AU 60 FINAL EXAM ACTUAL EXAM QUESTIONS WITH DETAILED VERIFIED ANSWERS 100% CORRECT ANSWER, Exams of Insurance Economics

Download AU 60 FINAL EXAM ACTUAL EXAM QUESTIONS WITH DETAILED VERIFIED ANSWERS 100% CORRECT ANSWER and more Exams Insurance Economics in PDF only on Docsity! AU 60 FINAL EXAM ACTUAL EXAM QUESTIONS WITH DETAILED VERIFIED ANSWERS (100% CORRECT ANSWERS) | ALREADY GRADED A+ 2024-2025 If an insured recently implemented risk control measures they believe will have immediate benefits and favorable impact their loss experience, what type of plan would they most likely want to use for the upcoming policy period? Correct Answer retrospective rating plans - insured might assert that the experience modification factor is not responsive because it does not include data from the most recent year An underwriter analyzing historical loss data for loss frequency trends must also evaluate historical _______ Correct Answer exposures The underwriter's primary source of dependable information about an account is the A. Claims adjuster. B. Applicant. C. Current insurer D. Producer. Correct Answer D. producer Which one of the following insurer employees would be best qualified to answer an underwriter's technical questions about an applicant's operations? Select one: A. Claim representative B. Premium auditor C. Producer D. Risk control representative Correct Answer D. Risk control representative Which one of the following is the primary benefit of using the services of an independent contractor who specializes in risk control work to inspect properties, rather than the insurer's risk control representative? A. Independent opinion of risk B. Customized reports C. Customer contact D. Quicker response Correct Answer D. Quicker response Which one of the following external resources would give Alex a general description of the industry's operations and the level of hazard by line of insurance? Select one: A. Dun & Bradstreet Report B. Best's Underwriting Guide C. Scopes Manual D. Fire Protection Handbook Correct Answer B. Best's Underwriting Guide Which one of the following Dun & Bradstreet report scores shows how promptly the company pays its bills relative to terms? Select one: A. Hazard index D. Return on assets Correct Answer B. Debt-to-assets ratio. Debt-to-assets ratio = Correct Answer Total liabilities ÷ total assets inventory turnover ratio Correct Answer COGS/inventory) The North American Industry Classification System (NAICS) uses a six digit code structure to classify specific Select one: A. Construction classes B. Business operations C. Demographic sectors D. Actuarial ratings Correct Answer B. Business operations An underwriter seeking to gain insight into the activities that might be conducted by an applicant would use which one of the following resources? Select one: A. Premium Audit Advisory Service Guide B. North American Industry Classification System C. Commercial Lines Manual Correct Answer B. North American Industry Classification System To effectively price insurance accounts, underwriters must be familiar with rate manuals. Which one of the following is true regarding rate manuals? Select one: A. Underwriters can typically rely solely on rate manuals to determine premiums for individual accounts. B. Rate manuals provide information concerning the use of endorsements that amend the policy. C. Underwriters typically use rate manuals to develop premiums for unique exposures for which there is no established rate. D. Rate manuals always contain an appropriate class or rate for each account. Correct Answer B. Rate manuals provide information concerning the use of endorsements that amend the policy. The amount needed to pay future claims and loss adjustment expenses is Select one: A. Easily determined by any insurer based on that insurer's claims costs for the previous year. B. Supplied by advisory organizations or developed by insurers with large enough pools of loss data. C. Determined collectively by all insurers within a market based on shared loss data. D. Specified by state insurance regulators based on accumulated data from all insurers operating in the state. Correct Answer B. Supplied by advisory organizations or developed by insurers with large enough pools of loss data. In using the pure premium method of ratemaking, Insurer X has calculated the new rate per exposure unit based on a pure premium of $45. The fixed expenses are $2.00 while the variable expenses are $5.00. Insurer X estimates the cost per exposure unit for profits and contingencies as $3.00. Therefore, the new rate per exposure unit would be Select one: A. $47. B. $50. C. $52. D. $55. Correct Answer D. $55. A rating plan that adjusts the insured premium for savings in insurance company commissions is called Select one: A. Expense modification. B. Participating. C. Experience. D. Rebating. Correct Answer A. Expense modification. One social criterion for ratemaking is simplicity. The requirement for simplicity arises out of the insurance industry's need to Select one: A. Base rates on factors that insureds have control over. B. Explain and defend its system to the public. C. Establish a ceiling on rates in order to make them affordable. D. Make insurance accessible to those who want or need it. Correct Answer B. Explain and defend its system to the public. All of the following are objectives of rate regulation, EXCEPT: Select one: