Chapters 1- 10 Written Questions

Question 1

Ch 1. What tactics can an underwriter use to overcome unfamiliarity with a new computer or technological
system? (5 marks)

Answer 1

Tactics to overcome unfamiliarity with new technology (any five of the following)
• Get acquainted with the new insurance system
• Get acquainted with the non-insurance tools
• Learn about the insurer’s database
• Become familiar with other database applications
• Learn about information available online
• Find out where to get help when it is needed

Question 2

Ch 1. What are five questions an underwriter can use to identify exposures, perils, and hazards? (5 marks)

Answer 2

Questions to identify exposures, perils, and hazards
• What perils does the risk face?
• Has the risk suffered any unusual losses (either large or small)?
• Are there physical hazards that can be reduced or eliminated?
• Does the risk present a moral hazard?
• Does the risk have high employee turnover

Question 3

Ch 1. Outline five critical workplace skills that an underwriter must apply to close deals and otherwise fulfill their duties. (5 marks)

Answer 3

Critical workplace skills (any five of the following)
• An underwriter should use natural curiosity to good advantage.
• Good communication is not adversarial.
• The telephone must be used with care.
• Texting and social media present their own set of problems.
• If a language difficulty presents itself, the underwriter should be patient.
• Written communication should be clear and free of idioms and colloquialisms.
• Written communication includes what the underwriter commits to file

Question 4

Ch 2. 1. What are five of the captions normally found on a loss run and why is each one important? (5 marks)

Answer 4

1. Loss run captions and their importance (any five of the following)
   • Date of loss: Can indicate good information about how insurance will be used
   • Date of report: Look for patterns of late reporting by reviewing the date of the loss and the date on
   which the loss was reported
   • Type of loss: Automobile, premises liability, products liability
   • Description of loss: Are the losses of the type expected from this risk?
   • Location: Location can have a very large effect on payout for a claim
   • Outstanding reserves: Know how to treat open claims
   • Losses incurred: Does the information about reserves and payments include deductibles or is net
   of them?
   • Claims paid: Helps get an accurate picture of the loss history

Question 5

Ch 2. What questions should an underwriter ask regarding loss reserving? (5 marks)

Answer 5

2. Questions regarding loss reserving
   • Is the claim still open for purposes of subrogation, or is there a problem with the claim?
   • Has coverage been denied and litigation pursued?
   • Has the claim just been overlooked when it should have been closed?
   • Are the injuries to parties to the claim serious?
   • Is liability an issue?

Question 6

Ch 2. Outline five situations where using mathematics in a statistical analysis might not yield useful
conclusions for an underwriter. (5 marks)

Answer 6

Situations where mathematics in a statistical analysis may not yield useful conclusions
• Insufficient statistical data
• Familiarity with the industry
• Sufficient data but difficulty in comparing risks
• Statistical improbability of loss that does not rule out the possibility of it
• An absence of loss yet an occurrence of some kind the underwriter should know about

Question 7

Ch 2. Remind Ahmed why he shouldn’t produce a loss rating for Two by Four Builders based simply on the
losses that the company has incurred to date. (5 marks)

Answer 7

a. Loss rating based on reported losses
• Even with quantitative and qualitative skills working together, an underwriter must be careful with loss
rating and its interpretation.
• Loss rating based on only losses that have been incurred to date would not be appropriate.
• Those losses will continue to develop.
• There may be losses that have been incurred but not reported (IBNRs).
• Loss rating based on only reported losses is merely provisional.

Question 8

Ch 2. Explain to Ahmed how to create a loss triangle so he can estimate future losses. (5 marks)

Answer 8

b. Loss triangle method
• Groups losses by year over successive time periods
• An accident year matches all losses, regardless of when they were actually reported, to the 12-month
period in which they occurred
• Losses can be valued at different intervals, such as three months or six months
• Shows a history of change in the amounts of all losses
• By reviewing patterns of loss development factors calculated in this historical loss triangle, you can
estimate future losses

Question 9

Ch 2. Ahmed asks what other information he can find out from loss triangles. List some questions that
arranging data in loss triangles can help answer. (5 marks)

Answer 9

c. Comparisons based on loss triangles
• Are there any changes in claim-reporting patterns? Look at each accident year after the 12-month
evaluation period and ask whether reserves are stable, whether they have increased or decreased
significantly, and whether there is a ready explanation for any such changes.
• Are claims taking longer to settle, or are they being settled more quickly?
• Has there been a change in the exposure units?
• If revenue has been used, has revenue declined and have claims therefore been reduced
proportionately?
• Has there been a change in coverage—perhaps in deductibles applied or coverage restricted?

