AU 60 - Terms - Commercial Underwriting
Principles UPDATED ACTUAL Questions
and CORRECT Answers
"To minimize the effects of adverse selection, underwriters
- carefully select the applicants whose loss exposures they are willing to insure
- charge prmeiums that accurately relflect the loss exposures for those applicants they select
- monitor applications and books of business for unusual patterns of policy growth or loss" -
CORRECT ANSWER - Describe the approaches underwriters take to minimize the effects
of adverse selection
"Underwriters ensure the adequacy of policyholders' surplus by
- adhering to underwriting guidelines
- making certain that all loss exposures are correctly identified
- charging adequate premiums for the applications that are accepted" - CORRECT
ANSWER - Describe the approaches underwriters take to ensure the adequacy of policy-
holders's surplus
If loss exposures, risks, or policy limits on an application exceed an underwriter's authority, they
will seek approval through supervisory and management ranks within the underwriting
department - CORRECT ANSWER - Describe the approaches underwriters take to ensure
that the policies of accepted applicants adhere to underwriting guidelines
Line underwriters evaluate individual accounts for acceptability and execute underwriting policy
by following practices and procedures outlined by staff underwriters. Staff underwriters work
closely with underwriting management to perform activities essential for profitable risk selection
- CORRECT ANSWER - Distinguish between the activities of line underwriters and those
of staff underwriters
"Effective account selection by line underwriters is essential to attaining these goals:
- Avoiding adverse selection
,- Charging adequate premiums for accounts with a higher-than-average chance of loss
- Selecting better-than-average accounts for which the premium charged will be more than
adequate
- Rationing an insurer's available capacity to obtain an optimum spread of loss exposures by
locaiton, class, size of risk, and line of business" - CORRECT ANSWER - Describe the
goals of effective account selection by line underwriters
"Such underwriting guides identify
- specific hazards to evaluate
- alternatives to consider
- criteria to use when making the final decision, ways to implement the decision
- methods to monitor the decision.
The guides may also provide pricing instructions and reinsurance-related information." -
CORRECT ANSWER - Some underwriting guides contain systematic instructions for
handling particular classes of commercial accounts. Describe the instructions such guides might
include
Staff underwriters work cooperatively with the actuarial and legal departments to develop new
coverages and modify existing coverage forms developed by advisory organizations -
CORRECT ANSWER - Explain how staff underwriters are involved in the development of
coverage forms
complaince with levels of authority ensures that the insurer accepts applcants within its
underwriting policy - CORRECT ANSWER - Explain why it is important that
underwriters operate within their assigned levels of underwriting authority
A notation next to a specific classification in the underwriting guide might indicate that a senior
underwriter must review and approve an application from that classification before it is
processed further. Depending on the concerns that underwriting management places on a
classification, underwriting approval might be required from the line udnerwriter's branch
manger or a staff underwriter at the home office - CORRECT ANSWER - Describe how
insurers communicate underwriting authority through underwriting guidelines
,An insurer's financial capacity refers to the relationship between premiums written and the size
of the policyholders' surplus or the insurer's net worth - CORRECT ANSWER - Describe
the components of an insurer's financial capacity
Rapid premium growth results in a reduction in policyholders' surplus to pay for expenses
generated by that growth, because of conservative statutory accounting principles used in
insurance. This contraint often precludes prmeium expansion unless the insurer purchases
reinsurance or obtains moer capital - CORRECT ANSWER - Explain how rapid premium
growth can cause insurers to experience excessive premium-to-surplus ratios
"Regulation may affect underwriting policy in these ways:
- Insurers must be licenses to write insurance in each state in which they do business
- Rates, rules, and forms must be filed with state regulators
- Underwriting guidelines are required to be filed in some states
- If consumer groups believe that the insurance industry has not adequately served certain
geographic areas, regulatory focus on insurance availability can lead to requirements to extend
coverage to loss exposures that an insurer might otherwise not write" - CORRECT
ANSWER - Identify four ways that regulation may affect underwriting policy
Reinsurers may expressly exclude reinsurance coverance for loss exposures covered by
