AU-60 COMMERCIAL UNDERWRITING
PRINCIPLES EXAM QUESTIONS AND
ANSWERS
Loss Exposure - ANSWER-Any condition or situation that presents a possibility of
loss, whether or not an actual loss occurs.
Hazard - ANSWER-A condition that increases the frequency or severity of a loss.
Information Efficiency - ANSWER-The balance that underwriters must maintain
between the hazards presented by the account and the information needed to
underwrite it.
Application - ANSWER-A legal document that provides information obtained directly
from an applicant requesting insurance and that an insurer can use for underwriting
and claim handling purposes.
Loss run - ANSWER-A report detailing an insured's history of claims that have
occurred over a specific period, valued as of a specific date.
Counteroffer - ANSWER-A proposal an offeree makes to an offeror that varies in
some material way from the original offer, resulting in rejection of the original offer
and constituting a new offer.
Estimated loss potentials (ELP) - ANSWER-Rate development factors used for
operations with unique characteristics or for which inadequate statistical experience
exists. ELPS are multiplied by loss cost multipliers to develop rates
(A) rated classification - ANSWER-The rate classifications provided by the ISO
Commercial Lines Manual that describe operations with unique characteristics or for
which inadequate statistical experience exists.
Experience Rating - ANSWER-A rating plan that adjusts the premium for the current
policy period to recognize the loss experience of the insured organization during past
policy periods.
Schedule Rating - ANSWER-A 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.
Retrospective rating - ANSWER-A ratemaking technique 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.
, Facultative Reinsurance - ANSWER-Reinsurance of individual loss exposures in
which the primary insurer chooses which loss exposures to submit to the reinsurer,
and the reinsurer can accept or reject any loss exposures submitted.
Account underwriting - ANSWER-A method of underwriting in which all of the
business form a particular applicant is evaluated as a whole.
Underwriting audit - ANSWER-A review of underwriting files to ensure that individual
underwriters are adhering to underwriting guidelines.
National association of insurance commissioners - ANSWER-An association of
insurance commissioners from the fifty U.S. states, the District of Columbia, and the
five U.S. territories and possessions, whose purpose is to coordinate insurance
regulation activities among the various state insurance departments.
Premium-to-surplus ratio, or capacity ratio - ANSWER-A capacity ratio that indicates
an insurer's financial strength by relating net written premiums to policyholders'
surplus
Statutory accounting principles (SAP) - ANSWER-The accounting principles and
practices that are prescribed or permitted by an insurer's domiciliary state and that
insurers must follow.
Return on Equity (ROE) - ANSWER-A profitability ratio expressed as a percentage
by dividing a company's net income by its net worth (book value). Depending on the
context, net worth is sometimes called shareholders' equity, owners' equity, or
policyholders' surplus.
Market Conduct Examination - ANSWER-An analysis of an insurer's practices in four
operational areas: sales and advertising, underwriting, ratemaking, and claim
handling.
predictive modeling - ANSWER-A process in which historical data based on
behaviors and events are blended with multiple variables and used to construct
models of anticipated future outcomes.
Underwriting submission - ANSWER-Underwriting information for an initial
application, or a substantive policy midterm or renewal change.
Expert systems, or knowledge-based systems - ANSWER-Computer software
programs that supplement the underwriting decision-making process. These systems
ask for the information necessary to make an underwriting decision, ensuring that no
information is overlooked.
unfair trade practices - ANSWER-methods of competition or advertising or
procedures that tend to deprive the public of information necessary to make informed
insurance decisions
binder - ANSWER-A temporary written or oral agreement to provide insurance
coverage until a formal written policy is issued.
PRINCIPLES EXAM QUESTIONS AND
ANSWERS
Loss Exposure - ANSWER-Any condition or situation that presents a possibility of
loss, whether or not an actual loss occurs.
Hazard - ANSWER-A condition that increases the frequency or severity of a loss.
Information Efficiency - ANSWER-The balance that underwriters must maintain
between the hazards presented by the account and the information needed to
underwrite it.
Application - ANSWER-A legal document that provides information obtained directly
from an applicant requesting insurance and that an insurer can use for underwriting
and claim handling purposes.
Loss run - ANSWER-A report detailing an insured's history of claims that have
occurred over a specific period, valued as of a specific date.
Counteroffer - ANSWER-A proposal an offeree makes to an offeror that varies in
some material way from the original offer, resulting in rejection of the original offer
and constituting a new offer.
Estimated loss potentials (ELP) - ANSWER-Rate development factors used for
operations with unique characteristics or for which inadequate statistical experience
exists. ELPS are multiplied by loss cost multipliers to develop rates
(A) rated classification - ANSWER-The rate classifications provided by the ISO
Commercial Lines Manual that describe operations with unique characteristics or for
which inadequate statistical experience exists.
Experience Rating - ANSWER-A rating plan that adjusts the premium for the current
policy period to recognize the loss experience of the insured organization during past
policy periods.
Schedule Rating - ANSWER-A 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.
Retrospective rating - ANSWER-A ratemaking technique 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.
, Facultative Reinsurance - ANSWER-Reinsurance of individual loss exposures in
which the primary insurer chooses which loss exposures to submit to the reinsurer,
and the reinsurer can accept or reject any loss exposures submitted.
Account underwriting - ANSWER-A method of underwriting in which all of the
business form a particular applicant is evaluated as a whole.
Underwriting audit - ANSWER-A review of underwriting files to ensure that individual
underwriters are adhering to underwriting guidelines.
National association of insurance commissioners - ANSWER-An association of
insurance commissioners from the fifty U.S. states, the District of Columbia, and the
five U.S. territories and possessions, whose purpose is to coordinate insurance
regulation activities among the various state insurance departments.
Premium-to-surplus ratio, or capacity ratio - ANSWER-A capacity ratio that indicates
an insurer's financial strength by relating net written premiums to policyholders'
surplus
Statutory accounting principles (SAP) - ANSWER-The accounting principles and
practices that are prescribed or permitted by an insurer's domiciliary state and that
insurers must follow.
Return on Equity (ROE) - ANSWER-A profitability ratio expressed as a percentage
by dividing a company's net income by its net worth (book value). Depending on the
context, net worth is sometimes called shareholders' equity, owners' equity, or
policyholders' surplus.
Market Conduct Examination - ANSWER-An analysis of an insurer's practices in four
operational areas: sales and advertising, underwriting, ratemaking, and claim
handling.
predictive modeling - ANSWER-A process in which historical data based on
behaviors and events are blended with multiple variables and used to construct
models of anticipated future outcomes.
Underwriting submission - ANSWER-Underwriting information for an initial
application, or a substantive policy midterm or renewal change.
Expert systems, or knowledge-based systems - ANSWER-Computer software
programs that supplement the underwriting decision-making process. These systems
ask for the information necessary to make an underwriting decision, ensuring that no
information is overlooked.
unfair trade practices - ANSWER-methods of competition or advertising or
procedures that tend to deprive the public of information necessary to make informed
insurance decisions
binder - ANSWER-A temporary written or oral agreement to provide insurance
coverage until a formal written policy is issued.
