STUDY 8-UNDERWRITING AND RATING

Question 1

rate

Answer 1

Amount charged to an insured that reflects the expectation of loss for a covered risk, insurance company expenses, and profit. In other words, it is the basis of premium calculation for the insurance provided for the exposure.
Turn

Question 2

disclosure

Answer 2

The process of revealing all relevant facts.

Question 3

mortgagee

Answer 3

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.

Question 4

effective date

Answer 4

The date of inception of an insurance policy, or the date additional coverages become effective.

Question 5

manual rating

Answer 5

A pricing method in which an insurer uses rates that are based on its own experience rather than on that of a specific group for which it is calculating a premium.

Question 6

loss payee

Answer 6

A person or an entity other than the named insured to whom the proceeds of insurance will be paid.

Question 7

retention

Answer 7

(1) The amount of liability the ceding company (primary insurer) retains for its own account. It may be a percentage or a dollar amount of each risk. (2) Also refers to the part of the risk retained by clients without insuring it (either because insurance is deemed too expensive or the loss is not insurable).

Question 8

mortgage clause

Answer 8

A clause in an insurance policy that stipulates the rights and obligations of the insurer and the mortgagee.

Question 9

named insured

Answer 9

The person or party designated in the policy as the insured, who has certain rights under the policy, as opposed to someone who may be covered by the policy but is not specifically named and does not have the same rights as the named insured.

Question 10

expense loading

Answer 10

The part of a premium rate that represents the cost to the insurer of producing and maintaining the policy.

Question 11

underwriting rules

Answer 11

The rules used by insurance companies to assess the insurability of a particular risk. These rules are set individually by insurance companies and may differ for each class of business.

Question 12

special hazards

Answer 12

Foreseen hazards/risks common to certain types of businesses that are not covered in an ordinary policy. For example, woodworking plants and paint shops.

Question 13

loading

Answer 13

An additional charge included in an insurance rate to reflect a hazard not contemplated in the basic rate for the class.

Question 14

acquisition cost

Answer 14

The cost of putting business on the books and acquiring the premium. The items involved are not standard with all insurers, but generally may include such items as agents’/brokers’ commissions, field representatives’ costs, premium tax, and perhaps some of the relevant head office acquisition costs of operation.

Question 15

loss probability

Answer 15

The likelihood of a risk resulting in a loss, taking into account all its various hazards and protections.

Question 16

application

Answer 16

A request by an insured for insurance. Applications may be done verbally, in writing, or online. The insured provides information relating to the subject for insurance. The insurer then assesses this information and decides whether to accept the risk for insurance and on the terms of such acceptance.

Question 17

expiry

Answer 17

End of the policy period.

Question 18

frequency of loss

Answer 18

This is a measure of how often losses are likely to occur in the future. Assuming the average size of loss is constant, the higher the loss frequency, the worse the loss experience.

Question 19

applicant

Answer 19

The person or firm requesting insurance. That party answers oral questions or completes and signs written forms that contain information to assess the risk.

Question 20

pure premium

Answer 20

Portion of the total premium that is needed to pay expected losses. It does not take into account money needed for company expenses.

Question 21

exposure

Answer 21

The hazard threatening a risk because of external or internal physical conditions.

Question 22

representation

Answer 22

A statement or conduct made to influence an insurer to decide on a risk. The decision includes declining or accepting the risk and deciding the rate and premium to be charged. In insurance, these statements are said to be “material to the risk” and are enough to void a policy ab initio (Latin term meaning “from the beginning”).

Question 23

severity of loss

Answer 23

This is the average size of the losses. The larger the average loss, the higher the loss severity is said to be. And assuming the loss frequency is constant, the higher the loss severity, the worse the loss experience.

Question 24

broker of record

Answer 24

The broker currently receiving a commission to handle a policy.