underlying manuscript forms developed for a particular insured or covered by underlying forms
developed independently of an advisory organization - CORRECT ANSWER - Describe
the types of underlying insurance forms that may concern reinsurers
Underwriting guidelines provide a structure for underwriting decisions by identifying the major
considerations underwriters should evaluate for each type of insurance the insurer writes. -
CORRECT ANSWER - Explain how underwriting guidelines provide a structure for
underwriting decisions
Routine decisions are those for which the line underwriter clearly has decision-making authoriy
according to the underwriting guidelines. Nonroutine decisions involve submissions that fall
outside the underwriter's authority - CORRECT ANSWER - Contrast routine underwriting
decisions with nonroutine underwriting decisions
, Compliance with underwriting guidelines ensures that coverage limits and accepted loss
exposures will not exceed the insurer's treaty reinsuranec, because staff underwriters reflect those
treaty limitations in the guidelines. - CORRECT ANSWER - Explain how compliance
with underwriting guidelines ensures adherence to reinsurance treaty limitations
Predictive modeling can procide a consistent way to review individual applications that improves
for the overall profitability of a book of business. It can also help in managing a large book of
business for which conducting an in-depth underwriting review on every account would be too
costly - CORRECT ANSWER - Describe the potential advantages of using predictive
modeling in making underwriting decisions
Underwriting guidelines that are not being followed may be either outdated or considered
unrealistic, which could indicate that a critical review for updates is required. - CORRECT
ANSWER - Explain how underwriting audits provide staff underwriters with information
on the effectiveness of existing underwriting guidelines
"The undewriting process entails these six steps:
a. Evaluate the submission
b. Develop underwriting alternatives
c. Select an underwriting alternative
d. Determine an appropriate premium
e. Implement the underwriting decision
f. Monitor underwriting decisions" - CORRECT ANSWER - What are the steps in the
underwriting process
"Any five of these are principal sources of underwriting information:
- producers, insurance applications, inspection reports , government records, financial rating
services, loss data, field marketing personnel, premium auditors, claim files, production records,
and consultants' reports" - CORRECT ANSWER - List five princpal sources of
underwriting information
"An underwriter may suggest these modifications to a submission:
- Require loss control measures
Principles UPDATED ACTUAL Questions
and CORRECT Answers
"To minimize the effects of adverse selection, underwriters
- carefully select the applicants whose loss exposures they are willing to insure
- charge prmeiums that accurately relflect the loss exposures for those applicants they select
- monitor applications and books of business for unusual patterns of policy growth or loss" -
CORRECT ANSWER - Describe the approaches underwriters take to minimize the effects
of adverse selection
"Underwriters ensure the adequacy of policyholders' surplus by
- adhering to underwriting guidelines
- making certain that all loss exposures are correctly identified
- charging adequate premiums for the applications that are accepted" - CORRECT
ANSWER - Describe the approaches underwriters take to ensure the adequacy of policy-
holders's surplus
If loss exposures, risks, or policy limits on an application exceed an underwriter's authority, they
will seek approval through supervisory and management ranks within the underwriting
department - CORRECT ANSWER - Describe the approaches underwriters take to ensure
that the policies of accepted applicants adhere to underwriting guidelines
Line underwriters evaluate individual accounts for acceptability and execute underwriting policy
by following practices and procedures outlined by staff underwriters. Staff underwriters work
closely with underwriting management to perform activities essential for profitable risk selection
- CORRECT ANSWER - Distinguish between the activities of line underwriters and those
of staff underwriters
"Effective account selection by line underwriters is essential to attaining these goals:
- Avoiding adverse selection
,- Charging adequate premiums for accounts with a higher-than-average chance of loss
- Selecting better-than-average accounts for which the premium charged will be more than
adequate
- Rationing an insurer's available capacity to obtain an optimum spread of loss exposures by
locaiton, class, size of risk, and line of business" - CORRECT ANSWER - Describe the
goals of effective account selection by line underwriters
"Such underwriting guides identify
- specific hazards to evaluate
- alternatives to consider
- criteria to use when making the final decision, ways to implement the decision
- methods to monitor the decision.
