CU Underwriting Pricing and Ratemaking 2 — Questions and Answers
Question 1: In commercial lines underwriting, which rating factor typically has the MOST significant impact on workers' compensation premiums?
- Number of years in business
- Industry classification (class code) (Correct answer)
- Geographic location of headquarters
- Annual revenue of the company
Correct answer: Industry classification (class code)
Workers' compensation class codes reflect the inherent hazard of the type of work performed and are the primary driver of the manual rate applied to payroll.
Question 2: An underwriter applies a schedule rating credit of 15% to a commercial property risk. What is the basis for this type of modification?
- The insured's favorable loss history over the prior three years
- Specific physical or managerial characteristics that differ from the average risk in the class (Correct answer)
- Regulatory mandated discounts for long-term policyholders
- Competitor pricing pressure in the market
Correct answer: Specific physical or managerial characteristics that differ from the average risk in the class
Schedule rating allows underwriters to adjust rates for specific characteristics of an individual risk — such as building construction, protection, or management quality — that differ from the class average.
Question 3: What does the 'permissible loss ratio' represent in the loss ratio ratemaking method?
- The maximum loss ratio allowed by state regulators
- The target loss ratio that allows for recovery of expenses and a profit margin (Correct answer)
- The actual loss ratio achieved in the prior policy year
- The industry average loss ratio for the line of business
Correct answer: The target loss ratio that allows for recovery of expenses and a profit margin
The permissible loss ratio is 1 minus the expense ratio, representing the proportion of premium available to pay losses while still achieving profitability.
Question 4: Which exposure base is most commonly used for general liability insurance rating?
- Number of vehicles
- Square footage of premises
- Gross sales or payroll, depending on the operation (Correct answer)
- Number of employees
Correct answer: Gross sales or payroll, depending on the operation
General liability premiums are most commonly based on gross sales for mercantile and service operations, or payroll for contracting risks, as these best correlate with liability exposure.
Question 5: What is 'loss development' and why is it important in ratemaking?
- The process of marketing insurance products to new customers
- The growth of reported losses over time as claims mature to their ultimate value (Correct answer)
- The increase in premium rates due to inflation
- The expansion of coverage territory by an insurer
Correct answer: The growth of reported losses over time as claims mature to their ultimate value
Loss development accounts for the fact that reported losses at any given point in time are not final; factors are applied to project incurred losses to their estimated ultimate values for accurate ratemaking.
Question 6: An underwriter reviewing a large account uses 'experience rating modification.' A mod factor of 0.85 means the insured will:
- Pay 15% more than the manual premium
- Pay 85% of the manual premium (Correct answer)
- Receive a 15% credit on the next renewal
- Have claims capped at 85% of expected losses
Correct answer: Pay 85% of the manual premium
An experience modification factor of 0.85 is applied to the manual premium, resulting in a premium that is 15% below manual — a credit for better-than-average loss experience.
Question 7: Which statement best describes 'minimum premium' in underwriting pricing?
- The lowest rate the state allows an insurer to charge
- The floor amount charged for a policy regardless of how low calculated premium would otherwise be (Correct answer)
- The rate charged to the least risky class of business
- The premium before any surcharges or credits are applied
Correct answer: The floor amount charged for a policy regardless of how low calculated premium would otherwise be
A minimum premium ensures the insurer recovers basic fixed administrative and acquisition costs even for very small or short-term policies, regardless of computed premium.
CU Underwriting Pricing and Ratemaking 2
In commercial lines underwriting, which rating factor typically has the MOST significant impact on workers' compensation premiums?