Question 10

Ch 3. What are some questions that an underwriter can ask for a personal property application regarding
growing marijuana? (5 marks)

Answer 10

1. Questions to ask for a personal property application regarding growing marijuana
   • Is an applicant growing marijuana on the premises?
   • How many plants are being grown?
   • What is the value of each plant?
   • How are plants grown? (Details are needed here about hydroponics or intense lighting systems.)
   • What security measures have been taken?

Question 11

Ch 3. What are five elements included in the builders risk broad form and what is the purpose of each? (5
marks)

Answer 11

2. Five elements included in the builders risk broad form and their purpose (any five of the following)
   • Indemnity agreement: Describes exactly what the insurer agrees to pay in the event of loss or
   damage by an insured peril
   • Replacement cost: Cost of replacing, repairing, constructing, or reconstructing the property on the
   same project site with new property of like, kind, and quality
   • Property insured: Property under construction, installation, reconstruction, or repair
   • Exclusions: Exclusions normally found in an all-risks property wording, as well as other exclusions
   that are specific to risks under construction
   • Extensions of coverage: Offered as part of the amount of insurance, not in addition to it
   • Cessation of coverage: Coverage ends with the expiry of the policy period
   • Loss adjustment: Any claim is to be adjusted with the general contractor or owner
   • Subrogation: Waives all rights of subrogation against any corporation, firm, individual, or other interest
   with respect to which insurance is provided by the form
   • Amount of insurance and premium adjustment: Should be the same as the estimated completed
   value of the project
   • Verification of values: Gives the insurer the right to examine the insured’s books at any reasonable
   time during the term of the policy or within a year after termination of the policy

Question 12

Ch 3. What are the important considerations an underwriter will want to address regarding potential
exposures for builders risk insurance? (5 marks)

Answer 12

3. Underwriting considerations for builders risk insurance
   • The qualifications and expertise of the policyholder, who the architect on the project is, whether the
   architect is reliable and experienced in this type of construction, and what kind of engineering expertise
   the project requires
   • What natural features of the site might affect the project, anything about the surroundings that might
   give rise to a claim such as vandalism or theft, and the potential of losses from weather
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   • The methods and type of construction that will be used
   • Whether materials will be delivered to the site as needed or stored on site for extended periods, how
   much material will be on site at any given time, and whether there is off-site storage
   • What precautions—what security measures—are being taken to safeguard the site

Question 13

Ch 3. Explain to Janice why her company needs business interruption insurance. (5 marks)

Answer 13

a. Importance of business interruption insurance
• Business interruption insurance indemnifies the insured business against losses arising from its
inability to continue the normal operations and functions of the business.
• Coverage is triggered by the total or partial suspension of business operations caused by the loss,
loss of use of, or damage to all or part of the buildings, plant, machinery, equipment, or other
property as the result of a covered loss.
• The physical damage caused by fires and other insured perils is covered by a commercial property
policy, but the income that is lost while the business gets back on its feet is covered by a business
interruption insurance policy.
• All business interruption insurance addresses two aspects of an indirect loss:
o The reduction in earnings directly resulting from the interruption of business due to a covered
peril
o The necessary expense incurred to reduce the business interruption loss

Question 14

Ch 3. b. Help Janice decide whether to use the British or American form by comparing the information on the
forms regarding indemnity period, coinsurance, stock, and bylaws. (5 marks)

