AU 60 FINAL EXAM PRACTICE 100% VERIFIED ANSWERS 2024/2025 CORRECT STUDY SET, Exams of Organization and Business Administration

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AU 60 FINAL EXAM PRACTICE

100% VERIFIED ANSWERS

2024/2025 CORRECT STUDY

SET

The common distinction between field underwriters and corporate underwriters is that line underwriters Implement the steps in the underwriting process. Corporate underwriters assist underwriting management with formulating underwriting policy. Which one of the following statements is correct with regard to regulation and insurers' operations? Solvency regulation indirectly influences underwriting by limiting new business for insurers. Underwriting regulations seek to ensure correct classification of insureds because Misclassification can result in inadequate premiums and drain an insurer's surplus. 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? Quicker response John is a risk management specialist for XYZ Company. John examines XYZ's financial statements on a quarterly basis. Which one of the following best describes a reason for this analysis? A review of the financial statements helps John to determine XYZ's insurance needs. Cost of goods sold appears on the income statements of manufacturing and retail entities. Which one of the following statements best describes cost of goods sold Cost of goods sold reports expenses after an inventory item is sold.

Which one of the following types of analysis helps an underwriter identify abnormal values reported by an organization? Vertical analysis Liquidity ratios are used to determine a company's ability to pay off its short-term debts. Typically, the higher the value of the ratio, The larger the margin of safety the company possesses to cover its short-term debts. Which one of the following ratios indicates the adequacy of a company's working capital to meet its current financial obligations? Current ratio The most recent financial statements for Buddy's Burger Hut reveal the following: Cash$50,000 Equipment$25,000 Inventory$15,000 Accounts Receivable$2,500 Cost of Goods Sold$125,000 Marketable Securities$5,000 Current Liabilities$50, Based on this information, Buddy's Burger Hut's Acid-Test Ratio is Buddy's Burger Hut's Acid-Test Ratio is 1.15. ($50,000 + $5,000 + $2,500) / $50,000 = 1. An organization that considers both key business risks and opportunities when formulating its business strategies reflects its commitment to which one of the following? Enterprise risk management William is a plumber. He has a contract with a home builder to install the bathrooms in a new housing development. William will supply the materials and equipment. He will be paid a fixed fee per house and must complete the job by an agreed deadline. Which one of the following best describes William's relationship to the home builder? Subcontractor Which one of the following sources of underwriting information provides a hazard index by line of insurance for the various classifications? Best's Underwriting Guide

point in time that provides data on specific characteristics of the policies in the book of business. This report is called a(n) Risk profile. While reunderwriting its book of commercial property insurance, Property Insurance Company (PIC) learned that many of the buildings it insured are covered for far less than their replacement cost. Property Insurance Company believes the under-valuation may have been intentional to help the agents get the business. PIC ordered that upon renewal, each commercial property policy would include a provision requiring the property to be insured for 90 percent of its replacement value. If this requirement is not met, the settlement following a loss will be reduced. The policy provision that PIC will add to their policies is called a(n) Insurance-to-value provision. Molly is an underwriter for Stanton Insurance. She is working on an all-lines renewal with the producer, Dan. While gathering information for the renewal, Molly notices that the renewal payrolls and sales are almost 20 percent higher than the expiring policy. Dan confirms that the company is experiencing some significant growth, but has not expanded into any new products or territories. He also tells Molly that the company will be marketing its insurance business this renewal, so her pricing should be as aggressive as possible. Molly states that this is an important account to Stanton Insurance and arranges a meeting with Dan and the loss control representative on the account. She discusses some deductible and rating plan options that could help offset some of the premium growth and asks for Dan's feedback. They also discuss how the loss control representative could work with the insured during this period of growth. Opening stage Which one of the following skills/tools helps an underwriter add value to service provided to customers and insurers? Innovation An insurance company must have adequate policyholders' surplus if it wishes to Increase its written premium volume.