The guides may also provide pricing instructions and reinsurance-related information." -
CORRECT ANSWER - Some underwriting guides contain systematic instructions for
handling particular classes of commercial accounts. Describe the instructions such guides might
include
Staff underwriters work cooperatively with the actuarial and legal departments to develop new
coverages and modify existing coverage forms developed by advisory organizations -
CORRECT ANSWER - Explain how staff underwriters are involved in the development of
coverage forms
complaince with levels of authority ensures that the insurer accepts applcants within its
underwriting policy - CORRECT ANSWER - Explain why it is important that
underwriters operate within their assigned levels of underwriting authority
A notation next to a specific classification in the underwriting guide might indicate that a senior
underwriter must review and approve an application from that classification before it is
processed further. Depending on the concerns that underwriting management places on a
classification, underwriting approval might be required from the line udnerwriter's branch
manger or a staff underwriter at the home office - CORRECT ANSWER - Describe how
insurers communicate underwriting authority through underwriting guidelines
,An insurer's financial capacity refers to the relationship between premiums written and the size
of the policyholders' surplus or the insurer's net worth - CORRECT ANSWER - Describe
the components of an insurer's financial capacity
Rapid premium growth results in a reduction in policyholders' surplus to pay for expenses
generated by that growth, because of conservative statutory accounting principles used in
insurance. This contraint often precludes prmeium expansion unless the insurer purchases
reinsurance or obtains moer capital - CORRECT ANSWER - Explain how rapid premium
growth can cause insurers to experience excessive premium-to-surplus ratios
"Regulation may affect underwriting policy in these ways:
- Insurers must be licenses to write insurance in each state in which they do business
- Rates, rules, and forms must be filed with state regulators
- Underwriting guidelines are required to be filed in some states
- If consumer groups believe that the insurance industry has not adequately served certain
geographic areas, regulatory focus on insurance availability can lead to requirements to extend
coverage to loss exposures that an insurer might otherwise not write" - CORRECT
ANSWER - Identify four ways that regulation may affect underwriting policy
Reinsurers may expressly exclude reinsurance coverance for loss exposures covered by
underlying manuscript forms developed for a particular insured or covered by underlying forms
developed independently of an advisory organization - CORRECT ANSWER - Describe
the types of underlying insurance forms that may concern reinsurers
Underwriting guidelines provide a structure for underwriting decisions by identifying the major
considerations underwriters should evaluate for each type of insurance the insurer writes. -
CORRECT ANSWER - Explain how underwriting guidelines provide a structure for
underwriting decisions
Routine decisions are those for which the line underwriter clearly has decision-making authoriy
according to the underwriting guidelines. Nonroutine decisions involve submissions that fall
outside the underwriter's authority - CORRECT ANSWER - Contrast routine underwriting
decisions with nonroutine underwriting decisions
, Compliance with underwriting guidelines ensures that coverage limits and accepted loss
exposures will not exceed the insurer's treaty reinsuranec, because staff underwriters reflect those
treaty limitations in the guidelines. - CORRECT ANSWER - Explain how compliance
with underwriting guidelines ensures adherence to reinsurance treaty limitations
Predictive modeling can procide a consistent way to review individual applications that improves
for the overall profitability of a book of business. It can also help in managing a large book of
business for which conducting an in-depth underwriting review on every account would be too
costly - CORRECT ANSWER - Describe the potential advantages of using predictive
modeling in making underwriting decisions
Underwriting guidelines that are not being followed may be either outdated or considered
unrealistic, which could indicate that a critical review for updates is required. - CORRECT
ANSWER - Explain how underwriting audits provide staff underwriters with information
on the effectiveness of existing underwriting guidelines
"The undewriting process entails these six steps:
a. Evaluate the submission
b. Develop underwriting alternatives
c. Select an underwriting alternative
d. Determine an appropriate premium
e. Implement the underwriting decision
f. Monitor underwriting decisions" - CORRECT ANSWER - What are the steps in the
underwriting process
"Any five of these are principal sources of underwriting information:
- producers, insurance applications, inspection reports , government records, financial rating
services, loss data, field marketing personnel, premium auditors, claim files, production records,
and consultants' reports" - CORRECT ANSWER - List five princpal sources of
underwriting information
"An underwriter may suggest these modifications to a submission:
- Require loss control measures
