AU60 Final Exam Prep Solved 100%
A drought in three states where PQR Insurance Company writes coverage lead to an
underwriting directive to not write business in areas susceptible to wildfires. Three
months after the directive was issued, the Vice President of Underwriting ordered a
review of recent underwriting files to ensure that underwriters were adhering to this
guideline. This review is called a(n) - ANSWER-Underwriting audit.
A rating plan that adjusts the insured premium for savings in insurance company
commissions is called - ANSWER-Expense modification.
ABC Insurance Company sells property insurance. The company is reunderwriting its
book of business at midyear. The company hoped to retain 80 percent of policyowners.
The retention rate is 82 percent and the loss ratio on the retained business is 62
percent. The company had hoped to write $2.5 million in premiums for the year, and the
midyear value was $1.3 million in premiums written. The new policy goal for the year
was 6,000 and 3,500 new policies had been written at midyear. The loss ratio goal for
the year was 65 percent, and the loss ratio at midyear was 68 percent. Assuming
premium writings and losses are distributed uniformly over the year, what should ABC
Insurance Company conclude about its performance at midyear? - ANSWER-New
business is contributing negatively to the loss ratio.
ABC Insurance Company's actuary has calculated the pure premium for the company's
homeowner's insurance line as $40. Fixed expenses for the line are $2.50 per exposure
unit and variable expenses are 12 percent. The company's loading for profits and
contingencies is 5 percent. Using the pure premium ratemaking method and rounding to
the nearest whole dollar, which one of the following is the rate per exposure unit that
ABC needs to charge? - ANSWER-The rate per exposure unit that ABC needs to
charge is $51, calculated as (pure premium plus expenses per exposure unit) divided by
(1 minus variable expense percentage minus profit and contingencies factor). In this
case, the rate per exposure = ($40+$2.50) / (1-0.12-0.05)
ABC Insurance Company's ratio of premiums to surplus is 2 to 1. If the state
requirement where ABC transacts business is 3 to 1, then ABC - ANSWER-If the state
requirement where ABC transacts business is 3 to 1, then ABC is meeting the state's
surplus requirement.
All of the following are characteristics of independent contractors, EXCEPT: -
ANSWER-When an independent contractor's work is unsatisfactory, the usual recourse
is to discharge the contractor.
All of the following are objectives of rate regulation, EXCEPT: - ANSWER-Rates
promote availability and affordability of insurance.
, All of the following are underwriting activities typically performed by corporate
underwriters, EXCEPT: - ANSWER-Support producers and insureds
An insurance company must have adequate policyholders' surplus if it wishes to -
ANSWER-Increase its written premium volume.
An insurer's comprehensive income includes - ANSWER-Unrealized gains and losses
on securities.
An organization that considers both key business risks and opportunities when
formulating its business strategies reflects its commitment to which one of the following?
- ANSWER-Enterprise risk management
An underwriter is attempting to conduct ratio analysis on a company. The underwriter
notices that the company has $12 million in total sales, $8 million in cash sales, $4
million in credit sales, and a $2 million accounts receivable balance. Based on these
figures, what is the company's accounts receivable turnover ratio? - ANSWER-The
company's accounts receivable turnover ratio is 2 ($4 million/$2 million).
An underwriter is attempting to conduct ratio analysis on a company. The underwriter
notices that the company has $2 million in cash, $1 million in marketable securities, $3
million in inventory, $2 million in accounts receivable, and $7 million in current liabilities.
Which one of the following conclusions can the underwriter reach by calculating liquidity
ratios? - ANSWER-The company may not be able to meet its short-term obligations
because its acid test ratio is less than one.
An underwriter is attempting to conduct ratio analysis on a company. The underwriter
notices that the company has $3 million in total assets, $1 million in current assets, $2
million in total liabilities, and $1 million in current liabilities. Which one of the following
conclusions can the underwriter reach by calculating the company's debt-to-assets
ratio? - ANSWER-Debt-to-assets ratio = Total liabilities ÷ total assets. $2 million ÷ $3
million = .667. A ratio over .5 indicates financing mostly by debt. The company's assets
are financed mostly through debt.
An underwriter is attempting to conduct ratio analysis on a company. The underwriter
notices that the company has $8 million in sales, $5 million in gross profit, and $2 million
in net income. Which one of the following conclusions can the underwriter reach by
calculating the company's net profit margin? - ANSWER-Twenty-five percent of the
company's sales is left after all expenses are paid.
An underwriter is trying to determine XYZ Manufacturing's efficiency using the accounts
receivable (A/R) turnover ratio. XYZ's income statement shows $10 million in sales (half
of which is attributable to credit sales) and the balance sheet shows $200,000 in A/R.
What is XYZ's accounts receivable turnover ratio? - ANSWER-The A/R turnover ratio
uses the sales attributed to credit sales; thus, $5,000,000/$200,000 = 25 times.
