AU 60 - ASSIGNMENT 1 -
FUNDAMENTALS OF
UNDERWRITING QUESTIONS &
ANSWERS (RATED A+)
Book of business - ANSWERA group of policies with a common characteristic, such
as territory or type of coverage, or all policies written by a particular insurer or
agency.
Adverse selection - ANSWERIn general, the tendency for people with the greatest
probability of loss to be the ones most likely to purchase insurance.
Policyholders' surplus - ANSWERUnder statutory accounting principles (SAP), an
insurer's total admitted assets minus its total liabilities.
Capacity - ANSWERThe amount of business an insurer is able to write, usually
based on a comparison of the insurer's written premiums to its policyholders' surplus.
Underwriting guidelines (underwriting guide) - ANSWERA written manual that
communicates an insurer's underwriting policy and that specifies the attributes of an
account that an insurer is willing to insure.
Underwriting authority - ANSWERThe scope of decisions that an underwriter can
make without receiving approval from someone at a higher level.
Financial Capacity - ANSWERAn insurer's ____ refers to the relationship between
premiums written and the size of the policyholders' surplus, which is an insurer's net
worth. That relationship is crucial in evaluating insurer solvency.
National Association of Insurance Commissioners (NAIC) - ANSWERThe ____ has
developed a series of financial ratios that it uses in conjunction with analytical
evaluations to identify insurers that should receive additional solvency surveillance
from regulators.
Underwriting - ANSWERThe overarching purpose of ____ is to develop and maintain
a profitable book of business for the insurer.
Adverse Selection - ANSWERUnderwriters minimize the effects of ____ by carefully
selecting the applicants whose loss exposures they are willing to insure, charging
appropriate premiums for the applicants that they do accept with premiums that
accurately reflect the loss exposures, and monitoring applications and books of
business for unusual patterns of policy growth or loss.
,Policyholders' Surplus - ANSWERAn insurance company must have adequate ____
if it wishes to increase its written premium volume.
Capacity - ANSWERAn insurer's ____ is limited by regulatory guidelines and often
by its own voluntary constraints, which are frequently more conservative than those
imposed by regulators.
Capacity - ANSWERIf an insurer's underwriting practices generate policy premiums
that exceed losses and expenses, the policyholders' surplus will increase, thereby
increasing ____.
C. To develop and maintain a profitable book of business. - ANSWERThe
overarching purpose of underwriting is
A. Achieve the underwriting goals of the company.
B. Make and sustain a profit.
C. To develop and maintain a profitable book of business.
D. Add to policyholder surplus.
A. Enforcing underwriting guidelines - ANSWERTania receives an application for
homeowner's insurance for a home valued at $500,000 from Patrick, the producer for
Keithly Insurance Company. Since Tania's underwriting authority is $350,000 on
property risks, she must refer it to Lachlan, her underwriting supervisor. Which one
of the following additional functions for underwriting profitability does this case
illustrate?
A. Enforcing underwriting guidelines
B. Prevention of errors and omissions
C. Guarding against adverse selection
D. Ensuring adequate policyholder surplus
B. Insurers must minimize the effects of adverse selection on the book of business. -
ANSWERFor underwriting to achieve its purpose,
A. Underwriters must select applicants with legal hazards.
B. Insurers must minimize the effects of adverse selection on the book of business.
C. Underwriters must randomly select applicants to insure.
D. Insurers must follow the steps in the underwriting process in strict sequence.
C. Underwriting authority. - ANSWERUnderwriting guidelines reflect the levels of
A. Responsibility by job title.
B. Loss exposure.
C. Underwriting authority.
D. Written premium by type of insurance.
D. Guarding against adverse selection - ANSWERTo achieve profitability, the
underwriting function serves which one of the following additional purposes?
