AU 60 - Chapter 1 Study Guide with
Complete Solutions
adverse selection - Answer✔✔-the tendency for people with the greatest probability of loss to
be the ones most likely to purchase insurance
underwriting function serves these purposes - Answer✔✔-guarding against adverse selection,
ensuring adequate policyholders surplus, and enforcing underwriting guidelines
policyholders surplus - Answer✔✔-under statutory accounting principles (SAP), an insurer's
total admitted assets minus its total liabilities
capacity - Answer✔✔-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 - Answer✔✔-a written manual that communications an insurer's
underwriting policies and that specifies the attributes of an account that an insurer is willing to
insure
underwriting authority - Answer✔✔-the scope of decisions that an underwriter can make
without receiving approval from someone at a higher level
line underwriter - Answer✔✔-underwriter who is primarily responsible for implementing the
steps in the underwriting process / work directly with producers and applicants
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staff underwriter - Answer✔✔-underwriter who is usually located in the home office and who
assists underwriting management with making and implementing underwriting policy
effective account selection (4) - Answer✔✔-1. avoid adverse selection 2. charging adequate
premium 3. selecting better-than-average accounts 4. rationing an insurer's available capacity to
obtain an optimum spread of loss exposures by location, class, size of risk, and line of business
manuscript policy - Answer✔✔-an insurance policy that is specifically drafted according to
terms negotiated between a specific insured (or group of insureds) and an insurer
underwriting policy - Answer✔✔-translates an insurer's mission and goals into specific
strategies that, in turn, determine the composition of the insurer's book of business
3 types of markets - Answer✔✔-standard market (average-better than average)
non-standard market (higher risk applications)
specialty market (accounts that have unique needs)
advisory organization - Answer✔✔-an independent organization that works with and on behalf
of insurers that purchase or subscribe to its services
prospective loss costs - Answer✔✔-loss data that are modified by loss development, trending
and credibility processes, but without considerations for profit and expenses
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