insurance coverage prepared by an insurer or its agent and commonly used by policyholders to provide evidence of insurance

Question 30

Combined ratio

Answer 30

a profitability ratio that indicates whether an insurer has made an underwriting loss or gain

Question 31

distortions can be created by

Answer 31

• changes in premium volume
• major catastrophic losses
• delays in loss reporting and loss development
• underwriting cycle

Question 32

when combined ratio is 100%

Answer 32

every premium dollar is being used to pay claims and cover operating costs (no insurer profit)

Question 33

when combined ratio is > 100%

Answer 33

an underwriting loss occurs (more $ paid out than taken in)

Question 34

when combined ratio is <100%

Answer 34

an underwriting profit occurs because not all premium $ taken in are being used for claims and expenses

Question 35

Production underwriting

Answer 35

performing underwriting functions in an insurer’s office as well as traveling to visit and maintain rapport with agents and sometimes clients

Question 36

Selection

Answer 36

Guidelines to ensure that the quality of the underwriter’s book of business does not deteriorate

Question 37

Product or line of business mix

Answer 37

Evaluates an underwriters contribution to a profitable book of business

Question 38

Premium to underwriter

Answer 38

Volume of premium an underwriter is able to handle is often used to measure performance