Answer 14

b. British vs. American approach to business interruption insurance
• In the American spirit of free enterprise, an insured who suffers an interruption of business is
considered indemnified after the product and a place to sell it have been restored.
• The British approach recognizes that an interruption of business will continue to affect the business
even after it has reopened.
• Indemnity period
o British form: As long as there is a reduction in profit as a result of damage by a covered peril, the
policy will respond. The indemnity period or restoration period is defined in the policy. Payments
can take place for up to 12 months after the date of loss.
o American form: Payment for loss of gross earnings is provided for the period required to rebuild,
repair, or replace the damaged property with due diligence and dispatch. The premium
adjustment clause limits the period to a maximum of 12 months after the date of loss.
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• Coinsurance
o British form: In effect, 100 percent. There is no coinsurance clause as such in the profits form. An
average clause in the insuring agreement has the effect of establishing 100 percent coinsurance.
o American form: 50 percent or 80 percent, depending on what option the insured chooses
regarding the treatment of ordinary payroll.
• Stock
o British form: No exclusion
o American form: In the gross earnings form for manufacturers, loss of earnings caused by
damage to finished stock is excluded.
• Bylaws
o British form: Includes any delays caused by the application of bylaws
o American form: No coverage for delays caused by the application of bylaws

Question 15

Ch 3. c. Explain to Janice why the company must be very accurate with its financial forecast and its estimate
of the maximum length of an interruption. (5 marks)

Answer 15

c. Financial forecasting for business interruption insurance
• Negotiating business interruption insurance requires that the insured be very accurate with its
financial forecast and with its estimate of the maximum length of an interruption caused by an
insured loss.
• The estimate and forecast are important to the insured for securing the proper amount of insurance.
• They are important to the underwriter for setting appropriate terms on which to offer the coverage.
• To ensure that the amount of insurance chosen at inception will be adequate, the business must
forecast future sales, expenses, and profits for two years from inception.
• The amount of insurance suggested by this forecast of future financial results is a minimum amount;
the insured should buy at least this much insurance, if not more.

Question 16

Ch 4. 1. What are five primary concerns of underwriters for excess and umbrella policies? (5 marks)

Answer 16

1. Concerns regarding excess and umbrella policies (any five of the following)
   • They should obtain copies of the underlying wordings to understand what coverage they provide and
   to establish the intent of the wording in the excess or umbrella policy.
   • They need to establish whether the underlying policy is an occurrence form or a claims-made form.
   • They must determine whether sublimits in the underlying policy might reduce the threshold for the
   excess or umbrella policy to participate in a loss settlement.
   • Underwriters of an excess or especially an umbrella policy must be satisfied that the primary insurer is
   stable and financially strong enough to pay losses, or those parts of losses, that fall in the primary layer.
   • Underwriters need to know whether the primary insurer has a good claims department, whether the
   primary insurer is known to cooperate with excess or umbrella insurers, and whether the defence
   lawyers they retain are of good reputation and ability.
   • Underwriters must know that the effective and expiration dates of the excess or umbrella policy are
   concurrent with the effective and expiration dates of the underlying policy.
   • Underwriters must determine whether the risk does business or engages in other activity in the United
   States, where there are no caps on the damages that may be awarded by the courts for non-economic
   loss (unlike Canada).

Question 17

Ch 4. What are five typical exclusions for directors and officers insurance? (5 marks)

Answer 17

2. Typical exclusions for directors and officers insurance (any five of the following)
• Proven deliberate dishonesty
• Libel or slander
• Bodily injury or property damage
• Failure to maintain adequate insurance
• Fines and penalties
• Pollution

Question 18

Ch 4. 3. List five advantages to having one policy covering all participants in a wrap-up policy. (5 marks)

Answer 18

3. Advantages to a wrap-up policy
   • In the event of a loss, a wrap-up policy eliminates disputes among the insurers of the other parties.
   • Only the insurer providing the wrap-up directs or administers the response to a claim under it.
   • A wrap-up policy assures uniformity of coverage for all parties to it during the term of the construction
   project, thereby avoiding any potential gaps in coverage under the liability policies of individual
   contractors.
   • The liability policies of individual contractors may have insufficient limits for the liabilities that could arise
   out of their work on the project.
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   • The wrap-up policy covers the full term of the project and also an acceptable period afterwards—as
   long as two or three years—for claims that might arise out of completed operations.

