AU 60 (COMMERCIAL UNDERWRITING PRINCIPLES) EXAM COMPREHENSIVE
EXAM QUESTIONS |FREQUENTLY TESTED QUESTIONS |RECENTLY TESTING
REAL EXAM QUESTIONS|VERIFIED SOLUTIONS (100% CORRECT)
Question 1
What is the primary distinction between the roles of line underwriters and corporate
underwriters?
A) Line underwriters formulate underwriting policy while corporate underwriters implement it.
B) Line underwriters handle claims while corporate underwriters handle investments.
C) Line underwriters implement the steps in the underwriting process, whereas corporate
underwriters assist management with formulating underwriting policy.
D) Line underwriters focus on marketing while corporate underwriters focus on reinsurance.
E) Line underwriters operate in the home office while corporate underwriters operate in the field.
Correct Answer: C) Line underwriters implement the steps in the underwriting process,
whereas corporate underwriters assist management with formulating underwriting policy.
Rationale: Line underwriters (or field underwriters) are responsible for evaluating
individual risks and applying established guidelines. Corporate underwriters work at a
higher level to research markets, create those guidelines, and develop new insurance
products.
Question 2
In the context of insurance regulation and operations, how does solvency regulation typically
influence the underwriting function?
A) It requires underwriters to meet with every applicant in person.
B) It directly sets the price for every individual policy.
C) It indirectly influences underwriting by limiting the amount of new business an insurer can
write based on its surplus.
D) It mandates that all underwriters have a legal degree.
E) It requires insurers to provide free coverage to high-risk individuals.
Correct Answer: C) It indirectly influences underwriting by limiting the amount of new
business an insurer can write based on its surplus.
Rationale: Regulators monitor the "premium-to-surplus" ratio. If an insurer writes too
much business relative to its surplus, its solvency is at risk. Therefore, underwriting is
constrained by the company’s financial capacity to take on new risk.
Question 3
Why do underwriting regulations place a high priority on the correct classification of insureds?
A) To ensure that all insureds pay the exact same premium regardless of risk.
B) Because misclassification can result in inadequate premiums and drain an insurer's surplus.
C) To make it easier for marketing representatives to sell policies.
D) To reduce the number of endorsements needed on a policy.
E) To allow insurers to avoid paying claims in low-income areas.
, 2
Correct Answer: B) Because misclassification can result in inadequate premiums and drain
an insurer's surplus.
Rationale: Correct classification ensures that the premium charged is commensurate with
the risk. If a high-risk insured is classified as low-risk, the insurer will not collect enough
premium to cover potential losses, threatening financial stability.
Question 4
What is the primary benefit to an insurer of using an independent contractor specializing in risk
control to inspect a property rather than a staff representative?
A) Lower overall cost for every inspection.
B) Access to proprietary software.
C) Quicker response time.
D) Guaranteed acceptance of the risk.
E) Better knowledge of company-specific underwriting guidelines.
Correct Answer: C) Quicker response time.
Rationale: Independent risk control contractors are often located closer to the risk or have
more immediate availability, allowing an underwriter to get necessary data faster than
waiting for a busy internal representative.
Question 5
John, a risk management specialist, examines his company's financial statements quarterly.
Which of the following is a primary reason for this specific analysis in an insurance context?
A) To determine which employees should receive bonuses.
B) To assist the underwriter in determining the company's insurance needs and limits.
C) To calculate the company's federal income tax.
D) To design a new logo for the marketing department.
E) To select a new site for the corporate headquarters.
Correct Answer: B) To assist the underwriter in determining the company's insurance needs
and limits.
Rationale: Financial statements reveal the value of assets to be insured, the volume of sales
(for liability rating), and the company’s ability to retain risk through deductibles or self-
insurance.
Question 6
How is "Cost of Goods Sold" (COGS) treated on the income statements of manufacturing and
retail entities?
A) It reports the cost of all materials purchased during the year, regardless of use.
B) It reports expenses for inventory items only after they have been sold.
C) It is considered a fixed administrative expense.
D) It includes only the salary of the CEO.
E) It is reported as an asset on the balance sheet.
, 3
Correct Answer: B) It reports expenses for inventory items only after they have been sold.
Rationale: COGS represents the direct costs of producing or purchasing the goods sold by a
company. Under accounting principles, these costs are matched as expenses against the
revenue generated by the sale of those specific goods.