A. Underwriting supervisor B. Field underwriter C. Corporate underwriter D. Producer Correct Answer C. Corporate underwriter The most important thing a field underwriter does is Correct Answer Evaluating new submissions and renewal underwriting. Corporate underwriters share research of the market responsibilities with actuarial and marketing departments. Research includes an ongoing evaluation of which one of the following? Select one: A. The hit ratios by underwriter B. Average loss ratio for a book of business C. Optimal product mix in the book of business. D. Revision to coverage forms Correct Answer C. Optimal product mix in the book of business Sofie, a property underwriter for Cintriell Insurance Company is reviewing a new homeowners application. Sofie has changed the protection class to unprotected, as the fire protection class listed by the producer is an eight and is incorrect. Which one of the following line underwriter activities is Sofie performing? Select one: A. Coordinating with producer efforts B. Classifying and pricing accounts C. Selecting insureds D. Recommending correct coverage Correct Answer B. Classifying and pricing account Which one of the following is the most common use of predictive modeling in the underwriting of small commercial accounts? Select one: A. Risk analysis B. Risk selection C. Rating D. Coverage proposal Correct Answer C. Rating i.e. predicting prospective loss costs Determining common characteristics among the accounts that are renewing, those that are not renewing, and those that are most profitable in order to determine if there is a common reason why accounts are not renewing is an example of what? Correct Answer data mining During a general market conduct examination of underwriting, examiners would look for evidence of all of the following, EXCEPT: Select one: A. Improper cancellations B. Inaccurate filing of rates and forms C. Misclassification of risk D. Inconsistent claim practices Correct Answer D. Inconsistent claim practices Underwriters, in conjunction with ratemakers, help achieve actuarial equity by Select one: A. Ensuring that all consumers have equal access to insurance at affordable rates. B. Ensuring that rates are consistent and vary little among insurers. C. Assigning insureds with similar characteristics to the same rating class. D. Charging similar premiums for all risks that they agree to insure. Correct Answer C. Assigning insureds with similar characteristics to the same rating class Which one of the following statements is correct with regard to regulation and insurers' operations? Select one: A. Solvency regulation indirectly influences underwriting by limiting new business for insurers. B. Financial responsibility laws generally have no effect on the underwriting function. C. Misclassification of current risks will not affect the accuracy of future rates. D. Regulation of underwriting practices helps insurers remain solvent but is not expected to minimize claims. Correct Answer A. Solvency regulation indirectly influences underwriting by limiting new business for insurers. Rate regulation: A. Directly affects underwriting B. Indirectly affects underwriting Correct Answer A. Directly Accounts Receivable$2,500 Cost of Goods Sold$125,000 Marketable Securities$5,000 Current Liabilities$50,000 Correct Answer Cash $50k Marketable securities $5k AR $2500 $57,500 / $50,000 = 1.15 ratio Gross profit is reported on the income statement. How is gross profit calculated? Correct Answer Sales - COGS Bob's Manufacturing has been in business for one year. Which one of the following is true regarding Bob's year- end financial statements? Select one: A. The beginning balance on the statement of changes in shareholders' equity will show as $0 B. Cash on the balance sheet will be shown as $0. C. The fact that there are no prior year reports will have no impact on the financial statements. D. Change in cash on the statement of cash flow will be $0. Correct Answer A. The beginning balance on the statement of changes in shareholders' equity will show as $0 Which ratio can be used to assess the extent of an organization's debt financing compared to other organizations in the same industry? Correct Answer debt- to-equity Which offers coverage codes for liability lines? A. Commercial Lines Manual (CLM) B. Premium Audit Advisory Service (PAAS) C. North American Industry Classification System NAICS Correct Answer A. Commercial Lines Manual (CLM) Which offers detailed information about liability classifications? A. Commercial Lines Manual (CLM) B. Premium Audit Advisory Service (PAAS) C. North American Industry Classification System NAICS Correct Answer Premium Audit Advisory Service (PAAS) Which offers taxonomy of business operations and activities? A. Commercial Lines Manual (CLM) B. Premium Audit Advisory Service (PAAS) C. North American Industry Classification System NAICS Correct Answer C. North American Industry Classification System NAICS Actuaries and underwriters both have roles in pricing insurance products. Which one of the following is actuaries' primary pricing role? Select one: A. Individual account pricing B. Account classification C. Application of premium modification plans D. Ratemaking Correct Answer D. Ratemaking To achieve profitability, the underwriting process serves which one of the following additional purposes? Select one: A. Charging fair premiums