TRIP Portfolio Management & Strategy 3 — Questions and Answers
Question 1: A transportation insurer reports a combined ratio of 112% for its trucking liability line. What does this indicate?
- The insurer is earning 12 cents of profit for every dollar of premium collected
- Losses and expenses exceed premiums collected, resulting in an underwriting loss (Correct answer)
- The insurer's investment income fully offsets its underwriting operations
- The loss ratio is exactly 12 percentage points above the expense ratio
Correct answer: Losses and expenses exceed premiums collected, resulting in an underwriting loss
A combined ratio above 100% means the insurer is paying out more in losses and expenses than it collects in premium, producing an underwriting loss.
Question 2: In transportation liability lines, which factor most commonly causes loss development to extend over many years compared to property cargo lines?
- Cargo losses are typically discovered years after delivery
- Liability claims involving bodily injury often take years to litigate and settle (Correct answer)
- Property losses require regulatory approval before payment can be made
- Cargo claims are subject to international arbitration with longer timelines
Correct answer: Liability claims involving bodily injury often take years to litigate and settle
Bodily injury liability claims, including truck accidents, frequently involve prolonged litigation, medical treatment, and appeals, creating long development tails.
Question 3: During a soft market cycle in commercial auto insurance, a prudent portfolio strategy is to:
- Aggressively grow market share by accepting all submissions regardless of quality
- Maintain underwriting discipline and accept reduced volume rather than compromise pricing adequacy (Correct answer)
- Increase reinsurance cessions to offset inadequate rates on retained business
- Suspend all new business writing until rates harden
Correct answer: Maintain underwriting discipline and accept reduced volume rather than compromise pricing adequacy
Maintaining underwriting discipline in soft markets prevents writing unprofitable business that produces adverse development when losses emerge.
Question 4: IBNR (Incurred But Not Reported) reserves are particularly important in transportation insurance because:
- Transportation policies are always written on a claims-made basis
- Many transportation claims—especially cargo damage and injury—are reported months or years after the incident (Correct answer)
- IBNR is required only for transportation lines under US statutory accounting
- Transportation insurers are prohibited from closing claims within the policy year
Correct answer: Many transportation claims—especially cargo damage and injury—are reported months or years after the incident
The delay between a loss event and formal claim reporting—common in cargo damage and bodily injury—requires IBNR reserves to accurately reflect ultimate liability.
Question 5: A transportation insurer reviews its loss ratio trend and finds deterioration driven by nuclear verdicts against trucking companies. The BEST portfolio response is to:
- Immediately cancel all trucking liability policies to eliminate exposure
- Re-evaluate risk selection criteria, pricing adequacy, and policy limits offered for the trucking segment (Correct answer)
- Transfer all trucking liability to a captive without repricing
- Increase deductibles on property damage coverage to offset liability losses
Correct answer: Re-evaluate risk selection criteria, pricing adequacy, and policy limits offered for the trucking segment
A systematic loss ratio deterioration from social inflation requires a coordinated underwriting and pricing review, not portfolio elimination or unrelated coverage adjustments.
Question 6: Premium-to-surplus ratio is used in insurance portfolio management primarily to measure:
- How much premium is returned to policyholders as dividends
- The insurer's financial leverage and capacity to absorb unexpected losses relative to capital (Correct answer)
- The ratio of new business premium to renewal premium in the portfolio
- The percentage of premium ceded to reinsurers under treaty agreements
Correct answer: The insurer's financial leverage and capacity to absorb unexpected losses relative to capital
Premium-to-surplus ratio indicates how much business is written relative to the insurer's capital base, serving as a leverage and solvency measure.
Question 7: Rate adequacy testing in a transportation portfolio involves comparing:
- Gross written premium to reinsurance recoveries for the period
- Filed rates to actuarially indicated rates based on loss and expense experience (Correct answer)
- Policy limits across the book to average claim severity
- The carrier's loss ratio to the state-mandated maximum loss ratio
Correct answer: Filed rates to actuarially indicated rates based on loss and expense experience
Rate adequacy testing compares what is being charged to what actuarial analysis says should be charged to achieve target profitability.
TRIP Portfolio Management & Strategy 3
A transportation insurer reports a combined ratio of 112% for its trucking liability line.
What does this indicate?