Jane is Regional Manager for Goshen Mutual. The retention rate for her region's commercial auto book has dropped by 10 percent over the last 18 months. Jane has asked an information technology (IT) specialist to help her determine common characteristics among the accounts that are renewing, those that are not renewing, and those that are most profitable. She is also trying to determine if there is a common reason why accounts are not renewing. Which one of the following forms of analysis will the IT specialist use to help Jane focus on improving her auto retention? Data mining Which one of the following insurer representatives is most likely to meet with the insured, see their operations, and review their financial operations on an annual basis? Premium auditor Samuel is a commercial accounts underwriter working on a new application with five buildings located within the same territory. Samuel would like a photo of each building, and some nontechnical information about the condition of the parking lots and the neighboring buildings. Which one of the following would be the most cost effective source of this information? Marketing representative Which one of the following Dun & Bradstreet report scores shows how promptly the company pays its bills relative to terms? Paydex Which one of the following statements about the balance sheet is correct? Net worth is positive whenever the value of assets exceeds the value of liabilities and negative if the value of liabilities exceeds the value of assets. Which one of the following is a major purpose of the statement of cash flows? It is used to assess the ability to generate positive future cash flows. It is used to assess an organization's need for additional financing. Which one of the following is an example of a leverage ratio? Debt-to-equity ratio

Mega Steel Inc. is looking to purchase workers compensation coverage for its 10,000 employees. Despite having an inconsistent loss history, Mega Steel has recently implemented some risk control measures that it believes will lead to fewer losses in the upcoming policy period. Which one of the following individual rating plans would be best for Mega Steel? Retrospective rating plan One social criterion for ratemaking is simplicity. The requirement for simplicity arises out of the insurance industry's need to Explain and defend its system to the public. During an economic recession, AMM Insurance Company decided to review the claims under its businessowners policies for three territories. Some findings about these claims were: Sales off by more than 50 percent when loss occurred—84 percent; Loss caused by natural peril (e.g. fire)— 32 percent; Loss caused by human peril (e.g. theft)—68 percent; Loss could have been prevented by insured—42 percent, and Loss referred to AMM's special investigative unit—33 percent. Based on these findings, which one of the following appears to be the greatest problem with AMM's businessowners policies in these territories? Moral hazard Which one of the following will draft a manuscript policy or endorsement that is worded to address the specific needs of the insured? Corporate Underwriter Underwriters, in conjunction with rate makers, help achieve actuarial equity by Assigning insureds with similar characteristics to the same rating class. Because of the expense of risk control reports and the importance of making a quick decision on a new submission, underwriters sometimes approve a submission subject to a favorable risk control report. Why is it critical that the underwriter receive the report quickly after the policy's inception date? Statutes in many states limit an insurer's right to cancel to a brief period of time. Which one of the following statements regarding motor vehicle reports (MVRs) is true?

They are particularly useful in predicting an account's future losses. Underwriters must be careful when comparing financial statements using trend analysis because false impressions about a company can be created. Which one of the following might cause an underwriter to have a false impression about a company's health because of an inventories increase on the financial statement? The inventory increase was caused by a change in the inventory valuation method. Which one of the following ratios can be used to assess the extent of an organization's debt financing compared to other organizations in the same industry? Debt-to-equity ratio An underwriter is attempting to conduct ratio analysis on a company. The underwriter notices that the company has $12 million in total sales, $8 million in cash sales, $4 million in credit sales, and a $2 million accounts receivable balance. Based on these figures, what is the company's accounts receivable turnover ratio? The company's accounts receivable turnover ratio is 2 ($4 million/$2 million). Ren is underwriting a property policy for XYZ, Inc. He is particularly concerned with how much inventory is on hand and how fast it can be sold. XYZ's income statement shows sales of $500, and cost of goods sold (COGS) of $350,000. The balance sheet shows inventory at $200,000 and cash of $150,000. Using the inventory turnover ratio, Ren finds that XYZ can convert inventory to sales Using the inventory turnover ratio (COGS/inventory), Ren finds that XYZ can convert inventory to sales 1.75 times. An underwriter seeking to gain insight into the activities that might be conducted by an applicant would use which one of the following resources? North American Industry Classification System Once an insurance rate is calculated, it is multiplied by which one of the following to produce a premium? The appropriate number of exposure units.