for applications that are accepted B. Transferring the risks of individuals and businesses C. Selecting accounts with a lower-than-average chance of loss D. Guarding against adverse selection Correct Answer D. Guarding against adverse selection Tobias, a successful producer with Barnley's Insurance Company, is struggling with an intricate quote on homeowners coverage for his insured, Hanna. Hanna not only has substantial collections of guns and silverware, but also has a small farm located at her premises. Which one of the following individuals from Barnley Insurance Company could provide assistance and support to Tobias? Select one: A. The claims representative B. Corporate underwriter C. The field underwriter D. The actuary Correct Answer C. The field underwriter Which one of the following statements is correct with respect to market conduct examinations? Select one: A. General examinations are conducted in response to specific complaints made against the insurer. The commercial underwriting process determines which submissions will be accepted, and the ______, _____ , and _______ under which they are accepted Correct Answer amount (of insurance), price, conditions What is the first step of the commercial underwriting process? Correct Answer 1. Evaluating the application During which step of the commercial underwriting process would an underwriter look to understand the activities, operations and character of each applicant? Correct Answer 1. Evaluating the application Sprinkler systems or fire alarms are examples of _____ ______ _____, often recommended during which step of the underwriting process? Correct Answer Risk control measures, recommended during step #2: developing underwriting alternatives An underwriter would accept, reject or modify an application during which step of the underwriting process? Correct Answer 2. Develop underwriting alternatives An underwriter may adjust the premium and amend policy terms and conditions during which step of the underwriting process? Correct Answer step 2- Develop underwriting alternatives After the developing underwriting alternatives step, an underwriter may choose to do what? Correct Answer 3. Select underwriting alternatives After selecting an underwriting alternative (if necessary), what is the next step in the underwriting process? Correct Answer 4. Determining an appropriate premium Underwriters make sure each loss exposure is accurately classified during which step of the underwriting process? Correct Answer 4. Determining an appropriate premium After an underwriter has evaluated an application, made appropriate modifications, and determined a premium, what is the next step in the underwriting process? Correct Answer 5. Implement the underwriting decision Implementing an underwriting decision includes: 1. Communication decisions to ______ 2. Issue _____ _____ 3. Recording information about the _______ and _______ Correct Answer 1. communicate to producer 2. Issue required documents 3. record info about applicant and policy A temporary agreement providing insurance coverage until the formal policy is issued Correct Answer binder What is the final step in the underwriting process? Correct Answer 6. Monitor underwriting decision Selecting insureds is typically the responsibility of a: A. Field Underwriter B. Corporate Underwriter Correct Answer A. Field Underwriter Ensuring accurate classification and pricing is typically the responsibility of a: A. Field Underwriter B. Corporate Underwriter Correct Answer A. Field Underwriter Recommending or providing coverage is typically the responsibility of a: A. Field Underwriter B. Corporate Underwriter Correct Answer A. Field Underwriter Managing a book of business is typically the responsibility of a: A. Field Underwriter B. Corporate Underwriter Correct Answer A. Field Underwriter Supporting producers and insureds is typically the responsibility of a: A. Field Underwriter B. Corporate Underwriter Correct Answer A. Field Underwriter Formulating underwriting policy is typically the responsibility of a: Government regulators oversee insurers' underwriting practices to prevent: 1. insurer ________ 2. _____ ________ of applicants and insureds Correct Answer 1. insolvency 2. unfair discrimination TRUE/FALSE: It illegal for insurers to discriminate against different groups of insureds or applicants Correct Answer FALSE: Not only is it legal, it's often necessary. it's a descriptive term that means to distinguish, differentiate, or categorize ____ _______ is needed to ensure that each insured pays for the risk it presents to the insurer Correct Answer Fair discrimination _________ (the _____ or _____) provide more information about an account for underwriters than any other data source. Correct Answer Producers ... agent or broker For an underwriter, the two most important items on an application are: 1. the ____ ______ 2. information regarding the applicant's ______ _____ Correct Answer 1. loss history 2. prior insurance TRUE/FALSE: In accordance with ACORD, the style and format of insurance applications must be the same amongst insurers Correct Answer FALSE - the style and format of applications vary among insurers, most include the same general questions. ACORD is an organization that produces standardized applications used by a number of different insurers TRUE/FALSE: Loss frequency is usually a better indicator of future loss