A drought in three states where PQR Insurance Company writes coverage lead to an
underwriting directive to not write business in areas susceptible to wildfires. Three
months after the directive was issued, the Vice President of Underwriting ordered a
review of recent underwriting files to ensure that underwriters were adhering to this
guideline. This review is called a(n) - ANSWER-Underwriting audit.
A rating plan that adjusts the insured premium for savings in insurance company
commissions is called - ANSWER-Expense modification.
ABC Insurance Company sells property insurance. The company is reunderwriting its
book of business at midyear. The company hoped to retain 80 percent of policyowners.
The retention rate is 82 percent and the loss ratio on the retained business is 62
percent. The company had hoped to write $2.5 million in premiums for the year, and the
midyear value was $1.3 million in premiums written. The new policy goal for the year
was 6,000 and 3,500 new policies had been written at midyear. The loss ratio goal for
the year was 65 percent, and the loss ratio at midyear was 68 percent. Assuming
premium writings and losses are distributed uniformly over the year, what should ABC
Insurance Company conclude about its performance at midyear? - ANSWER-New
business is contributing negatively to the loss ratio.
ABC Insurance Company's actuary has calculated the pure premium for the company's
homeowner's insurance line as $40. Fixed expenses for the line are $2.50 per exposure
unit and variable expenses are 12 percent. The company's loading for profits and
contingencies is 5 percent. Using the pure premium ratemaking method and rounding to
the nearest whole dollar, which one of the following is the rate per exposure unit that
ABC needs to charge? - ANSWER-The rate per exposure unit that ABC needs to
charge is $51, calculated as (pure premium plus expenses per exposure unit) divided by
(1 minus variable expense percentage minus profit and contingencies factor). In this
case, the rate per exposure = ($40+$2.50) / (1-0.12-0.05)
ABC Insurance Company's ratio of premiums to surplus is 2 to 1. If the state
requirement where ABC transacts business is 3 to 1, then ABC - ANSWER-If the state
requirement where ABC transacts business is 3 to 1, then ABC is meeting the state's
surplus requirement.
All of the following are characteristics of independent contractors, EXCEPT: -
ANSWER-When an independent contractor's work is unsatisfactory, the usual recourse
is to discharge the contractor.
All of the following are objectives of rate regulation, EXCEPT: - ANSWER-Rates
promote availability and affordability of insurance.
, All of the following are underwriting activities typically performed by corporate
underwriters, EXCEPT: - ANSWER-Support producers and insureds
An insurance company must have adequate policyholders' surplus if it wishes to -
ANSWER-Increase its written premium volume.
An insurer's comprehensive income includes - ANSWER-Unrealized gains and losses
on securities.
An organization that considers both key business risks and opportunities when
formulating its business strategies reflects its commitment to which one of the following?
- ANSWER-Enterprise risk management
An underwriter is attempting to conduct ratio analysis on a company. The underwriter
notices that the company has $12 million in total sales, $8 million in cash sales, $4
million in credit sales, and a $2 million accounts receivable balance. Based on these
figures, what is the company's accounts receivable turnover ratio? - ANSWER-The
company's accounts receivable turnover ratio is 2 ($4 million/$2 million).
An underwriter is attempting to conduct ratio analysis on a company. The underwriter
notices that the company has $2 million in cash, $1 million in marketable securities, $3
million in inventory, $2 million in accounts receivable, and $7 million in current liabilities.
Which one of the following conclusions can the underwriter reach by calculating liquidity
ratios? - ANSWER-The company may not be able to meet its short-term obligations
because its acid test ratio is less than one.
An underwriter is attempting to conduct ratio analysis on a company. The underwriter
notices that the company has $3 million in total assets, $1 million in current assets, $2
million in total liabilities, and $1 million in current liabilities. Which one of the following
conclusions can the underwriter reach by calculating the company's debt-to-assets
ratio? - ANSWER-Debt-to-assets ratio = Total liabilities ÷ total assets. $2 million ÷ $3
million = .667. A ratio over .5 indicates financing mostly by debt. The company's assets
are financed mostly through debt.
An underwriter is attempting to conduct ratio analysis on a company. The underwriter
notices that the company has $8 million in sales, $5 million in gross profit, and $2 million
in net income. Which one of the following conclusions can the underwriter reach by
calculating the company's net profit margin? - ANSWER-Twenty-five percent of the
company's sales is left after all expenses are paid.
An underwriter is trying to determine XYZ Manufacturing's efficiency using the accounts
receivable (A/R) turnover ratio. XYZ's income statement shows $10 million in sales (half
of which is attributable to credit sales) and the balance sheet shows $200,000 in A/R.
What is XYZ's accounts receivable turnover ratio? - ANSWER-The A/R turnover ratio
uses the sales attributed to credit sales; thus, $5,000,000/$200,000 = 25 times.
