The Underwriting Function

Question 1

Policyholders’ surplus

Answer 1

Under statutory accounting principles (SAP), an insurer’s total admitted assets minus its total liabilities

Question 2

Capacity

Answer 2

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

Question 3

Underwriting authority

Answer 3

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

Question 4

Line underwriter

Answer 4

Underwriter who is primarily responsible for implementing the steps in the underwriting process

Question 5

Staff underwriter

Answer 5

Underwriter who is usually located in the home office and who assists underwriting management with making and implementing underwriting policy

Question 6

Manuscript policy

Answer 6

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

Question 7

Underwriting policy (underwriting philosophy)

Answer 7

A guide to individual and aggregate policy selection that supports an insurer’s mission statement

Question 8

Advisory organization

Answer 8

An independent organization that works with and on behalf of insurers that purchase or subscribe to its services

Question 9

Prospective loss costs

Answer 9

Loss data that are modified by loss development, trending, and credibility processes, but without consideration for profit and expenses

Question 10

Loss development

Answer 10

The increase or decrease of incurred losses over time

Question 11

Trending

Answer 11

A statistical technique for analyzing environmental changes and projecting such changes into the future

Question 12

Treaty reinsurance

Answer 12

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

Question 13

Underwriting audit

Answer 13

A review of underwriting files to ensure that individual underwriters are adhering to underwriting guidelines

Question 14

National Association of Insurance Commissioners (NAIC)

Answer 14

An association of insurance commissioners from the fifty U.S. states, the District of Columbia, and the five U.S. territories and possessions, whose purpose is to coordinate insurance regulation activities among the various state insurance departments

Question 15

Premium-to-surplus ratio or capacity ratio

Answer 15

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

Question 16

Statutory accounting principles (SAP)

Answer 16

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

Question 17

Return on equity (ROE)

Answer 17

A profitability ratio expressed as a percentage by dividing a company’s net income by its net worth (book value). Depending on the context, net worth is sometimes called shareholders’ equity, owners’ equity, or policyholders’ surplus

Question 18

Market conduct examination

Answer 18

An analysis of an insurer’s practices in four operational areas: sales and advertising, underwriting, ratemaking, and claim handling

Question 19

Predictive modeling

Answer 19

A process in which historical data based on behaviors and events are blended with multiple variables and used to construct models of anticipated future outcomes

Question 20

Underwriter

Answer 20

An insurer employee who evaluates applicants for insurance, selects those that are acceptable to the insurer, prices coverage, or a substantive policy midterm or renewal change

Question 21

Underwriting submission

Answer 21

Underwriting information for an initial application, or a substantive policy midterm or renewal change

Question 22

Expert systems, or knowledge-based systems

Answer 22

Computer software programs that supplement the underwriting decision-making process. These systems ask for the information necessary to make an underwriting decision, ensuring that no information is overlooked

Question 23

Information efficiency

Answer 23

The balance that underwriters must maintain between the hazards presented by the accountant and the information needed to underwrite it

Question 24

Application

Answer 24

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

Question 25

Counteroffer

Answer 25

A proposal an offer 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 26

(a) rated classification

Answer 26

The rate classifications provided by the ISO Commercial Lines Manual that describe operations with unique characteristics or for which inadequate statistical experience exists

Question 27

Estimated loss potentials (ELP)

Answer 27

Rate development factors used for operations with unique characteristics or for which inadequate statistical experience exists. ELPs are multiplied by loss cost multipliers to develop rates

Question 28

Experience rating

Answer 28

A ratemaking technique that adjusts the insured’s premium for the upcoming policy period based on the insured’s experience for the current period

Question 29

Schedule rating

Answer 29

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 include

Question 30

Retrospective rating

Answer 30

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 31

Facultative reinsurance

Answer 31

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 32

Account underwriting

Answer 32

A method of underwriting in which all of the business from a particular applicant is evaluated as a whole

Question 33

Unfair trade practices

Answer 33

Methods of competition or advertising or procedures that tend to deprive the public of information necessary to make informed insurance decisions

Question 34

Binder

Answer 34

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

Question 35

Certificate of insurance

Answer 35

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

Question 36

Combined ratio

Answer 36

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

Question 37

Production underwriting

Answer 37

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

Question 38

Hit ratio

Answer 38

The ratio of insurance policies written to those that have been quoted to applicants for insurance