experience than severity Correct Answer TRUE TRUE/FALSE: Loss severity usually a better indicator of future loss experience than frequency Correct Answer FALSE TRUE/FALSE: Insureds can typically control the the severity of a loss Correct Answer FALSE TRUE/FALSE: Insureds can typically control the the frequency of a loss Correct Answer TRUE Experience Rating Plan: Increases or reduces premium for a _____ period based on the insured's own _____ _____ for a period in the ____ _____ Correct Answer Premium for future period based on loss experience for a period in the recent past Supplemental application information is available from these internal sources: - ____ ______Reports - ______ working for the ____ _______ - Insurer ____ Correct Answer - Risk Control Reports - Others working for the same insurer - Insurer files A _______ _______ could be the only insurer representative to meet the insured, see its operations, and review its financial records Correct Answer premium auditor Supplemental application information is available from these external sources: - Publications of _______ ________ _________ - _______ _______ Services - ________ Records - ________ Guides - _________ ________ Publications Correct Answer - Publications of Insurance Advisory Organizations - Financial Reporting Services - Government Records - Valuation Guides - Background Resource Publications TRUE/FALSE: Risk control reports are typically always needed for each application, even if one has been done for the same applicant for another line of insurance Correct Answer FALSE - For example, if an auto risk control report indicates that an insured is safety conscious and replaces vehicles at regular intervals, a property underwriter could infer that the insured would care for the machinery covered by property insurance in the same way. The property underwriter might decide that a new risk control report is not necessary. B. Noncurrent Assets Correct Answer .B. Noncurrent Asset Copyrights and trademarks are: A. Current Assets B. Noncurrent Assets Correct Answer B. Noncurrent Assets Cost of Goods Sold = _______ _______ + _______ to ________ - ______ ______ Correct Answer Beginning Inventory + Additions to Inventory - Ending Inventory The cost of treasury stock is deducted from where? Correct Answer Shareholders equity Which financial statement is used to determine an organizations ability to meet financial obligations? Correct Answer Statement of Cash Flows What are the 3 sections of the Statement of Cash Flows? Correct Answer 1. Cash Flows From Operating Activities 2. Cash Flows From Investing Activities 3. Cash Flows From Financing Activites Which section of the Cash Flow Statement begins with Net Income? Correct Answer Cash Flows From Operating Activities The sale or purchase of equipment would be reflected in which section of the Cash Flow Statement? Correct Answer Cash Flows From Investing Activities The receipt of payments on loans made to others would be reflected in which section of the Cash Flow Statement? Correct Answer Cash Flows From Investing Activities The acquisition or disposal of marketable securities would be reflected in which section of the Cash Flow Statement? Correct Answer Cash Flows From Investing Activities Issuing or repurchasing stocks, bonds or mortgages would be reflected in which section of the Cash Flow Statement? Correct Answer Cash Flows From Financing Activities Paying dividends would be reflected in which section of the Cash Flow Statement? Correct Answer Cash Flows From Financing Activities _______ ______ looks for any unusual percentages in the common-size statements Correct Answer Vertical analysis Vertical analysis compares a company's ______ vs ______ or ______ _____ Correct Answer percentages vs competitors or industry averages AR Turnover is what type of ratio? A. Efficiency B. Profitability C. Liquidity D. Leverage Correct Answer A. Efficiency Asset Turnover is what type of ratio? A. Efficiency B. Profitability C. Liquidity D. Leverage Correct Answer A. Efficiency Inventory turnover is what type of ratio? A. Efficiency B. Profitability C. Liquidity D. Leverage Correct Answer A. Efficiency Net profit margin is what type of ratio? A. Efficiency B. Profitability C. Liquidity D. Leverage Correct Answer B. Profitability Return on assets is what type of ratio? A. Efficiency B. Profitability C. Liquidity D. Leverage Correct Answer B. Profitability Net Income = profit Turnover = efficiency Cash/equivalent = liquidity Debt = leverage DuPont identity - return on equity: (_____ _____/ _____) x (______ / _____ ______) x (_______ ______ / _________ ______) Correct Answer (net income / sales) x (Sales / total assets) x (total assets / shareholders equity) Acid-test (quick ratio): (____ + ________ ________ + ______ _____) / ______ ______ Correct Answer (Cash + marketable securities + AR) / current liabilities Debt to equity ratio: _____ - ____ ___ / _____ _____ Correct Answer long- term debt / shareholders equity Debt to assets ratio: ______ ______ / _____ _______ Correct Answer Total liabilities / Total assets Equity multiplier: _____ _____ / ________ ______ Correct Answer Total assets / shareholders equity What ratio measures how quickly a business collects the funds it is owed? Correct Answer AR turnover An AR receivable turnover that is high indicates the company's performance is A. Efficient B. Inefficient Correct