AU 60 - EVALUATING COMMERCIAL
UNDERWRITING RISKS QUESTIONS
& ANSWERS CORRECT 100%
Policyholders' Surplus - ANSWERUnder statutory accounting principles (SAP), an
insurer's total admitted assets minus its total liabilities.
Market conduct examination - ANSWERAn analysis of an insurer's practices in four
operational areas: sales and advertising, underwriting, ratemaking, and claims
handling.
Loss reviews - ANSWERA deteriorating loss ratio can be the result of multiple
problems and conflicting trends in a book of business can make it difficult to isolate
those problems. Underwriters typically use third-party software to create risk profile
analysis reports that provides data on specific characteristics and smaller segments
of business.
Special and unique circumstance reviews - ANSWERWhen an insurer acquires a
book of business from another insurer, it will typically investigate these accounts to
determine the risk characteristics of policies compared with the expected risk profile.
Professional employer organization (PEO) - ANSWERA company that leases
workers to small or mediumsized client companies to supply the client's permanent
workforce, making the client an indirect employer; these relationships create
insurance implications related to employee status.
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? - ANSWERA. Risk control representative
B. Marketing representative
C. Claim representative
D. Premium auditor
Which one of the following external sources of underwriting information is more likely
to be used by an underwriter in the pricing phase, than in risk-selection decisions? -
ANSWERA. Insurance advisory organizations
B. Government reports
C. Applicant's Web site
D. Financial reporting services
Which one of the following is a major purpose of the statement of cash flows? -
ANSWERA. It is used to assess the ability to generate positive future cash flows.
B. It is used in the cash allocation process by line managers.
, C. It is used by insurance agents to balance daily bank deposits.
D. It is used by middle management to assess future resource needs.
Pure Premium Ratemaking Method - ANSWERThe pure premium method is based
largely on the pure premium for the particular type of insurance for which a rate must
be determined. This method relies on past experience and does not consider current
rates.
*Pure Premium: incurred losses/exposure units
*Steps of ratemaking method:
1. Contingencies factor: pure premium/expense
2. Rate per exposure unit: (pure premium + expenses)/(1 - contingencies factor)
3. Variable expenses: (1 - variable - contingencies)
4. Fixed expenses: Stated as dollar amounts per exposure unit
Loss ratio method - ANSWERA method for determining insurance rates based on a
comparison of actual and expected loss ratios. *if ratio is positive, indicates a rate
increase*
Actual loss ratio: Incurred losses/earned premium
Expected loss ratio: 100% - expense provision
Rate change: (actual loss ratio - expected loss ratio) / expected loss ratio
Judgment ratemaking method - ANSWERA method for determining insurance rates
that relies heavily on the experience and knowledge of an actuary or an underwriter
who makes little or no use of loss experience data.
Experience rating plan - ANSWERA rating plan that increases or reduces the
premium for a future period based on the insured's own loss experience for a period
in the recent past.
*Gives insureds a direct financial incentive to implement risk control measures
Retrospective rating plan - ANSWERA rating plan 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.
*Implementing new techniques after inconsistent loss history
Schedule rating plan - ANSWERA 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.
*Condition of premises, equipment, etc
*Safety programs
UNDERWRITING RISKS QUESTIONS
& ANSWERS CORRECT 100%
Policyholders' Surplus - ANSWERUnder statutory accounting principles (SAP), an
insurer's total admitted assets minus its total liabilities.
Market conduct examination - ANSWERAn analysis of an insurer's practices in four
operational areas: sales and advertising, underwriting, ratemaking, and claims
handling.
Loss reviews - ANSWERA deteriorating loss ratio can be the result of multiple
problems and conflicting trends in a book of business can make it difficult to isolate
those problems. Underwriters typically use third-party software to create risk profile
analysis reports that provides data on specific characteristics and smaller segments
of business.
Special and unique circumstance reviews - ANSWERWhen an insurer acquires a
book of business from another insurer, it will typically investigate these accounts to
determine the risk characteristics of policies compared with the expected risk profile.
Professional employer organization (PEO) - ANSWERA company that leases
workers to small or mediumsized client companies to supply the client's permanent
workforce, making the client an indirect employer; these relationships create
insurance implications related to employee status.
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? - ANSWERA. Risk control representative
B. Marketing representative
C. Claim representative
D. Premium auditor
Which one of the following external sources of underwriting information is more likely
to be used by an underwriter in the pricing phase, than in risk-selection decisions? -
ANSWERA. Insurance advisory organizations
B. Government reports
C. Applicant's Web site
D. Financial reporting services
Which one of the following is a major purpose of the statement of cash flows? -
ANSWERA. It is used to assess the ability to generate positive future cash flows.
B. It is used in the cash allocation process by line managers.
, C. It is used by insurance agents to balance daily bank deposits.
D. It is used by middle management to assess future resource needs.
Pure Premium Ratemaking Method - ANSWERThe pure premium method is based
largely on the pure premium for the particular type of insurance for which a rate must
be determined. This method relies on past experience and does not consider current
rates.
*Pure Premium: incurred losses/exposure units
*Steps of ratemaking method:
1. Contingencies factor: pure premium/expense
2. Rate per exposure unit: (pure premium + expenses)/(1 - contingencies factor)
3. Variable expenses: (1 - variable - contingencies)
4. Fixed expenses: Stated as dollar amounts per exposure unit
Loss ratio method - ANSWERA method for determining insurance rates based on a
comparison of actual and expected loss ratios. *if ratio is positive, indicates a rate
increase*
Actual loss ratio: Incurred losses/earned premium
Expected loss ratio: 100% - expense provision
Rate change: (actual loss ratio - expected loss ratio) / expected loss ratio
Judgment ratemaking method - ANSWERA method for determining insurance rates
that relies heavily on the experience and knowledge of an actuary or an underwriter
who makes little or no use of loss experience data.
Experience rating plan - ANSWERA rating plan that increases or reduces the
premium for a future period based on the insured's own loss experience for a period
in the recent past.
*Gives insureds a direct financial incentive to implement risk control measures
Retrospective rating plan - ANSWERA rating plan 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.
*Implementing new techniques after inconsistent loss history
Schedule rating plan - ANSWERA 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.
*Condition of premises, equipment, etc
*Safety programs