Question 7
Which type of financial analysis involves expressing each item on a financial statement as a
percentage of a base figure to help an underwriter identify abnormal values?
A) Horizontal analysis
B) Ratio analysis
C) Vertical analysis
D) Trend analysis
E) Regression analysis
Correct Answer: C) Vertical analysis.
Rationale: Vertical analysis (often resulting in common-size statements) allows underwriters
to see the relationship between items, such as whether "Inventory" is an unusually high
percentage of "Total Assets" compared to industry peers.
Question 8
When an underwriter evaluates liquidity ratios, what does a higher ratio value typically indicate?
A) The company is likely to go bankrupt within a month.
B) The company has too much debt and not enough assets.
C) The larger the margin of safety the company possesses to cover its short-term debts.
D) The company is less efficient at selling its inventory.
E) The company's stock price is about to decrease.
Correct Answer: C) The larger the margin of safety the company possesses to cover its short-
term debts.
Rationale: Liquidity ratios measure the ability to convert assets into cash to meet immediate
obligations. Higher ratios suggest the company is in a strong position to pay its bills as they
come due.
Question 9
Which of the following ratios specifically indicates the adequacy of a company's working capital
to meet its current financial obligations?
A) Debt-to-equity ratio
B) Net profit margin
C) Current ratio
D) Inventory turnover ratio
E) Equity multiplier
Correct Answer: C) Current ratio.
Rationale: The current ratio is calculated as Current Assets divided by Current Liabilities.
, 4
It is the primary measure used to determine if a company has enough short-term assets to
cover its short-term debts.
Question 10
A business has $50,000 in Cash, $5,000 in Marketable Securities, $2,500 in Accounts
Receivable, $15,000 in Inventory, and
50,000𝑖𝑛𝐶𝑢𝑟𝑟𝑒𝑛𝑡𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠. 𝑊ℎ𝑎𝑡𝑖𝑠𝑡ℎ𝑒𝐴𝑐𝑖𝑑
− 𝑇𝑒𝑠𝑡𝑅𝑎𝑡𝑖𝑜? 𝐴)1.00𝐵)1.15𝐶)1.45𝐷)0.85𝐸)2.15𝐶𝑜𝑟𝑟𝑒𝑐𝑡𝐴𝑛𝑠𝑤𝑒𝑟:∗∗ 𝐵)1.15 ∗∗ 𝑅𝑎𝑡𝑖𝑜𝑛𝑎𝑙𝑒:∗
∗ 𝑇ℎ𝑒𝐴𝑐𝑖𝑑 − 𝑇𝑒𝑠𝑡(𝑜𝑟𝑄𝑢𝑖𝑐𝑘)𝑅𝑎𝑡𝑖𝑜𝑒𝑥𝑐𝑙𝑢𝑑𝑒𝑠𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦𝑓𝑟𝑜𝑚𝑐𝑢𝑟𝑟𝑒𝑛𝑡𝑎𝑠𝑠𝑒𝑡𝑠. 𝐶𝑎𝑙𝑐𝑢𝑙𝑎𝑡𝑖𝑜𝑛: (
50,000 cash + $5,000 securities + $2,500 AR) / $50,000 liabilities = $57,500 / $50,000 = 1.15.**
Question 11
An organization that formulates business strategies by considering both key risks and potential
opportunities reflects a commitment to:
A) Traditional Risk Management.
B) Hazard Risk Management only.
C) Enterprise Risk Management (ERM).
D) Financial Auditing.
E) Loss Control Engineering.
Correct Answer: C) Enterprise Risk Management (ERM).
Rationale: ERM is a holistic approach that looks at risk across the entire organization,
including strategic, financial, operational, and hazard risks, often viewing risk
management as a way to create value/opportunity.
Question 12
William is a plumber who installs bathrooms for a home builder. He supplies his own materials
and equipment, is paid a fixed fee per house, and must meet a specific deadline. What is
William’s relationship to the builder?
A) Employee
B) Partner
C) Subcontractor
D) General Agent
E) Line Underwriter
Correct Answer: C) Subcontractor.
Rationale: Subcontractors are independent parties hired to perform specific tasks. Because
William provides his own tools and materials and works for a fixed fee rather than an
hourly wage under direct supervision, he is not an employee.