Question 19

Ch 5. 1. What are five underwriting considerations regarding potential insureds who disclose their intention to provide short-term accommodation? (5 marks)

Answer 19

1. Considerations regarding insureds who want to provide short-term accommodation (any five of the
   following)
   • Whether a rental or an exchange website is being used and, if so, which one(s)
   • How often and for how long the person has guests—for example, if it is strictly a seasonal thing
   • How many rooms are being rented
   • The number of guests the host rents to at one time
   • Whether the insured actively participated in the selection process of the guests
   • Whether the host (or a member of the host’s family) is normally there when guests are present
   • Whether valuables will be locked up or removed from the home
   • Who checks the property between tenants for damage and, if the home owner is not local, whether
   there is a family member or property manager
   • Whether information is provided about safety and security measures: smoke detectors, fire
   extinguishers or sprinklers, clearly marked exits, handrails on staircases, and so on
   • Whether there is a pool
   • Whether the host allows guests to use on-site laundry facilities

Question 20

Ch 5. 2. Name five of the six levels of vehicle automation and what each level involves. (5 marks)

Answer 20

2. Levels of vehicle automation and what each level involves (any five of the following)
   • Level 0—No automation: Full-time performance of all aspects of the dynamic driving task is required
   of the driver, even when enhanced by warning or intervention systems.
   • Level 1—Driver assistance: The driving-mode-specific performance by a driver-assistance system of
   either steering or acceleration/deceleration uses information about the driving environment, with the
   expectation that the human driver performs all remaining aspects of the dynamic driving task.
   • Level 2—Partial automation: The driving-mode-specific performance by one or more driverassistance systems of both steering and acceleration/deceleration uses information about the driving
   environment, with the expectation that the human driver performs all remaining aspects of the
   dynamic driving task.
   • Level 3—Conditional automation: The driving-mode-specific performance of all aspects of the
   dynamic driving task is completed by an automated driving system, with the expectation that the
   human driver will respond appropriately to a request to intervene.
   • Level 4—High automation: The driving-mode-specific performance of all aspects of the dynamic
   driving task is completed by an automated driving system, even if a human driver does not respond
   appropriately to a request to intervene.
   • Level 5—Full automation: The full-time performance of all aspects of the dynamic driving task under all
   roadway and environmental conditions that can be managed by a human driver is instead completed
   by an automated driving system

Question 21

Ch 5. 3. List five lines of insurance with applications for blockchain technology. (5 marks)

Answer 21

3. Lines of insurance with application for blockchain technology (any five of the following)
   • Directors and officers liability
   • Fidelity or financial crime
   • Cyber risk
   • Errors and omissions or professional liability
   • Kidnap and ransom
   • Employment practices liability

Question 22

Ch 6. 1. What are five effects of climate change and the threats they pose? (5 marks)

Answer 22

1. Effects of climate change and the threats they pose (any five of the following)
   • Rising global temperature
   • Widespread melting of Arctic sea ice
   • Changing precipitation patterns
   • Changes in the frequency and intensity of extreme events
   • Melting permafrost threatens northern buildings and transportation and releases methane, which
   further accelerates global warming
   • East and west coast sea levels will rise, threatening to flood cities, increase storm damage, and
   accelerate erosion
   • Increased activity of pest and invasive species pose risks to ecosystems and to the economy
   • There is an increased risk of weather-related catastrophes such as droughts and floods
   • Hotter summers will bring increased risks of heat-related health problems, as well as longer and more
   severe forest fire seasons

Question 23

Ch 6. 2. How can governments and the insurance industry reduce flood risks? (5 marks)

Answer 23

2. Ways to reduce flood risks (any five of the following)
   • Educating and empowering consumers to mitigate
   • Improving land-use planning
   • Making targeted infrastructure investments
   • Improving building codes
   • Sharing data
   • Preserving and restoring wetlands