Answer A. Efficient If a company sells more (assuming assets stay equal), it's asset turnover will be: A. Higher B. Lower Correct Answer A. Higher Which ratio best shows the return shareholders are recieving? Correct Answer ROE _______ ratios are used to determine an organization's ability to pay off its short-term debt obligations Correct Answer Liquidity ________ ratios provide insight into how an organization uses borrowed funds Correct Answer Leverage individual creates a ______ _______by engaging in a business activity and is both entitled to all the profits and responsible for all losses, liabilities, and debts Correct Answer sole proprietorship TRUE/FALSE: From a legal perspective, there's no difference between a sole proprietorship and its owner. Correct Answer TRUE On the declarations page of a policy of a sole proprietor, the insured will typically have: A. His or her name B. The name of the business C. both Correct Answer C. both TRUE/FALSE: If an insured sells the property that is insured, the insurance on their property transfers with it when the property is sold Correct Answer FALSE - Such a transfer requires the consent of the insurer, and most insurers prefer to write new insurance policies for new owners. TRUE/FALSE: Subsidiaries of corporations should always appear on the declarations page Correct Answer FALSE: subsidiaries could have their own insurance policies TRUE/FALSE: Unincorporated associations should list both the name of the corporations and their partners Correct Answer FALSE: typically listed with their name alone TRUE/FALSE: Liability insurance coverage forms try to measure insurable interest of each party Correct Answer FALSE - In attempting to provide necessary coverage, liability policies occasionally provide duplicate coverage TRUE/FALSE: Many parties that engage in joint operations with others choose to insure those operations under a joint policy that is separate from each party's individual policy Correct Answer TRUE TRUE/FALSE: Wrap-ups typically include commercial auto coverage Correct Answer FALSE financial stability by referring to ____ ____ and/or ________ ______ from owner's _______ ______ Correct Answer Loss experience and/or financial records from owners' other businesses When a new commercial venture has no loss or organizational history, you could evaluate the venture's commitment to controlling losses by turning to the new venture's _____ and ______ _____ plans, _______ policy and _______ Correct Answer safety and loss control plans, business policy, and procedures To gauge a businesses reputation, you can use _____ _____ to assess the general sentiment of customers Correct Answer data mining Quality of work of a business can result in a ______ ______ ______; an organizations _____ ____ can indicate whether faulty products or inferior work have led to bodily injury or harm Correct Answer liability loss exposure; claims history Signs of poor organizational culture would include employees who are: - un_______ - in______ - poorly _______ - primarily employed _____-time (for non-seasonal or specialized labor) Correct Answer - untrained - inexperienced - poorly compensated - employed part-time organizations that have adopted _______ _______ _______ can be more attractive from an underwriting standpoint because they often take risk into account when formulating their business strategies Correct Answer enterprise risk management (ERM) TRUE/FALSE: An enterprise risk management program typically focuses on negative risk only when formulating business strategy Correct Answer FALSE, both positive and negative Which is most likely to alert an underwriter to possible concerns about a commercial insurance applicant's prudence of operations? A. The organization uses independent contractors B. The organization uses a broker to provide risk management advice C. The organization is a new venture D. The organization has rapidly expanded while introducing a new product Correct Answer D. The organization has rapidly expanded while introducing a new product The length of time that management personnel have been in business and the types of experience they have is part of what Leadership Characteristic? A. Ability and Experience B. Reputation C. Quality of Work D. Prudence of Operations E. Employees F. Risk Management G. Operational Authority Correct Answer Ability and Experience Frequent work corrections (callbacks), numerous complaints about the business, and a higher ratio of negative reviews to positive reviews than is normal for the industry is part of what Leadership Characteristic? A. Ability and Experience B. Reputation C. Quality of Work D. Prudence of Operations E. Employees F. Risk Management G. Operational Authority Correct Answer B. Reputation Ventures that are unusual for the insured's classification are a sign that what Leadership Characteristic could be lacking? A. Ability and Experience B. Reputation C. Quality of Work D. Prudence of Operations E. Employees F. Risk Management If an employer sets work hours and provides training, tools, and supplies, they have _____ and _____ over the work, and an ________-________ relationship exists Correct Answer direction and control; employer-employee relationship If an employer pays by the hour or pays a salary, they have _____ and _____ over the work, and an ________- ________ relationship exists Correct Answer direction and