Question 13
Which external underwriting source provides a hazard index by line of insurance for various
EXAM QUESTIONS |FREQUENTLY TESTED QUESTIONS |RECENTLY TESTING
REAL EXAM QUESTIONS|VERIFIED SOLUTIONS (100% CORRECT)
Question 1
What is the primary distinction between the roles of line underwriters and corporate
underwriters?
A) Line underwriters formulate underwriting policy while corporate underwriters implement it.
B) Line underwriters handle claims while corporate underwriters handle investments.
C) Line underwriters implement the steps in the underwriting process, whereas corporate
underwriters assist management with formulating underwriting policy.
D) Line underwriters focus on marketing while corporate underwriters focus on reinsurance.
E) Line underwriters operate in the home office while corporate underwriters operate in the field.
Correct Answer: C) Line underwriters implement the steps in the underwriting process,
whereas corporate underwriters assist management with formulating underwriting policy.
Rationale: Line underwriters (or field underwriters) are responsible for evaluating
individual risks and applying established guidelines. Corporate underwriters work at a
higher level to research markets, create those guidelines, and develop new insurance
products.
Question 2
In the context of insurance regulation and operations, how does solvency regulation typically
influence the underwriting function?
A) It requires underwriters to meet with every applicant in person.
B) It directly sets the price for every individual policy.
C) It indirectly influences underwriting by limiting the amount of new business an insurer can
write based on its surplus.
D) It mandates that all underwriters have a legal degree.
E) It requires insurers to provide free coverage to high-risk individuals.
Correct Answer: C) It indirectly influences underwriting by limiting the amount of new
business an insurer can write based on its surplus.
Rationale: Regulators monitor the "premium-to-surplus" ratio. If an insurer writes too
much business relative to its surplus, its solvency is at risk. Therefore, underwriting is
constrained by the company’s financial capacity to take on new risk.
Question 3
Why do underwriting regulations place a high priority on the correct classification of insureds?
A) To ensure that all insureds pay the exact same premium regardless of risk.
B) Because misclassification can result in inadequate premiums and drain an insurer's surplus.
C) To make it easier for marketing representatives to sell policies.
D) To reduce the number of endorsements needed on a policy.
E) To allow insurers to avoid paying claims in low-income areas.
, 2
Correct Answer: B) Because misclassification can result in inadequate premiums and drain
an insurer's surplus.
Rationale: Correct classification ensures that the premium charged is commensurate with
the risk. If a high-risk insured is classified as low-risk, the insurer will not collect enough
premium to cover potential losses, threatening financial stability.
Question 4
What is the primary benefit to an insurer of using an independent contractor specializing in risk
control to inspect a property rather than a staff representative?
A) Lower overall cost for every inspection.
B) Access to proprietary software.
C) Quicker response time.
D) Guaranteed acceptance of the risk.
E) Better knowledge of company-specific underwriting guidelines.
Correct Answer: C) Quicker response time.
Rationale: Independent risk control contractors are often located closer to the risk or have
more immediate availability, allowing an underwriter to get necessary data faster than
waiting for a busy internal representative.
Question 5
John, a risk management specialist, examines his company's financial statements quarterly.
Which of the following is a primary reason for this specific analysis in an insurance context?
A) To determine which employees should receive bonuses.
B) To assist the underwriter in determining the company's insurance needs and limits.
C) To calculate the company's federal income tax.
D) To design a new logo for the marketing department.
E) To select a new site for the corporate headquarters.
Correct Answer: B) To assist the underwriter in determining the company's insurance needs
and limits.
Rationale: Financial statements reveal the value of assets to be insured, the volume of sales
(for liability rating), and the company’s ability to retain risk through deductibles or self-
insurance.
Question 6
How is "Cost of Goods Sold" (COGS) treated on the income statements of manufacturing and
retail entities?
A) It reports the cost of all materials purchased during the year, regardless of use.
B) It reports expenses for inventory items only after they have been sold.
C) It is considered a fixed administrative expense.
D) It includes only the salary of the CEO.
E) It is reported as an asset on the balance sheet.
, 3
Correct Answer: B) It reports expenses for inventory items only after they have been sold.
Rationale: COGS represents the direct costs of producing or purchasing the goods sold by a
company. Under accounting principles, these costs are matched as expenses against the
revenue generated by the sale of those specific goods.