, A. Transferring the risks of individuals and businesses
B. Enforcing underwriting goals
C. Adding to policyholder surplus
D. Guarding against adverse selection
C. Underwriting practices must generate policy premiums that exceed losses and
expenses. - ANSWERVictor, the sales manager for Hallbinger's Insurance Company,
wants the company to grow in written premium. He wants his agents to write more
auto and homeowners business. In order to do so, the company must have adequate
capacity. Which one of the following impacts Victor's agents and the company the
most concerning surplus and capacity?
A. Sales must submit business with a lower-than-average chance of loss.
B. Claims must pay only covered losses and have low expenses.
C. Underwriting practices must generate policy premiums that exceed losses and
expenses.
D. Research and development must create policies which are marketable.
C. Develop and maintain a profitable book of business for the insurer. -
ANSWERThe principal purpose of underwriting is to
A. Insure only those applicants with minimal or no loss exposure.
B. Decline to insure those applicants with a risk of incurring a severe loss.
C. Develop and maintain a profitable book of business for the insurer.
D. Educate producers regarding the insurer's underwriting guidelines.
D. Develop and maintain a profitable book of business for the insurer. -
ANSWERThe purpose of underwriting is to
A. Maximize the impact of adverse selection on the portfolio.
B. "Pre-qualify" or field underwrite applicants.
C. Compile information to develop a profile of loss exposures.
D. Develop and maintain a profitable book of business for the insurer.
B. Adverse selection. - ANSWERSofie and the members of her homeowner's
association have homeowner's policies on their coastal dwellings. They have heard
that there are eleven named hurricane storms predicted for their coastal area this
year. Sofie and the homeowner association members plan to increase their
homeowner's property coverage limits to handle their concern about the possible
hurricane damage. Their action is known as
A. Prevention of inadequate property limits.
B. Adverse selection.
C. Prevention of errors and omission claims.
D. Property limits assessment.
D. Ensuring adequate policyholder's surplus - ANSWERJulio, a producer for Argot's
Insurance Company, submits an application for a 50-year-old residence to Mathilde,
the underwriter. Julio wants to know why the homeowners rate is higher for his 50-
year-old residence. Mathilde explains that the homeowners rate for the 50-year-old
FUNDAMENTALS OF
UNDERWRITING QUESTIONS &
ANSWERS (RATED A+)
Book of business - ANSWERA group of policies with a common characteristic, such
as territory or type of coverage, or all policies written by a particular insurer or
agency.
Adverse selection - ANSWERIn general, the tendency for people with the greatest
probability of loss to be the ones most likely to purchase insurance.
Policyholders' surplus - ANSWERUnder statutory accounting principles (SAP), an
insurer's total admitted assets minus its total liabilities.
Capacity - ANSWERThe amount of business an insurer is able to write, usually
based on a comparison of the insurer's written premiums to its policyholders' surplus.
Underwriting guidelines (underwriting guide) - ANSWERA written manual that
communicates an insurer's underwriting policy and that specifies the attributes of an
account that an insurer is willing to insure.
Underwriting authority - ANSWERThe scope of decisions that an underwriter can
make without receiving approval from someone at a higher level.
Financial Capacity - ANSWERAn insurer's ____ refers to the relationship between
premiums written and the size of the policyholders' surplus, which is an insurer's net
worth. That relationship is crucial in evaluating insurer solvency.
National Association of Insurance Commissioners (NAIC) - ANSWERThe ____ has
developed a series of financial ratios that it uses in conjunction with analytical
evaluations to identify insurers that should receive additional solvency surveillance
from regulators.
Underwriting - ANSWERThe overarching purpose of ____ is to develop and maintain
a profitable book of business for the insurer.
Adverse Selection - ANSWERUnderwriters minimize the effects of ____ by carefully
selecting the applicants whose loss exposures they are willing to insure, charging
appropriate premiums for the applicants that they do accept with premiums that
accurately reflect the loss exposures, and monitoring applications and books of
business for unusual patterns of policy growth or loss.
,Policyholders' Surplus - ANSWERAn insurance company must have adequate ____
if it wishes to increase its written premium volume.