control; employer-employee relationship Which Best's Underwriting Guide feature identifies the relative degree of risk, on a 1 to 10 scale, for each line of insurance coverage typically provided in a classification Correct Answer Hazard Index Which Best's Underwriting Guide feature helps explain the exposure or level of risk associated with a line of coverage for a particular classification and often provides more insight into the Hazard Index number Correct Answer Underwriting comments Which Best's Underwriting Guide feature lists classifications that could provide the underwriter with additional sources of risk-related information regarding a particular business Correct Answer Related Classifications Which Best's Underwriting Guide feature explains what businesses in this classification typically do, the materials and equipment they tend to use, and the processes they generally adopt Correct Answer Risk Description Which Best's Underwriting Guide feature describes the risk associated with each line of insurance coverage typically provided in a classification Correct Answer Lines of Coverage Which Best's Underwriting Guide feature indicates unique or large hazards that represent the primary underwriting considerations for a class of business Correct Answer Special Exposure Which Best's Underwriting Guide feature provides questions the underwriter should be able to answer about a business before accepting the associated risks Correct Answer Underwriters checklist Rate manuals collect the ____ _____ used for rating, as well as other valuable additional information that can support pricing decisions. Correct Answer loss costs Insurance Rate = _______ _______ _____ + ________ + _______ & _____ Correct Answer Prospective loss costs + expenses + profit & contingencies The insurance rates used for most lines of business are _____ rates Correct Answer class TRUE/FALSE: Fire rates apply only to the property at the particular location indicated Correct Answer TRUE What 2 types of policies typically use judgement rates? Correct Answer Marine and speciality TRUE/FALSE: Commercial classification systems are not comprehensive, and accounts don't typically fit logically into a given class Correct Answer FALSE - almost all accounts fit logically into a given class. These classification systems are designed to expedite pricing and reflect a logical approach. TRUE/FALSE: Placing two accounts in the same business into different classes is a form of unfair discrimination and is therefore illegal Correct Answer TRUE - State insurance examiners look for that type of unfair discrimination during market conduct examinations, and examiners will impose fines if they find a pattern of unfair discrimination. What ratemaking method develops rates from past experiences? Correct Answer Pure premium method What ratemaking method modifies existing rates? Correct Answer Loss ratio method What ratemaking method develops rates when data is limited? Correct Answer Judgement method What is the oldest ratemaking method? Correct Answer Judgment TRUE/FALSE: Because individual rating plans use different approaches to modifying the rate for an account, more than one plan can apply to an account Correct Answer TRUE Under what type of rating plan is a provisional (or deposit) premium charged at the beginning of the policy period? Correct Answer a retrospective rating plan Under what type of rating plan are rates increased/decreased based on the insured's actual losses? Correct Answer experience rating plan To be eligible for an experience rating plan, an account must have at least __ years of loss experience Correct Answer 3 (not including the year immediately before rating) TRUE/FALSE: Retrospective rating is an option that must be elected in writing Correct Answer TRUE TRUE/FALSE: Experience rating is an option that must be elected in writing Correct Answer TRUE Retrospective premium = (_____ ______ + _______ _____) x ___ multiplier Correct Answer (basic premium + converted losses) x tax multiplier To adjust premiums to capture risk characteristics not captured in the class rate, and underwriter would use an ______ _____ ____ ________ Correct Answer individual risk premium modification The _______ _______ plan in liability insurance allows underwriters to modify the final premium to reflect factors not included in the class Correct Answer schedule rating Location, premises and materials are ______ _________ used in a schedule rating table Correct Answer Risk Characteristics TRUE/FALSE: insureds who are eligible to use experience rating are also generally eligible to use schedule rating Correct Answer TRUE TRUE/FALSE: insureds who are eligible to use experience rating generally cannot use schedule rating Correct Answer FALSE, insureds must meet specified minimum premium amounts TRUE/FALSE: In a schedule rating, not every account will warrant a debit or credit, and some accounts will be documented with a zero percent modification factor Correct Answer TRUE TRUE/FALSE: Expense modification can be used in conjunction with schedule plans, but not experience rating plans Correct Answer FALSE - can be used with both, though such plans are not permitted in every state, and must be file with state regulators TRUE/FALSE: Expense modification can be used in conjunction with schedule and experience rating plans Correct Answer TRUE - can be used with both, though such plans are not