Chapter 7 Exercises

Work these the way an underwriter works a desk: lead with the decision — do we want it, at what price, on what terms, and is it even mine to decide? — and only then reach for the technique. Items marked with a dagger (†) have worked solutions in Appendix: Answers to Selected Exercises; the rest are for discussion or self-test. Section references like (§7.3) point you back to the relevant part of the chapter. The numbers in every priced or graded example are illustrative teaching figures, not real rates.

A. Recall and definitions

  1. † Define underwriting in one sentence, and explain the two senses in which the chapter uses the word (the whole process vs. the decision at its center). (§7.1)
  2. Name the seven stages of the underwriting process in order, and say in a phrase what each contributes. (§7.1)
  3. Distinguish underwriting authority from binding authority. Why is binding authority called "the sharpest edge" of the concept? (§7.3)
  4. † List the six dimensions along which a typical authority grid sets limits. Why does the chapter say authority is "an and, not an or"? (§7.3)
  5. Define risk appetite and name the four appetite tiers the chapter uses, with one sentence on what you do with a risk in each. (§7.4)
  6. What is the underwriting file, and what three roles does it play at once? (§7.5)
  7. Name the three corners of the underwriting–claims–actuarial triangle and state, in a phrase, what each corner sees that the other two cannot. (§7.6)
  8. State the first theme of the book ("underwriting is judgment") and the one qualification the chapter attaches to it (the kinds of risk on each side of the line). (§7.7)

B. The process and where it breaks

  1. † The chapter argues that "most underwriting mistakes are really failures at one specific step rather than a single bad call at the end." Give three concrete examples of an upstream failure (before the decision) and, for each, the downstream loss it can cause. (§7.1)
  2. Explain the purpose of the clearance step. Give two distinct problems clearance is designed to catch before any real underwriting work begins. (§7.1)
  3. For a simple, high-volume personal-auto renewal, which of the seven process stages are typically compressed, automated, or invisible — and which one still most often pulls a human in? (§7.1, §7.4)
  4. A trainee says, "Triage is just laziness — you should fully evaluate every risk." Explain why triage is a discipline rather than a shortcut, and what appetite tier most efficiently powers it. (§7.1, §7.4)

C. Authority and referral

  1. † Your authority grid is: property limit up to \$10M; standard and light-manufacturing classes; schedule credits/debits up to ±15%; binding authorized. For each of the following, state whether you can handle it on your own authority or must refer, and why: (a) a \$7M standard mercantile risk at a 10% credit; (b) a \$12M warehouse at a 5% debit; (c) an \$8M light-manufacturing risk that needs a 22% credit to be competitive; (d) a \$6M foundry (a heavy-manufacturing class not on your grid). (§7.3)
  2. Explain why exceeding your binding authority can be a firing offense when a missed inspection is usually a teaching moment. In your answer, explain how the company can be legally on a risk even though the underwriter wasn't authorized to bind it. (§7.3)
  3. † Describe the difference between "referring everything" and "stretching" your authority. Why are both failures, and what does the chapter say a good referral actually looks like? (§7.3)
  4. Authority "flows down" from the chief underwriting officer. Explain what that means and why the chapter calls an underwriter's authority grid "the organization's judgment about that person's judgment." (§7.3, §7.4)

D. Guidelines, philosophy, and appetite

  1. The chapter says guidelines "encode the past; risks live in the present." Explain the limit this names, and why a referral path is the standard fix built into almost every guideline manual. (§7.4)
  2. † An underwriter follows the guidelines slavishly on every account, never deviating. The chapter says this underwriter "is not safe." Explain why — and describe the skill that does make an underwriter safe. (§7.4)
  3. Name the three forces an underwriting philosophy must hold in tension. Explain why the easiest way to grow fast (underpricing) is also the oldest way to destroy an insurance company, and when the damage becomes visible. (§7.2)
  4. † Describe "unconscious drift in a soft market" step by step. Name two specific mechanisms a disciplined firm uses to make sure drift has to be "a decision someone signs, not a tide no one notices." (§7.2)
  5. A regional carrier's appetite statement marks "coastal wind-exposed property over \$10M" as restricted / refer. A second carrier marks the identical class target / preferred. Are they contradicting each other? Explain how two carriers can rationally place the same risk in opposite tiers. (§7.2, §7.4)

E. Underwrite this submission

  1. † Triage and route. A submission lands: a single-location plastics-injection-molding plant, \$14M building / \$6M equipment, built 2001, sprinklered, fire protection class 3, inland (no catastrophe exposure), one small fire loss in five years (~\$40K, since corrected). The class is on your "acceptable" list; your grid tops out at a \$10M property limit. Walk it through clearance → triage → appetite → authority and state your conclusion: do you proceed, and on whose authority? Write the two-line triage note you'd put in the file. (§7.1, §7.3, §7.4)
  2. Appetite call. For each risk, assign the most likely appetite tier (target / acceptable / restricted / prohibited) for a typical conservative regional carrier and give a one-line reason: (a) a 10-year-old sprinklered suburban office building, no losses; (b) a wood-frame nightclub with pyrotechnics; (c) a standard auto-parts retailer; (d) a coastal seafood processor with ammonia refrigeration and three freeze-related losses. (§7.4)
  3. Whose decision? Re-read the Harbor Steel triage in the chapter's Underwriting File. List every independent feature of the account that, on its own, pushes the risk toward a referral. Why does it matter that there is more than one? (§7.3, The Underwriting File)