Question 24

Ch 6. 3. How is climate change increasing the risks of wildfire? (5 marks)

Answer 24

3. How climate change is increasing wildfire risk (any five of the following)
   • Temperatures rising
   • Higher temperatures causing droughts
   • Increasing frequency and severity of wildfire
   • Raising wind speeds
   • Higher wind speeds help fires spread more rapidly
   • Rapidly spreading fires are harder to control and contain

Question 25

Ch 7. 1. What are five useful questions an underwriter can ask about a risk’s financial soundness? (5 marks)

Answer 25

1. Questions to ask about a risk’s financial soundness
   • Whether the risk is a stable company that will remain in business for a long time or is operating on a
   minimal budget, taking drastic steps just to meet its payroll
   • Where the risk’s revenue is generated and whether the risk has plans to grow in a particular region
   • How the risk employs people
   • Whether the risk has purchased (or is about to purchase) any new operations
   • Whether the risk has discontinued any operations, and why

Question 26

Ch 7. 2. What relevant questions can an underwriter answer using a risk’s statement of cash flow? (5 marks)

Answer 26

2. Questions to answer using a risk’s statement of cash flow (any five of the following)
   • What is the business’s payment experience with creditors? Does it pay its bills on time? If any are past
   due, how much is owed?
   • What is the state of the business’s accounts receivables? Is there much outstanding? If so, how much,
   and for how long has it been past due? How long does it take, on average, to receive money?
   • Are excessive funds tied up in inventory?
   • Is the business nearing the maximum amount of credit its creditors will extend? Has it borrowed more?
   Why?
   • Are funds coming from owners’ equity, a cash infusion, or the business’s operations? Are these funds
   in the form of revenues or credit extended by lenders?
   • What investing activities took place? Did the business see a return or a loss on them?

Question 27

Ch 7. 3. What are some of the questions an underwriter might ask about a risk’s financial statements that
could indicate potential problems with the risk? (5 marks)

Answer 27

3. Questions to ask about a risk’s financial statements that may indicate problems with the risk
   • Is there a difference in how certain items are booked?
   • Was there an infusion of capital? If so, why was it needed? Without it, how would the company’s
   financial health look?
   • Does the business depend too much on a limited number of sources for revenue or supplies?
   • Does the business face competitors with new or better products or services? Can it adapt to the new
   marketplace?
   • Has the company changed auditors at any time in the past?Why?

Question 28

Ch 7. 3. What are some of the questions an underwriter might ask about a risk’s financial statements that
could indicate potential problems with the risk? (5 marks)

Answer 28

3. Questions to ask about a risk’s financial statements that may indicate problems with the risk
   • Is there a difference in how certain items are booked?
   • Was there an infusion of capital? If so, why was it needed? Without it, how would the company’s
   financial health look?
   • Does the business depend too much on a limited number of sources for revenue or supplies?
   • Does the business face competitors with new or better products or services? Can it adapt to the new
   marketplace?
   • Has the company changed auditors at any time in the past?Why?

Question 29

Ch 8. 1. Why did the market for alternative risk financing grow so quickly in the mid-1980s? (5 marks)

Answer 29

1. Growth of alternative risk financing (any five of the following)
   • Aftermath of the capacity crisis
   • Risk profiles had not increased at the same rate as their insurance premiums
   • Insurance terms tightened in a hard market
   • Risk managers concerned about buying amount of insurance they needed
   • Risk managers concerned about ability to cover their exposures
   • Companies found they could have their own loss experience determine the cost of risk financing
   • Providing a company with stability through the insurance-market cycles
   • Allows companies to be less concerned about the financial health of insurers

Question 30

Ch 8. 2. What are some defining characteristics of an SIR? (5 marks)

Answer 30

2. Characteristics of an SIR (any five of the following)
   • An SIR is a self-insured retention, which is similar to a deductible
   • An insured applies an SIR before claiming against its policy
   • For losses below the level of an SIR, the insured does not involve the insurer at all but handles them
   itself
   • Where an SIR applies, the responsibility for claims lies largely, if not totally, with the insured
   • A deductible is effectively equivalent to an SIR in property insurance
   • SIRs can be another way for an insured to achieve the same sorts of objective as captives are set up
   to achieve
   • SIRs save an insured the administrative costs in setting up and running a captive