permitted in every state, and must be file with state regulators TRUE/FALSE: Savings in commission expense can be passed along to the insured to make the premium more competitive Correct Answer TRUE TRUE/FALSE: Reducing commissions to make the premium more competitive is considered to be rebating Correct Answer FALSE - it is not considered to be rebating because the rate reduction is authorized by a filing with the state insurance department and is based on specific expense savings TRUE/FALSE: Under a participating/dividend plan, penalties are assessed against the insured when loss experience is poor Correct Answer FALSE: no penalties, other than loss of the dividend, are assessed Participating plans are typically used for: A. Small accounts with worse-than-average loss experience B. Large accounts with worse-than-average loss experience TRUE/FALSE: If it is determined that an insurer has made an excessive profit, the profit must be returned to consumers or remitted to the state Correct Answer TRUE Examples of reunderwriting activities. policy-level - policy ________ - _________ corrections - _______ changes - changes to policy _______ Correct Answer - policy nonrenewals - classification corrections - coverage changes - changes to policy terms Examples of reunderwriting activities, organization-level - Change in ___________ ______ for ________ business - Change in ___________ ______ for ___ business Correct Answer - Change in underwriting guidelines for existing business - change in underwriting guidelines for new business Reunderwriting: all activities associated with the _________, __________ and __________ of loss-related variances in a book of business. Correct Answer analysis, identification, and correction Common reasons to reunderwrite a book of business include: - ___________ loss _____ and - _________ loss ___________ Correct Answer - deteriorating loss ratios - increased loss frequencies A ____ _______ analysis is a snapshot at a given point in time that provides data on specific characteristics of the policies in a book of business Correct Answer risk profile Deteriorating results caused by increasing loss frequency may indicate a problem in ______ ________ Correct Answer policy selection Unprofitable results caused by increasing loss severity would indicate ________ ________ Correct Answer pricing inadequacy The first step of the underwriting process is: - _______ insureds Correct Answer -selecting insureds The second step of the underwriting process is: - _______ coverage Correct Answer - pricing coverage The third step of the underwriting process is determining what? Correct Answer - determining insurance policy terms and conditions The final step of the underwriting process is: - ________ decisions Correct Answer - monitoring the underwriting decisions made. Underwriters can refer to what department/group for loss information that resemble ones to the account/exposure/business under analysis? Correct Answer Claims Underwriters can refer to what department/group for predictive analytics to help forecast potential losses? Correct Answer Actuarial/Data analytics Underwriters can unearth additional information through in-person inspections, interviews and research from what department/group? Correct Answer Producers TRUE/FALSE: Underwriters should rely on experts opinion on pricing a specialized policy Correct Answer FALSE - The underwriter should consider all information provided by the subject-matter experts and identify the information most likely to affect the policy, but it's up to the underwriter to decide which of those factors will affect insurance pricing What is the first step of a negotiation when renewing an account? Correct Answer Preparation stage What step of the renewal negotiation process involves gathering all the relevant information and establishing goals for the negotiation? Correct Answer 1. Preparation What is the 2nd step of the negotiation process when renewing an account? Correct Answer 2. Opening stage An independent contractor will work under an ______ contract, rather than a contract of _____ Correct Answer ordinary .. rather than contract of hire One approach to categorizing commercial accounts for _______ coverage is presented in the Commercial Lines Manual (CLM) of Insurance Services Office, Inc. (ISO) Correct Answer liability CLM: Liability coverage codes PAAS: Descriptive analysis of business operations, processes, products NAICS: Classifications of economic activity into 20 sectors ISO's ________ _____ ________ Service guides provide detailed information about all ISO general liability classifications and the workers compensation classifications of the National Commission on Compensation Insurance (NCCI) Correct Answer Premium Audit Advisory The North American _______ __________ System is a comprehensive taxonomy of business activities that groups all economic activities into 20 sectors Correct Answer North American Industry Classification The part of a rate component that represents the amount needed to pay future claims Correct Answer Prospective loss costs The part of a rate component that represents the amount needed to pay things such as overhead and premium taxes Correct Answer Expense provision TRUE/FALSE: An experience rating plan can be used for commercial auto physical damage Correct Answer TRUE TRUE/FALSE: Rate manuals typically do not contain information