Property And Casualty Insurance License Underwriting and Rating 2 — Questions and Answers
Question 1: What is a 'surplus lines' insurer?
- An insurer licensed in all 50 states
- A non-admitted insurer that covers risks that admitted carriers won't write (Correct answer)
- An insurer that only writes large commercial accounts
- A state-run insurer of last resort
Correct answer: A non-admitted insurer that covers risks that admitted carriers won't write
Surplus lines insurers are not licensed (admitted) in a state but are authorized to write coverage for unusual or hard-to-place risks that admitted carriers decline.
Question 2: What is a 'residual market' or 'assigned risk plan' for auto insurance?
- A voluntary market for preferred drivers
- A mechanism to provide coverage to drivers who cannot obtain insurance in the voluntary market (Correct answer)
- A reinsurance pool for catastrophic auto losses
- A state fund for uninsured accident victims
Correct answer: A mechanism to provide coverage to drivers who cannot obtain insurance in the voluntary market
Assigned risk plans (also called auto insurance plans) assign high-risk drivers who are rejected by the voluntary market to participating insurers on a rotational basis.
Question 3: What does 'filed rate' mean in insurance regulation?
- A rate submitted to and approved by the state insurance department before use (Correct answer)
- A rate charged only to commercial policyholders
- A rate set by the federal government
- A rate determined solely by the insurer without regulatory review
Correct answer: A rate submitted to and approved by the state insurance department before use
In prior-approval states, insurers must file rates with the state insurance department and receive approval before using them; in file-and-use states, rates are filed and can be used immediately.
Question 4: What is 'combined ratio' in insurance?
- The ratio of investments to total assets
- The sum of the loss ratio and expense ratio, measuring underwriting profitability (Correct answer)
- The ratio of claims paid to claims reported
- The ratio of premiums earned to premiums written
Correct answer: The sum of the loss ratio and expense ratio, measuring underwriting profitability
The combined ratio equals the loss ratio plus the expense ratio; a combined ratio below 100% indicates underwriting profit, while above 100% indicates an underwriting loss.
Question 5: What is a 'retrospective rating plan'?
- A plan where premiums are set in advance and never adjusted
- A plan where the final premium is adjusted after the policy period based on the insured's actual losses (Correct answer)
- A plan for writing policies retroactively
- A plan that discounts premiums based on past experience
Correct answer: A plan where the final premium is adjusted after the policy period based on the insured's actual losses
Under a retrospective rating plan, the insured pays an initial estimated premium, which is later adjusted based on actual losses incurred during the policy period, within minimum and maximum limits.
Question 6: What is 'reinsurance' and why do insurers purchase it?
- Insurance sold directly to consumers by large carriers
- Insurance that one insurer buys from another to spread risk and protect against catastrophic losses (Correct answer)
- State-mandated backup coverage for insolvent insurers
- Coverage for insurance agents against errors
Correct answer: Insurance that one insurer buys from another to spread risk and protect against catastrophic losses
Reinsurance allows primary insurers to transfer portions of their risk to reinsurers, stabilizing earnings, protecting surplus, and enabling them to write more business.
Property And Casualty Insurance License Underwriting and Rating 2
What is a 'surplus lines' insurer?