Property And Casualty Insurance License Underwriting and Rating 1 — Questions and Answers
Question 1: What is the primary purpose of underwriting in insurance?
- To process claims quickly
- To select and classify risks so that appropriate premiums are charged and adverse selection is avoided (Correct answer)
- To market policies to new customers
- To invest premium dollars for profit
Correct answer: To select and classify risks so that appropriate premiums are charged and adverse selection is avoided
Underwriting evaluates applicants, classifies risks into appropriate groups, and determines whether and at what price to offer coverage, protecting the insurer's book of business.
Question 2: What is 'adverse selection' in insurance?
- The insurer's tendency to reject all risky applications
- The tendency for higher-risk individuals to seek insurance more than lower-risk individuals (Correct answer)
- The insurer's practice of selecting only profitable markets
- The insured's choice of the lowest-premium policy
Correct answer: The tendency for higher-risk individuals to seek insurance more than lower-risk individuals
Adverse selection occurs when those most likely to suffer a loss disproportionately seek insurance, threatening the insurer's ability to price coverage fairly.
Question 3: What is a 'rating bureau' in property and casualty insurance?
- A government agency that approves all rates
- An organization that develops and files advisory loss costs and rating systems used by member insurers (Correct answer)
- An entity that pays claims on behalf of insolvent insurers
- A consumer bureau that rates insurer financial strength
Correct answer: An organization that develops and files advisory loss costs and rating systems used by member insurers
Rating bureaus like ISO (Insurance Services Office) collect industry loss data, develop advisory loss costs, and file rating systems that member insurers can adopt or modify.
Question 4: What are 'loss costs' in insurance rating?
- The total expenses incurred processing claims
- The portion of the premium intended to cover expected claims, before loading for expenses and profit (Correct answer)
- The deductibles retained by the insured
- The reinsurance premiums paid by the insurer
Correct answer: The portion of the premium intended to cover expected claims, before loading for expenses and profit
Loss costs (also called pure premiums) represent the actuarially projected cost of claims per exposure unit, which insurers then load with their own expense and profit factors.
Question 5: What is 'experience rating'?
- Rating based solely on industry-wide statistics
- Adjusting a premium based on the insured's own past loss experience (Correct answer)
- Setting rates based on the agent's experience level
- Applying discounts for long-term policyholders only
Correct answer: Adjusting a premium based on the insured's own past loss experience
Experience rating modifies a policyholder's premium up or down based on their individual loss history relative to what was expected for their class.
Question 6: What is a 'schedule rating' modification?
- A rating plan that follows a fixed payment schedule
- Debits and credits applied to a base rate based on specific physical or operational characteristics of the risk (Correct answer)
- A rating plan for seasonal businesses
- Automatic rate adjustments on policy anniversaries
Correct answer: Debits and credits applied to a base rate based on specific physical or operational characteristics of the risk
Schedule rating allows underwriters to manually adjust premiums based on specific favorable or unfavorable characteristics of the risk not captured in the class rate.
Property And Casualty Insurance License Underwriting and Rating 1
What is the primary purpose of underwriting in insurance?