In their reunderwriting of their businessowners policies (BOPs), LMN Insurance Company noted that many of their insureds exhibited a lax attitude towards loss control. The Vice President of Underwriting speculated that these insureds were indifferent to loss because if a loss occurred, the loss would be paid by LMN. This indifference to loss which increases the chance of loss is called Morale hazard. While specialized analytics and data-driven tools enhance the underwriter's risk selection process, which one of the following underwriting skills is required to evaluate the effect of a risk's poor attitude regarding safety and risk management? Judgement Lily is a large account underwriter for XYZ Insurance. The insurer is concerned about its exposure to emerging risks such as climate change, cyber risk, and resource management. Lily has been asked to be part of a team evaluating the exposures and reviewing policies written by XYZ Insurance to make sure that they are providing, or excluding, the exposures as intended. Lily's familiarity with which one of the following aspects of the insurance market would make her a valuable member of this team? Coverages and the policy wording Which one of the following is the most common use of predictive modeling in the underwriting of small commercial accounts? Rating Which one of the following is the primary reason that governments seek to prevent insurer insolvency through underwriting regulation? To prevent insureds from being left without coverage and suffering great financial loss Which one of the following insurer employees would be best qualified to answer an underwriter's technical questions about an applicant's operations? Premium auditor An insurer's comprehensive income includes Unrealized gains and losses on securities.

Equity multiplier is calculated by taking Total assets divided by shareholders' equity. The potential for hidden underwriting risks of associated insureds is greatest with which one of the following forms of ownership? Corporation Mortgageholders have a security interest in which one of the following types of property? Real property The amount needed to pay future claims and loss adjustment expenses is Supplied by advisory organizations or developed by insurers with large enough pools of loss data. Individual rating plans use different approaches to modify the rate for an account. Which one of the following types of individual rating plans is used to modify the premium of liability insurance policies based on risk characteristics such as condition of premises and equipment, and safety programs? Schedule rating plan All of the following are objectives of rate regulation, EXCEPT: Rates promote availability and affordability of insurance. JKL Insurance Company entered into a new state as part of an expansion strategy. Four independent agencies were appointed to market JKL coverages. JKL was unaware that many insurers had stopped writing workers compensation in the new state because of rate inadequacy. The new agents, needing a carrier that was accepting workers compensation, sold a large quantity of JKL workers compensation insurance. As workers compensation is a liability line, there was no early indication of any problem. The year-end results for this line, however, were horrendous. Which of the following sources of information could JKL have used to provide an early warning that there was a problem? New business review

All of the following are underwriting activities typically performed by corporate underwriters, EXCEPT: Support producers and insureds Which one of the following statements is true regarding additional insureds in liability insurance? Sometimes the existence of the particular party requesting to be added as an additional insured changes the account's underwriting acceptability. ABC Insurance Company's actuary has calculated the pure premium for the company's homeowner's insurance line as $40. Fixed expenses for the line are $2.50 per exposure unit and variable expenses are 12 percent. The company's loading for profits and contingencies is 5 percent. Using the pure premium ratemaking method and rounding to the nearest whole dollar, which one of the following is the rate per exposure unit that ABC needs to charge? The rate per exposure unit that ABC needs to charge is $51, calculated as (pure premium plus expenses per exposure unit) divided by (1 minus variable expense percentage minus profit and contingencies factor). In this case, the rate per exposure = ($40+$2.50) / (1-0.12-0.05) Publicly traded companies must file a Form 10-K annually with the Securities and Exchange Commission (SEC). Which one of the following best describes the information contained in Form 10 - K? It is similar to the company annual report but contains more detailed information. WC Distribution is located in California and distributes refrigerated foods throughout the West Coast region. As a commercial lines underwriter evaluating the organization, you are concerned about threats to the operations and supply chain. Which one of the following would be a major area of concern for WC Distribution? Natural or man-made catastrophes One of the objectives of insurance rate regulation is to ensure that rates are adequate. Which one of the following best describes why it is necessary for insurance rates to be "adequate?" Insurers setting rates too low in order to win market share can lead to insolvency. Which one of the following statements is true regarding loss trend analysis?

