General Underwriting Purposes, Functions, and Information in Insurance - Part II: Practice Questions and Solutions

This section of the study guide is intended to provide practice problems and solutions to accompany the pages of Insurance Operations, Regulation, and Statutory Accounting, cited below. Students are encouraged to read these pages before attempting the problems. This study guide is entirely an independent effort by Mr. Stolyarov and is not affiliated with any organization(s) to whose textbooks it refers, nor does it represent such organization(s).

Some of the questions here ask for short written answers based on the reading. This is meant to give the student practice in answering questions of the format that will appear on Exam 5. Students are encouraged to type their own answers first and then to compare these answers with the solutions given here. Please note that the solutions provided here are not necessarily the only possible ones.

Source:

Myhr, A.E.; and Markham, J.J. Insurance Operations, Regulation, and Statutory Accounting (Second Edition). American Institute for Chartered Property Casualty Underwriters. 2004. Chapter 4, pp. 4.19-4.28.

Original Problems and Solutions from The Actuary's Free Study Guide

Problem S5-52-1. Myhr and Markham, pp. 4.19-4.20, discuss the differences between line underwriters and staff underwriters. Define each kind of underwriter and give two examples of responsibilities that would be performed by each.

Solution S5-52-1.
A line underwriter is an "underwriter who is primarily responsible for implementing the steps in the underwriting process" (Myhr and Markham, p. 4.19).

The following are two examples of line underwriters' activities, provided by Myhr and Markham, p. 4.19:
"1. Assisting with determining appropriate coverage;
"2. Providing service to producers and policyholders."

A staff underwriter is an"underwriter who is usually located in the home office and who assists underwriting management with making and implementing underwriting policy" (Myhr and Markham, p. 4.19).

The following are examples of staff underwriters' activities, provided by Myhr and Markham, p. 4.20:

"1. Researching the market;
"2. Researching and developing coverages;
"3. Evaluating underwriting experience;
"4. Reviewing and revising rating plans;
"5. Formulating underwriting policy;
"6. Developing underwriting guides;
"7. Conducting underwriting audits;
"8. Assisting with education and training."

Any two of the above would suffice as an answer.

Problem S5-52-2. Myhr and Markham, pp. 4.20-4.21, mention four issues of the insurance market which staff underwriters, along with actuarial and marketing departments, research. List three of these four issues.

Solution S5-52-2. The following four issues are explicitly mentioned by Myhr and Markham, pp. 4.20-4.21:
"1. Effect of adding or deleting entire types of business;

"2. Effect of expanding into additional states or retiring from states presently serviced;

"3. Optimal product mix (the composition of the book of business, such as the percentage of premium generated by general liability or workers' compensation policies);

"4. Premium volume goals."

Any three of the above would suffice as an answer.

Problem S5-52-3. Myhr and Markham, p. 4.22, mention four constraints to which underwriting is subject:
1. Financial capacity;
2. Regulation;
3. Personnel and physical resources;
4. Reinsurance.

Each of the situations below is an example of one of these four constraints. For each situation, identify the constraint it exemplifies.

(a) Insurers in virtually every state must obtain licenses to write insurance for every specific type of insurance.
(b) If an insurer wishes to transfer a loss exposure to an external entity, it may not be able to do this if it uses certain manuscript forms judged by the external entity to be too risky.
(c) An insurer has an obsolete information infrastructure and has not updated its computer systems in 10 years, therefore being unable to promptly meet consumer demand for its products.
(d) An insurer might decide to altogether stop writing a certain class of business if the loss experience has been such that the rates are shown to be inadequate for the insurer to continue to exist if it continued to write the business.
(e) Insurers are subject to periodic market conduct examinations that determine whether or not the insurers deviated, in actual practice, from filed and approved rates and forms.
(f) An insurer's resources might be wiped out by a major catastrophic loss.
(g) An insurer may not be able to pursue writing aviation insurance if it does not have specially trained underwriters who are specifically familiar with this kind of insurance.

Solution S5-52-3.

All of the situations in this question are discussed in Myhr and Markham, pp. 4.22-4.24.

Situation (a) is an example of constraint 2. Regulation.
Situation (b) is an example of constraint 4. Reinsurance.
Situation (c) is an example of constraint 3. Personnel and physical resources.
Situation (d) is an example of constraint 1. Financial capacity.
Situation (e) is an example of constraint 2. Regulation.
Situation (f) is an example of constraint 1. Financial capacity.
Situation (g) is an example of constraint 3. Personnel and physical resources.

Problem S5-52-4. Which of the following statement about underwriting guides are true? More than one answer may be correct.

(a) Line underwriters typically develop underwriting guides.
(b) Staff underwriters typically develop underwriting guides.
(c) Once developed, an underwriting guide is expected to function throughout the insurer's existence as a complete and comprehensive document, requiring no future updates.
(d) The purpose of underwriting guides is to develop consistent and uniform guidelines for underwriting selection decisions throughout the geographic regions in which an insurer operates.
(e) The purpose of underwriting guides is to help an insurer distinguish acceptable geographic locations of insureds from unacceptable ones.
(f) If a loss exposure is classified as "worse than average" via an underwriting guide, this necessarily means that the loss exposure will be judged as being unacceptable to the insurer.
(g) Desirable methods of monitoring the underwriting decision are often incorporated into underwriting guides.

Solution S5-52-4. This question is based on the discussion in Myhr and Markham, p. 4.24. The following answers are correct:

(b) Staff underwriters typically develop underwriting guides.
(d) The purpose of underwriting guides is to develop consistent and uniform guidelines for underwriting selection decisions throughout the geographic regions in which an insurer operates.
(g) Desirable methods of monitoring the underwriting decision are often incorporated into underwriting guides.

Choice (a) is not correct; typically, underwriting guides are developed by staff underwriters to communicate information and practices to line underwriters.

Choice (c) is not correct; it is typically necessary for staff underwriters to periodically update underwriting guides based on changing external circumstances and internal policies.

Choice (e) is not correct, since the correct choice (d) states that underwriting guides help underwriters make uniform decisions throughout all the territories in which the insurer does business.

Choice (f) is not correct; some insurers even specialize in writing "worse than average" risks.

Problem S5-52-5. Myhr and Markham discuss underwriting audits and the use of statistical data by underwriters on p. 4.28.

(a) Define what an underwriting audit is.

(b) List three aspects on which a typical underwriting audit might focus.

(c) Name three ways by which statistical data analyzed by underwriters are often classified.

Solution S5-52-5.

(a) An underwriting audit is a "process in which members of an insurer's home office underwriting department examine files to see whether underwriters in branch or regional offices are following underwriting guidelines" (Myhr and Markham, p. 4.28).

(b) The following aspects on which underwriting audits focus are mentioned by Myhr and Markham, p. 4.28:

1. Proper documentation;
2. Adherence to procedure, classification, and rating practices;
3. Conformity of selection decisions to the underwriting guide and bulletins.

(c) The following classifications of statistical data are mentioned by Myhr and Markham, p. 4.28:

1. Data by type of insurance;
2. Data by class of business;
3. Data by size of loss exposure;
4. Data by territory.

Any three of the above would suffice as an answer. Other valid answers may also be possible.

See other sections of The Actuary's Free Study Guide for Exam 5.