Study 1 - Introduction to Underwriting

Question 1

Define insurance

Answer 1

A contract in which one party, the insurer, for monetary consideration agrees to reimburse another, the insured, for loss or liability for a loss on a defined subject caused by specified hazards or perils

Question 2

Define underwriter

Answer 2

The insurance company or group that underwrites or insures a particular risk

The individual within an insurance company whose responsibility is to accept or reject business in the particular line in which she specializes and, in this way, choose the risks her principals are prepared to underwrite

Question 3

Define risk

Answer 3

The chance of loss. Specifically, the possible loss or destruction of property is the possible incurring of a liability. Sometimes referred to as the subject of an insurance contract

Question 4

What are some lines of insurance underwrites may specialize in?

Answer 4

Property, liability, crime, boiler/machinery, professional liability, automobile and business interruption

Question 5

Briefly describe the role of an underwriter

Answer 5

To assess and modify or reject a risk on behalf of an insurer

Question 6

How is an underwriter an investor of capital?

Answer 6

The risk of loss would deplete capital and underwriters attempt to mitigate that risk

Question 7

What five items are typically in the strategic plan?

Answer 7

• The types of risk the insurer wants to pursue
• The lines of insurance it wants to underwrite
• The reinsurance it can arrange
• The amounts of insurance it will offer for risks of different types/sizes
• The approach it will take to pricing

Question 8

Define line guide

Answer 8

A listing of the maximum amounts of exposure an insurance company is prepared to accept on various classes of risk

Question 9

What are the three main elements of underwriting?

Answer 9

• Accepting or rejecting risk
• Investing capital
• Implementing the strategic plan

Question 10

What are the common considerations in a line guide?

Answer 10

• Licensing
• Types of business
• Lines of insurance
• Territory
• Capacity
• Reinsurance
• Pricing

Question 11

What three main items determine the amounts in the table of limits under Capacity?

Answer 11

• Occupancy of the risk
• Level of public fire protection
• Type of construction

Question 12

Define reinsurance

Answer 12

Insurance purchased by an insurance company from another insurance company to provide it protection against large losses it has already insured

Question 13

What other names might the reinsured go by?

Answer 13

“Original” or “primary” insurer

“Ceding company”

Question 14

Define facultative reinsurance

Answer 14

Reinsurance of risks on a case-by-case basis

Question 15

Define treaty reinsurance

Answer 15

Agreement between insurance company and reinsurer, automatically accepting a portion of the insurance company’s business within the terms of the contract

Question 16

How do underwriters treat facultative and treaty reinsurance?

Answer 16

Facultative; underwrites the risk, however does not have as much info as the insurer’s underwriter

Treaty; underwrites the entire portfolio of an insurance company, discussion & audits

Question 17

Define book of business

Answer 17

Generally related to joint ventures, the book of business refers to when a smaller brokerage owns its own book of business and enters into a partnership with a larger organization

Larger group will have access to it, small group retains right to repurchase full ownership

Question 18

Who is responsible for underwriting individual risks?

Answer 18

File underwriter

Question 19

Who is responsible for underwriting groups of risks?

Answer 19

Portfolio underwriter

Question 20

What change has effectively turned many underwriters into portfolio managers?

Answer 20

Allowing brokers to write business within certain criteria and within their authority

Question 21

What are the six main risks that an underwriter may review to assess the risk?

Answer 21

• Length of time in business
• Type of loss
• Perils
• Physical hazards
• Moral hazard
• Required info

Question 22

What are the three criteria in which an underwriter is generally required to refuse a risk?

Answer 22

• Risk is not a class permitted by line guide or falls short of minimum requirements
• Market conditions or competitive considerations require it (hard market vs soft market)
• The risk is too flawed to be accepted, not possible to negotiate on terms

Question 23

What are some tools an underwriter can utilize to increase the desirability of a risk?

Answer 23

Deductibles, premium rates, modifications of coverage and implementation of recommendations by the loss control department

Question 24

Define speculative risk

Answer 24

An insurance term for a situation where the possibility of either a financial loss or gain

Question 25

Define pure risk

Answer 25

A situation involving a chance of a loss or no loss, but no chance of gain

Question 26

What two questions are the basic foundation to determine if an item is insurable?

Answer 26

• Is there a chance of loss?

- Is there a chance of profit?

Question 27

What type of risk is insurable and which is uninsurable?

Answer 27

Pure risk is insurable

Speculative risk is uninsurable

Question 28

What are the three broad categories of insurable risks?

Answer 28

• Personal risks
• Property risks
• Liability risks

Question 29

What qualifies as a personal risk?

Answer 29

• Bodily injury
• Loss of life
• Loss of income

Due to:

• Death
• Physical disability (resulting from accident/sickness)
• Old age
• Unemployment

Question 30

What are the two types of losses for property risks?

Answer 30

• Direct loss

- Indirect loss

Question 31

What is a direct loss?

Answer 31

The actual damage or destruction of property insured

Question 32

What is an indirect loss?

Answer 32

A consequence of the direct loss

Question 33

What five negligent acts are commonly associated with liability risks?

Answer 33

• His or her conduct
• Operation of autos, aircrafts, boats, snowmobiles, trains, trucks, etc
• Ownership or occupancy (or both) of property
• Manufacturing of products
• Rendering of professional services

Question 34

What are the three classes of insurance?

Answer 34

• Personal lines
• Commercial lines
• Special risks

Question 35

What are some qualities of a good underwriter?

Answer 35

Experience, knowledge, skills and flexibility

Question 36

Who or what determines if an underwriter can accept or reject a risk?

Answer 36

The insurer