Question 7
Which type of financial analysis involves expressing each item on a financial statement as a
percentage of a base figure to help an underwriter identify abnormal values?
A) Horizontal analysis
B) Ratio analysis
C) Vertical analysis
D) Trend analysis
E) Regression analysis
Correct Answer: C) Vertical analysis.
Rationale: Vertical analysis (often resulting in common-size statements) allows underwriters
to see the relationship between items, such as whether "Inventory" is an unusually high
percentage of "Total Assets" compared to industry peers.
Question 8
When an underwriter evaluates liquidity ratios, what does a higher ratio value typically indicate?
A) The company is likely to go bankrupt within a month.
B) The company has too much debt and not enough assets.
C) The larger the margin of safety the company possesses to cover its short-term debts.
D) The company is less efficient at selling its inventory.
E) The company's stock price is about to decrease.
Correct Answer: C) The larger the margin of safety the company possesses to cover its short-
term debts.
Rationale: Liquidity ratios measure the ability to convert assets into cash to meet immediate
obligations. Higher ratios suggest the company is in a strong position to pay its bills as they
come due.
Question 9
Which of the following ratios specifically indicates the adequacy of a company's working capital
to meet its current financial obligations?
A) Debt-to-equity ratio
B) Net profit margin
C) Current ratio
D) Inventory turnover ratio
E) Equity multiplier
Correct Answer: C) Current ratio.
Rationale: The current ratio is calculated as Current Assets divided by Current Liabilities.
, 4
It is the primary measure used to determine if a company has enough short-term assets to
cover its short-term debts.
Question 10
A business has $50,000 in Cash, $5,000 in Marketable Securities, $2,500 in Accounts
Receivable, $15,000 in Inventory, and
50,000𝑖𝑛𝐶𝑢𝑟𝑟𝑒𝑛𝑡𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠. 𝑊ℎ𝑎𝑡𝑖𝑠𝑡ℎ𝑒𝐴𝑐𝑖𝑑
− 𝑇𝑒𝑠𝑡𝑅𝑎𝑡𝑖𝑜? 𝐴)1.00𝐵)1.15𝐶)1.45𝐷)0.85𝐸)2.15𝐶𝑜𝑟𝑟𝑒𝑐𝑡𝐴𝑛𝑠𝑤𝑒𝑟:∗∗ 𝐵)1.15 ∗∗ 𝑅𝑎𝑡𝑖𝑜𝑛𝑎𝑙𝑒:∗
∗ 𝑇ℎ𝑒𝐴𝑐𝑖𝑑 − 𝑇𝑒𝑠𝑡(𝑜𝑟𝑄𝑢𝑖𝑐𝑘)𝑅𝑎𝑡𝑖𝑜𝑒𝑥𝑐𝑙𝑢𝑑𝑒𝑠𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦𝑓𝑟𝑜𝑚𝑐𝑢𝑟𝑟𝑒𝑛𝑡𝑎𝑠𝑠𝑒𝑡𝑠. 𝐶𝑎𝑙𝑐𝑢𝑙𝑎𝑡𝑖𝑜𝑛: (
50,000 cash + $5,000 securities + $2,500 AR) / $50,000 liabilities = $57,500 / $50,000 = 1.15.**
Question 11
An organization that formulates business strategies by considering both key risks and potential
opportunities reflects a commitment to:
A) Traditional Risk Management.
B) Hazard Risk Management only.
C) Enterprise Risk Management (ERM).
D) Financial Auditing.
E) Loss Control Engineering.
Correct Answer: C) Enterprise Risk Management (ERM).
Rationale: ERM is a holistic approach that looks at risk across the entire organization,
including strategic, financial, operational, and hazard risks, often viewing risk
management as a way to create value/opportunity.
Question 12
William is a plumber who installs bathrooms for a home builder. He supplies his own materials
and equipment, is paid a fixed fee per house, and must meet a specific deadline. What is
William’s relationship to the builder?
A) Employee
B) Partner
C) Subcontractor
D) General Agent
E) Line Underwriter
Correct Answer: C) Subcontractor.
Rationale: Subcontractors are independent parties hired to perform specific tasks. Because
William provides his own tools and materials and works for a fixed fee rather than an
hourly wage under direct supervision, he is not an employee.
Question 13
Which external underwriting source provides a hazard index by line of insurance for various
