Chapter 9 Exercises

Work these the way you would work a real assessment: run the framework in order — exposure, hazard, controls, frequency and severity, grade and recommendation — and never let the loudest fact on the loss run drive the whole grade. 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 (§9.2) point you back to the relevant part of the chapter.

A. Recall and definitions

  1. † Spell out the four letters of COPE and give, in one phrase, what each one assesses. Which letter chiefly drives frequency and which chiefly drives severity? (§9.2)
  2. Define construction class and place these in order from most combustible to most fire-resistant: masonry non-combustible, frame, fire-resistive, joisted masonry, non-combustible. (§9.2)
  3. Explain the counterintuitive point about a bare-steel "non-combustible" building: why is it not the same as "fire-resistive," and how can steel fail in a fire? (§9.2)
  4. † Define fire protection class. What three things does the public-protection grade summarize, and is it primarily a frequency lever or a severity lever? (§9.2)
  5. Define external exposure and give two examples — one a neighboring property, one a natural/catastrophe exposure. (§9.2)
  6. Define loss control and distinguish a frequency control from a severity control with one original example of each. (§9.5)
  7. Define risk quality / grade. In what two senses is a grade "comparative" and "conditional"? (§9.7)
  8. List the five steps of the risk-assessment framework in order, and say in a phrase what each step hands the next. (§9.1)

B. COPE and the property read

  1. † Run COPE on a single-story masonry-walled restaurant with a commercial kitchen, located in a class-3 fire protection area with monitored fire alarms but no sprinklers, sharing a wall with a dry cleaner. Write a one-line finding for each letter, and name the one letter you would worry about most. (§9.2)
  2. Two physically identical fabrication plants come across your desk. One has current sprinkler test tags, a posted hot-work permit procedure, and spotless housekeeping; the other has expired tags, ad-hoc welding, and clutter. They have the same construction, occupancy, protection equipment, and exposure on paper. Why might you grade them very differently, and which COPE letter "hides" the difference? (§9.2, §9.3)
  3. A new underwriter says, "It's a metal building — steel doesn't burn — so construction is a non-issue." Correct them in two or three sentences. (§9.2)
  4. † Explain why occupancy drives frequency while construction drives severity, using a single building imagined first as an accounting office and then as a welding shop. (§9.2)

C. The inspection read

  1. A loss-control report on a fabrication plant contains a dozen glossy exterior photographs, states that "an automatic sprinkler system is present," and is silent on the electrical panels, the hot-work procedures, and the sprinkler test date. Is this a clean risk? State the principle and say exactly what you do next. (§9.3)
  2. † Why is housekeeping described as a leading indicator of loss rather than a lagging one? What does a consistently messy plant predict that the loss runs may not yet show? (§9.3)
  3. List the recurring physical-hazard themes a good loss-control report should address for an industrial property, and for each name one specific thing the report should say. (§9.3)
  4. The chapter argues the inspection is also "a read on management." You cannot photograph a safety culture — so what observable findings let you infer it, in either direction? (§9.3)

D. Moral and morale hazard

  1. † For each, identify whether it is primarily a moral-hazard or morale-hazard signal, and name one underwriting response: (a) a struggling business requests property limits well above the asset's plausible value; (b) a fully-insured plant lets its sprinkler test tags lapse and defers maintenance; (c) a sudden interest in flood coverage the week a storm is forecast; (d) a "we're covered, why worry" attitude from the insured. (§9.4)
  2. The chapter says Harbor Steel's moral-hazard screen "comes back clean," and that clean is a finding too. List the specific facts that make the screen clean, and explain why the reason a risk arrives (carrier non-renewal vs. post-loss shopping) changes the read. (§9.4)
  3. † Explain the "paranoia vs. gullibility" trap in the moral/morale-hazard read. What does the disciplined underwriter do instead, and why is "treat the signals as questions to resolve" different from both extremes? (§9.4)
  4. A colleague wants to decline an account because the surrounding neighborhood "didn't feel right" to the inspector. Separate the legitimate, risk-based part of a hazard assessment from the unlawful part, and say what a defensible, conduct-based version of the concern would have to look like. (§9.4, Compliance Corner)