Question 31

Ch 8. 3. What concerns should an underwriter have about underwriting a reciprocal? (5 marks)

Answer 31

3. Concerns about underwriting a reciprocal (any five of the following)
   • What underwriting criteria does the reciprocal use with its subscribers? Do all the subscribers fall
   within those criteria or do some subscribers present unusual exposures that may adversely affect the
   loss experience?
   • How broad is the coverage provided by the reciprocal?
   • Is the underwriter being asked by the reciprocal to insure a risk that has been excluded from the
   coverage the reciprocal provides to its subscribers?
   • Is the underwriter being asked to insure a risk for a line of coverage that the reciprocal does not want
   to provide its subscribers?
   • Is the reciprocal changing its limits of coverage or the amount of its retention?
   • How long has the reciprocal been operating?
   • What is the financial strength of the reciprocal?

Question 32

Ch 9. 1. What should underwriters of liability and property insurance across borders research in order to
minimize risk? (5 marks)

Answer 32

1. Research to minimize risk of insurance across borders
• Culture
• Judicial systems
• Natural exposures
• Role of the broker
• Fraud

Question 33

Ch 9. 2. What are five resources an underwriter can consult for information when researching exposures
faced by an international risk? (5 marks

Answer 33

2. Resources for researching international risks
• The local broker
• Personal knowledge
• The risk manager
• Reinsurers
• Multinational insurers

Question 34

Ch 9. 3. Name five websites that are useful to underwriters of international risk. (5 marks)

Answer 34

3. Useful websites for underwriter of international risk (any five of the following)
   • The National Association of Insurance Commissioners (NAIC) in the United States
   • The Centre for Risk, Banking and Financial Services of Nottingham University Business School in the
   United Kingdom
   • The European Union, which provides information on finance, the economy, law, and other elements
   of underwriting context for risks in Europe
   • The World Trade Organization, which provides research analysis, legal text, and documents about
   international trade
   • Commercial resources such as LexisNexis and Westlaw with insurance-related topics, including
   insurance statutes and legal information from several countries, in several places on their respective
   websites
   • Major insurance brokers, which often post articles on insurance issues in foreign countries
   • The Risk and Insurance Management Society (RIMS)

Question 35

Ch 10. 1. What are some advantages of a quota share treaty? (5 marks)

Answer 35

1. Advantages of a quota share treaty (any five of the following)
   • It can protect against frequency of losses as well as severity.
   • It may provide a ceding commission to the insurer, which helps to offset the acquisition and
   administrative costs associated with the business.
   • It protects the insurer’s net retention.
   • It helps with financial considerations.
   • It permits recovery on smaller losses, thus stabilizing results.
   • It increases capacity.

Question 36

Ch 10. 2. Name five items that are always included in a facultative certificate. (5 marks)
3. Name five items that are

Answer 36

2. Items in a facultative certificate (any five of the following)
• Name of the insurer—the ceding company
• Policy number
• Name of insured
• Insurer’s policy period
• Reinsurance policy period
• Coverages reinsured
• Original policy limits
• Insurer’s limits
• Insurer’s retention
• Reinsurance limits
• Minimum retained premium
• Premium
• Adjustment basis
• Installment arrangements
• Claims expenses
• Claims cooperation
• How insolvency is to be handled
• Any cancellation provisions
• How disputes are to be handled, and any arbitration provisions

Question 37

Ch 10. 3. Name five items that are always included in treaty contracts. (5 marks)

Answer 37

3. Items in treaty contracts (any five of the following)
   • A preamble identifying the parties to the contract
   • The class of business covered (for example, commercial automobile liability)
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   • Any exclusions
   • The basis of coverage
   • The ultimate net loss
   • The limits of the reinsurance
   • Claims reporting procedures and provisions
   • The commencement and termination of coverage
   • How insolvency is to be handled
   • How disputes are to be handled, and any arbitration provisions