about endorsements Correct Answer FALSE: Rate manuals provide important information about endorsements that can help underwriters obtain and retain accounts. TRUE/FALSE: An experience rating plan can be used for burglary and theft insurance Correct Answer TRUE TRUE/FALSE: An experience rating plan can be used for commercial property insurance Correct Answer FALSE insureds receive the cost benefits from favorable loss experience (or to incur the penalty from poor experience) more quickly than under: A. Experience Rating plans B. Retrospective Rating plans Correct Answer B. Retrospective Rating plans TRUE/FALSE: Retrospective rating is usually reserved for small to mid sized businesses Correct Answer FALSE: usually for large accounts Retrospective rating plans are primary used for what 2 types of policies? Correct Answer Workers compensation and employers liability Insurers market retrospective rating plans to accounts that might be considering what insurance alternative? Correct Answer self-insurance What type of policy is an individual risk premium modification (IRPM) plan used for? Correct Answer Property insurance TRUE/FALSE: In an individual risk premium modification (IRPM) plan, state regulators limit the amount of the credits or debits that an underwriter can apply to an individual account Correct Answer TRUE - usually up to 25% Experience rating uses loss experience from _______ policy periods to determine the premium for the _______ policy period Correct Answer prior policy period used to determine current policy period In ratemaking, the component included to pay future claims and loss adjustment expenses is referred to as what? Correct Answer prospective loss costs TRUE/FALSE: Insurers entering a new line of business typically use the loss ratio method to set their initial rates Correct Answer FALSE An underwriter that wants to gain insight into a business's activities should consult what resource? Correct Answer North American Industry Classification System (NAICS) TRUE/FALSE: Building or premises is one example of an ISO's North American Industry Classification System (NAICS) classification Correct Answer FALSE - ISO's Commercial Lines Manual (CLM) classification TRUE/FALSE: Selling or retail is one example of an ISO's Commercial Lines Manual (CLM) classification Correct Answer FALSE - selling or retail is not a CLM classification What type of data considers a company's geographical location relative to the insurer's risk appetite and balancing the book of business Correct Answer Policy in force Social inflation is typically of greatest concern when underwriting which line of business? Correct Answer Liability - a lawsuit against the company could result in a jury rendering a verdict that provides the plaintiff with a much higher award than usual for similar claims TRUE/FALSE: For efficiency ratios, higher ratios = more efficiency Correct Answer TRUE - numerators are Sales (AR turnover ratio and Asset turnover ratio) and COGS (inventory turnover), which will be higher for a business performing well TRUE/FALSE: For efficiency ratios, lower ratios = more efficiency Correct Answer FALSE - denominators are AR, Assets and Inventory, which will be low (relative to sales) for high performing businesses, and thus will produce higher ratios An insurer entering a new state should conduct what type of review? Correct Answer New business review The reunderwriting process begins and ends with what step? Correct Answer Monitoring An insurer that is hitting all of its retention and written premium goals but has a deteriorating loss ratio has an issue with what? Correct Answer unprofitable new business being written The concept of insureds who are highest risk being the ones most likely to seek insurance is known as what? Correct Answer adverse selection TRUE/FALSE: An underwriting audit is usually conducted by an outside firm. Correct Answer FALSE What type of review is done when an insurer acquires a new book of business from another insurer? Correct Answer special event review This report is a snapshot at a given point in time that provides data on specific characteristics of the policies in the book of business Correct Answer risk profile Intentionally bringing about a loss in order to collect from an insurer is called Correct Answer Moral hazard The critical difference between moral hazard and morale hazard is the ______. Moral hazard is __________ seeking risk. Morale hazard is ________ to risk. Correct Answer intent Moral hazard = intentionally seeking risk for personal gain, because you do not bear the cost of failure Morale hazard = indifference to unintentional risk Underwriters typically use third-party software to create what type of analysis reports that provide analysis on smaller segments of business within a book of business? Correct Answer risk profile analysis Commercial property policies usually include what type of provisions, which require insureds to purchase an amount of insurance that is equal, or close, to the value of the covered property or face underinsurance penalties Correct Answer insurance-to-value TRUE/FALSE: An insurer may alter its underwriting guidelines for loss exposures that are anticipated but have not yet manifested as losses within the book of business. Correct Answer TRUE TRUE/FALSE: Insurers typically try to implement corrective actions that effect the largest amount of policies