E. Controls and loss prevention

  1. † Sort the following into frequency controls and severity controls, and explain why a strong risk needs both: automatic sprinklers, a hot-work permit program, fire walls, infrared electrical scans, monitored fire detection, housekeeping discipline. (§9.5)
  2. Rewrite this weak loss-control requirement into a strong one that you could audit: "The insured should improve hot-work safety." Then state whether your version is a condition of binding or a recommendation, and why. (§9.5)
  3. Why is a working automatic sprinkler system described as the single most cost-effective severity control in the history of property insurance? What does it not do, and which controls cover that gap? (§9.5)
  4. † For the catastrophe peril on a coastal plant, frequency is "set by geography" and largely outside the insured's control. So what does loss control even look like for the cat peril, and which later chapters carry the tools (terms, reinsurance) that manage what on-site controls cannot? (§9.5)

F. Frequency, severity, and the grade

  1. † (Underwrite this submission.) A 60,000 sq ft furniture-manufacturing plant (heavy wood dust; spray-finishing booth) is frame construction, fire protection class 6, with a partial sprinkler system that does not cover the finishing area, and one \$300K dust-collector fire two years ago. Write a frequency read, a severity read, an as-is grade, and the three controls you would require to make it writable. State what you'd need verified before binding. (§9.2–§9.7)
  2. (Price this risk — qualitative.) Using only the assessment (the formal rate-build is Chapter 11), explain why the plant in Exercise 25 should carry a debit relative to the class rate, and name the two specific findings that justify the debit. Then explain how the required controls could later justify reducing that debit. (§9.6, §9.7)
  3. † (Find the red flag.) An application for a metalworking shop states "fully sprinklered, alarmed, no losses in 5 years." The loss-control inspection finds the sprinkler system was shut off for a renovation eight months ago and never recommissioned, and a small "incidental" fire last year was paid by the prior carrier but not disclosed. Identify the red flags, classify each (physical / moral / morale / disclosure), and say what each one does to your grade and your next step. (§9.3, §9.4)
  4. Explain why Harbor Steel grades below-average as-is but below-average-to-average as-proposed. Write the single sentence that captures the difference, and say why that sentence is the most useful line in the whole assessment. (§9.7)
  5. † Build a four-band grade scale (above-average / average / below-average / decline) and write the one-line "typical action" for each band. Then place these three risks on it and justify each: (a) a sprinklered, fire-resistive warehouse with clean losses and strong housekeeping; (b) a hot-work shop with two explained fires and controls available; (c) a derelict frame building, no protection, repeated unexplained losses, owner in distress. (§9.7)

G. Memo, ethics, and the Underwriting File

  1. (Write the recommendation.) Draft the loss-control recommendation section of the Harbor Steel assessment: a short paragraph plus two bulleted lists clearly separating required (conditions precedent to binding) from recommended (risk-improvement). Keep every requirement specific and auditable. (§9.7, The Underwriting File)
  2. † (Ethics dilemma.) Your manager, under pressure to hit a growth number, tells you to bind Harbor Steel now and "make the sprinkler certification and hot-work program post-binding recommendations instead of conditions, so we don't lose the account to the deadline." Lay out the underwriting, combined-ratio, and good-faith arguments against this, and propose a defensible alternative that still tries to win the account. (§9.5, §9.7)
  3. (Underwriting-File extension.) You receive the inspection back and it reveals a hazard the application never mentioned: a 1,000-gallon above-ground diesel tank inside the building, near a welding station, with no spill containment and no separation. Update your COPE read, your hazard finding, your grade, and your required-controls list. Does this change Harbor Steel from "controllable below-average" toward "decline," or is it just another control to require? Defend your call. (§9.2–§9.7, The Underwriting File)
  4. (Underwriting-File extension.) Write the two-sentence "what this assessment does and does not settle" note that closes the Harbor Steel risk-assessment file and hands it to Chapter 10 (the math) and Chapter 11 (the price). Be honest about the boundary of your work product. (§9.7, The Underwriting File)
  5. The chapter claims a risk is "not a fixed quantity you either accept or decline." Explain how this single idea — that controls change the risk — reframes the underwriter's job from gatekeeper to risk engineer, and connect it to the social-function theme (the insured ends up genuinely safer). (§9.5)