Chapter 8 - Underwriting and Rating: Setting Insurance Rates Flashcards
Identify the benefit of using a written and signed application for insurance.
a. It provides accurate documentation of what was requested, and it indicates the intentions of the parties at the time the application was made.
b. It allows the insured to get a premium discount of 15 percent.
c. It is less costly for the insurer to underwrite written applications than oral applications.
d. It allows the insured to choose which questions to answer and which to leave blank.
a. It provides accurate documentation of what was requested, and it indicates the intentions of the parties at the time the application was made.
It provides accurate documentation of what was requested, and it indicates the intentions of the parties at the time the application was made—particularly if the client signs it, as the signature attests to the accuracy of the information.
In the first step in rate making, what criteria are used to classify risks?
a. Types of objects insured and hazards of exposure
b. Types of objects insured and cost of premium
c. Location of exposure and cost of premium
d. Location of exposure and claims history
a. Types of objects insured and hazards of exposure
A classification of risks is established based on types of objects insured and hazards of exposure.
What can be a consequence of the applicant misrepresenting material facts on the application for insurance?
a. The applicant could be charged with criminal fraud.
b. The application could be charged a penalty premium of 15 percent.
c. Losses could be denied or the insurance policy could be voided.
d. The broker could be charged a penalty fee by the insurer of $200.
c. Losses could be denied or the insurance policy could be voided.
Misrepresentation of material facts in the application can have serious consequences, in extreme cases causing losses to be denied or the insurance policy to be voided.
What does it mean to underwrite a risk?
a. To calculate the pure premium for a risk
b. To scrutinize a risk and then decide on its eligibility for insurance
c. To investigate losses and pay claims
d. To conduct statistical analysis and create rates to charge for classes of insurance
b. To scrutinize a risk and then decide on its eligibility for insurance
To underwrite a risk is to scrutinize a risk and then decide on its eligibility for insurance.
What is an insurer’s retention?
a. The maximum amount that the insurer can insure
b. The amount of premium required to pay for all expected losses during a calendar year
c. The insurer’s acquisition costs for a calendar year
d. The amount of exposure and premium that is passed on to the reinsurer on a proportional basis
a. The maximum amount that the insurer can insure
Retention is the maximum amount that the insurer can insure.
What is pure premium?
a. The total premium for insuring the risk including loadings
b. The cost of the loadings added to the base premium to cover acquisition costs
c. The cost of a unit of insurance
d. The portion of the total premium that is needed to pay expected losses
d. The portion of the total premium that is needed to pay expected losses
Pure premium is the portion of the total premium that is needed to pay expected losses. It does not take into account money needed for company expenses.
When the insured has disclosed pertinent information to the broker or agent in the automobile insurance application, this knowledge of the broker or agent is considered as which of the following?
a. The knowledge of the insured
b. The knowledge of the insurer
c. Not relevant to the application
d. The most important factor in deciding whether a loss would be payable
b. The knowledge of the insurer
Brokers acting on behalf of the insurance company and on behalf of their clients have a duty to advise the insurer of all information material to the risk. Any failure to fulfil this duty could result in a broker being found liable for any losses that might occur.
Which of the following is a special class of loss payee that has a registered interest on real property offered as security for the money that the mortgagee has loaned the property owner?
a. Insured
b. Mortgagee
c. Named insured
d. Applicant
b. Mortgagee
A mortgagee is a special class of loss payee. Mortgagees have a registered interest on real property—that is, buildings or land—offered as security for the money that they have loaned the property owner.
Which of the following is the person or party designated in the policy as the insured, as opposed to someone who may be covered by the policy but is not specifically named?
a. Named insured
b. Mortgagee
c. Applicant
d. Insurer
a. Named insured
The named insured is the person or party designated in the policy as the insured, as opposed to someone who may be covered by the policy but is not specifically named.
Which statement is true about loss history on insurance applications?
a. A loss can occur whether or not it was an insurable claim.
b. All losses result in insurance claims.
c. Loss history only concerns actual claims under a policy.
d. Applications only require information for past claims exceeding the $500 threshold.
a. A loss can occur whether or not it was an insurable claim.
Losses are not necessarily the same as claims. A loss can occur whether or not it was an insurable claim for reasons such as the following: the property in question was not insured or not fully insured at the time of the loss, a previous insurer denied the claim, or the insureds elect to bear the loss themselves.
What are the 5 steps in the rate making process
Classify risk
Gather statistics on past losses
Calculate pure premiums
Determine the total premium
Calculate the rate/unit cost
Identify five types of information requested on an insurance application.
Information on an insurance application
Named insured
Policy term
Subject of insurance
Loss payees
Loss history
Prior insurance
Broker’s report
Signatures
Identify the five main steps in the ratemaking process.
Ratemaking process
Classify risks
Gather statistics on past losses
Calculate pure premium
Determine total premium, including loadings
Calculate the rate or unit cost
Outline the reasons that may cause underwriters to reject a risk.
Reasons for underwriters to reject a risk
The insurer may not insure that class of business
The risk may be too hazardous, meaning
it is so much more hazardous than the average that the potential for loss is certain
The risk may be substandard
The potential for improving or upgrading may exist, but the applicant is not prepared to carry out suggested improvements
Describe the type of information that would be included in the automobile insurance application.
Named insured: who the applicant is and who the named insured is
Policy term: the effective and expiry dates to determine how long insurance will be in force
Subject of insurance: the description of the automobile being insured, what it will be used for, who will use it, where it will be used
Broker’s report: may contain a note from Ricardo’s broker about other relevant details
Loss payees: a party other than the insured that will receive proceeds from the policy (for cars, this would be lienholders, such as a bank if Ricardo purchases the car using a car loan)
Loss history: the history of past claims (Ricardo has three past windshield claims)
Prior insurance: prior insurers’ names, policy numbers, and policy expiry dates
Signatures: if this is a hardcopy application, it will be signed (as required by law); if it is an electronic application, it may not be signed