F. Price this risk / the numbers around the decision

  1. † Authority math. Your pricing latitude is ±20% off the manual rate. The manual premium on an account is \$80,000. (a) What is the lowest premium you may quote on your own authority? (b) The broker needs \$60,000 to win the deal. By how much would you have to exceed your authority, in dollars and as a percentage off manual, and what must you therefore do? (§7.3) (Figures illustrative.)
  2. Growth vs. discipline. A book writes \$10M of premium at a 95% combined ratio (a 5% underwriting profit). A manager proposes growing it to \$13M by cutting price ~10% across the board, which she expects will push the combined ratio to about 104%. Using only these illustrative figures, compare the underwriting result (premium × (1 − combined ratio)) of the two scenarios and state, in plain words, what the growth actually bought. (§7.2; §3.5) (Figures illustrative.)
  3. † Override accountability. Over a year, an underwriter overrides the model's recommendation on 40 accounts. The book later wants to know whether the overrides were good judgment. Describe the single comparison you would run to answer that, and what result would vindicate the underwriter versus indict them. (§7.7)

G. Find the red flag

  1. † A bound file contains: the application, a premium, and a one-line note, "Wrote it — good account." No loss-run analysis, no inspection, no pricing rationale, no record of the subjectivity the broker mentioned. The risk has now had a \$900K fire. Identify at least three things wrong with this file and explain what each omission costs the company now that the loss has happened. (§7.5)
  2. An underwriter's decision note on a declined personal-lines account reads, in part, "neighborhood's going downhill." Explain precisely why that sentence is a serious problem in a legal record, and what a defensible version of the reasoning would have to look like instead. (§7.5; §7.2 Compliance Corner)
  3. A broker calls Friday at 4:55 p.m.: "I need you to bind this \$15M property risk by end of day or I lose it — just trust me, it's clean." Your binding authority tops out at \$10M. Name every red flag in this situation and state exactly what you do. (§7.3)

H. Write the memo

  1. † The referral memo. Write a short (150–250 word) referral memo escalating the Harbor Steel account to a senior underwriter. Use only what the chapter has established (do not price it or set final terms — that's later chapters). It should state the risk, why it exceeds your authority, the appetite tier you've assigned, the open questions, and your recommendation for next steps. (§7.3, §7.6, The Underwriting File)
  2. The decline that keeps the broker. Draft a brief, professional note declining a risk that fell in your "prohibited" tier, written so that the broker stays willing to send you good business in the future. (You will learn the full art of this in Chapter 13 — attempt it now with what §7.4 gives you.) (§7.4; preview of Ch. 13)

I. Ethics and judgment

  1. † An underwriter overrides a model's correct decline because the account is large, the broker is a friend, and the underwriter is behind on the annual premium target. The override is documented with a plausible-sounding rationale. Is documentation alone enough to make this defensible? Explain the difference between "judgment" and "preference wearing judgment's clothes," and what would actually test which one this was. (§7.7)
  2. The chapter says an insurer that treats its social function as irrelevant "has misunderstood what business it is in," and that "an insurer that loses money cannot keep any promise to anyone." Are these in conflict? Explain how a sound underwriting philosophy holds both at once, using the soft-market discipline example. (§7.2)
  3. Algorithms write simple risks "faster and more consistently" than humans. Consistency is usually a virtue — but give one scenario in which a consistently applied automated underwriting rule could produce an unfair outcome, and explain why consistency does not by itself guarantee fairness. (§7.4, §7.7; preview of Ch. 35)

J. The Underwriting File (extensions)

  1. † Open the process on Harbor Steel. In your own words, state the disposition the chapter reaches on the Harbor Steel account at the end of this chapter — what is settled, what is explicitly not settled, and why the appetite check raises a question rather than answering one. (The Underwriting File)
  2. The prior carrier is non-renewing Harbor Steel for "catastrophe exposure and the loss history." In triage, the chapter treats Harbor Steel as restricted / caution, not prohibited. Explain why the non-renewal does not automatically make this a decline for your company — and name one thing about the non-renewal that you would nonetheless want to understand before going further. (§7.4, The Underwriting File)
  3. Looking ahead: list the four things the chapter says you do not yet have on Harbor Steel (information, assessment, math, pricing/terms) and match each to the chapter (8–13) that will supply it. Why is it a discipline, not a weakness, to refuse to "decide" the account now? (§7.1, The Underwriting File; preview of Ch. 8–13)