Capacity - ANSWERAn insurer's ____ is limited by regulatory guidelines and often
by its own voluntary constraints, which are frequently more conservative than those
imposed by regulators.
Capacity - ANSWERIf an insurer's underwriting practices generate policy premiums
that exceed losses and expenses, the policyholders' surplus will increase, thereby
increasing ____.
C. To develop and maintain a profitable book of business. - ANSWERThe
overarching purpose of underwriting is
A. Achieve the underwriting goals of the company.
B. Make and sustain a profit.
C. To develop and maintain a profitable book of business.
D. Add to policyholder surplus.
A. Enforcing underwriting guidelines - ANSWERTania receives an application for
homeowner's insurance for a home valued at $500,000 from Patrick, the producer for
Keithly Insurance Company. Since Tania's underwriting authority is $350,000 on
property risks, she must refer it to Lachlan, her underwriting supervisor. Which one
of the following additional functions for underwriting profitability does this case
illustrate?
A. Enforcing underwriting guidelines
B. Prevention of errors and omissions
C. Guarding against adverse selection
D. Ensuring adequate policyholder surplus
B. Insurers must minimize the effects of adverse selection on the book of business. -
ANSWERFor underwriting to achieve its purpose,
A. Underwriters must select applicants with legal hazards.
B. Insurers must minimize the effects of adverse selection on the book of business.
C. Underwriters must randomly select applicants to insure.
D. Insurers must follow the steps in the underwriting process in strict sequence.
C. Underwriting authority. - ANSWERUnderwriting guidelines reflect the levels of
A. Responsibility by job title.
B. Loss exposure.
C. Underwriting authority.
D. Written premium by type of insurance.
D. Guarding against adverse selection - ANSWERTo achieve profitability, the
underwriting function serves which one of the following additional purposes?
, A. Transferring the risks of individuals and businesses
B. Enforcing underwriting goals
C. Adding to policyholder surplus
D. Guarding against adverse selection
C. Underwriting practices must generate policy premiums that exceed losses and
expenses. - ANSWERVictor, the sales manager for Hallbinger's Insurance Company,
wants the company to grow in written premium. He wants his agents to write more
auto and homeowners business. In order to do so, the company must have adequate
capacity. Which one of the following impacts Victor's agents and the company the
most concerning surplus and capacity?
A. Sales must submit business with a lower-than-average chance of loss.
B. Claims must pay only covered losses and have low expenses.
C. Underwriting practices must generate policy premiums that exceed losses and
expenses.
D. Research and development must create policies which are marketable.
C. Develop and maintain a profitable book of business for the insurer. -
ANSWERThe principal purpose of underwriting is to
A. Insure only those applicants with minimal or no loss exposure.
B. Decline to insure those applicants with a risk of incurring a severe loss.
C. Develop and maintain a profitable book of business for the insurer.
D. Educate producers regarding the insurer's underwriting guidelines.
D. Develop and maintain a profitable book of business for the insurer. -
ANSWERThe purpose of underwriting is to
A. Maximize the impact of adverse selection on the portfolio.
B. "Pre-qualify" or field underwrite applicants.
C. Compile information to develop a profile of loss exposures.
D. Develop and maintain a profitable book of business for the insurer.
B. Adverse selection. - ANSWERSofie and the members of her homeowner's
association have homeowner's policies on their coastal dwellings. They have heard
that there are eleven named hurricane storms predicted for their coastal area this
year. Sofie and the homeowner association members plan to increase their
homeowner's property coverage limits to handle their concern about the possible
hurricane damage. Their action is known as
A. Prevention of inadequate property limits.
B. Adverse selection.
C. Prevention of errors and omission claims.
D. Property limits assessment.
D. Ensuring adequate policyholder's surplus - ANSWERJulio, a producer for Argot's
Insurance Company, submits an application for a 50-year-old residence to Mathilde,
the underwriter. Julio wants to know why the homeowners rate is higher for his 50-
year-old residence. Mathilde explains that the homeowners rate for the 50-year-old