Historical loss frequency is usually a better indicator of future loss experience than severity. A drought in three states where PQR Insurance Company writes coverage lead to an underwriting directive to not write business in areas susceptible to wildfires. Three months after the directive was issued, the Vice President of Underwriting ordered a review of recent underwriting files to ensure that underwriters were adhering to this guideline. This review is called a(n) Underwriting audit. Which one of the following best describes what underwriting regulation seeks to prevent? Applying different standards or methods of treatment to insureds who have the same basic characteristics and loss potential Suzanne is a commercial lines underwriter. During the risk selection process, she gives stronger consideration to companies that use wearable sensors and telematics devices to help control their loss exposures. These items are examples of which one of the following types of technological advancements? Smart products Pacific West Insurance Company is considering the purchase of one of its competitors, Occidental West Insurance Company. Occidental has agreed to allow Marge Evans, Pacific West's director of underwriting, to review the risk profile of Occidental's homeowners and personal auto business and some policies written. These lines account for more than 85 percent of Occidental's premiums written. Marge's examination of Occidental's risk profile and policies written is a(n) Special event review. Rating manuals are used by underwriters to accomplish all of the following tasks, EXCEPT: Make risk selection decisions Which one of the following types of individual rating plans can be used by medium to large insureds in combination with risk control and allows the insured to manage its cash flow by avoiding upfront payments? A large deductible plan can be used by medium to large insureds in combination with risk control and allows the insured to manage its cash flow by avoiding upfront payments.

Insurer Y is using the pure premium ratemaking method in estimating expenses per exposure unit based on the insurer's past expenses. Insurer Y knows that incurred losses are $4 million including loss adjustment expenses of $500,000. All other expenses are $1.5 million. The earned-car years used in the calculations are 100,000. The expenses per exposure unit are The expenses per exposure unit are $15, calculated by dividing all other expenses of $1.5 million by earned car year of 100,000. Which one of the following is the most important regulatory criterion? Rate adequacy Which one of the following statements is correct with respect to market conduct examinations? The Department of Insurance (DOI) may suspend or revoke the insurer's certificate of authority if it finds that an insurer has violated a law. Which one of the following insurer representatives often meets with the insured in difficult circumstances, but can provide the underwriter with valuable information? Claim representative An underwriter is attempting to conduct ratio analysis on a company. The underwriter notices that the company has $3 million in total assets, $1 million in current assets, $2 million in total liabilities, and $1 million in current liabilities. Which one of the following conclusions can the underwriter reach by calculating the company's debt-to-assets ratio? Debt-to-assets ratio = Total liabilities ÷ total assets. $2 million ÷ $3 million = .667. A ratio over. indicates financing mostly by debt. The company's assets are financed mostly through debt. An underwriter is trying to determine XYZ Manufacturing's efficiency using the accounts receivable (A/R) turnover ratio. XYZ's income statement shows $10 million in sales (half of which is attributable to credit sales) and the balance sheet shows $200,000 in A/R. What is XYZ's accounts receivable turnover ratio? The A/R turnover ratio uses the sales attributed to credit sales; thus, $5,000,000/$200,000 = 25 times. Wrap-ups do not usually include which one of the following coverages?

Auto Lucy is analyzing a company's application for commercial insurance coverage. She is considering the loss exposures associated with the company's location and how many other businesses her company insures in that geographical area. Lucy is questioning whether the risk exceeds the insurer's risk appetite and if accepting this company with affect the overall book of business. Which one of the following types of geographical data is Lucy analyzing during this stage of the underwriting process? Policy in force data In underwriting an account, all of the following statements are true, EXCEPT: Underwriters need to be familiar with the rate applicable to each classification. Insurer People's Protection raised its Country Estate policies' rate by three percent in a declining economic market, which created huge profits for People's Protection. The next year, hoping for additional profits, the insurer increased rates only two percent maintaining that a five percent increase over two years was reasonable, because country estate owners' insurance products were designed to protect a wealthier customer who could afford to pay higher premiums. In which one of the following ways would People's Protection's second set of rates at two percent be considered as excessive? If the rates generate an unreasonable profit for People's Protection Josh received an all lines submission for a manufacturing risk that seemed to have severe exposure for multiple lines. He had limited knowledge of the industry, so he decided to consult with an external expert. After gaining additional knowledge from the subject-matter expert, Josh decided to decline the submission for all lines. This is an example of an underwriter using an external stakeholder to help do which one of the following? Determine the appropriate treatment technique The most important thing a field underwriter does is Evaluating new submissions and renewal underwriting. Common size statements are frequently used during vertical analysis. Which one of the following is true regarding common size statements?