Chapter 12 Exercises

Work these the way you would work a real submission: every structural feature is a decision about where the insured's money stops and yours begins, how high the policy goes, what it carves out, and what behavior it engineers. 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 (§12.3) point you back to the relevant part of the chapter.

A. Recall and definitions

  1. † Define deductible, and name the three jobs it does at once. Which job does a junior underwriter most often forget? (§12.1)
  2. Distinguish a per-occurrence deductible from an aggregate deductible. Which one does the most behavioral work on every loss, and which one weakens the incentive as the insured nears the cap? (§12.1)
  3. † What is a percentage (catastrophe) deductible, and why does catastrophe risk require it where a flat deductible fails? (§12.1)
  4. Define a self-insured retention (SIR) and explain the single most important way it differs from a deductible (hint: who handles the claim within the retained layer?). (§12.2)
  5. Distinguish a per-occurrence limit from an aggregate limit. For which kind of exposure — property or liability — does the aggregate usually bite hardest, and why? (§12.3)
  6. † Define a sublimit and give two reasons an underwriter would cap a coverage below the policy limit rather than excluding it entirely. (§12.3)
  7. State the coinsurance clause in one sentence, and explain what "the insured becomes a coinsurer of its own loss" means. (§12.4)
  8. What is a binder, and what does it mean to say it "binds exactly what it says"? (§12.7)
  9. Distinguish a large-deductible program from an SIR, and name the line of business where large deductibles are most common. (§12.2)
  10. Distinguish a binder from a coverage letter by what each legally obligates the insurer to do. (§12.7)

B. Deductibles and retentions (applied reasoning)

  1. † A property is insured for \$10,000,000 with a \$25,000 all-other-perils deductible and a 5% named-windstorm deductible. Compute the insured's retention and the insurer's payment for (a) a \$70,000 fire and (b) a \$2,000,000 named-storm loss. State which deductible applies to each. (§12.1)
  2. An underwriter raises a commercial account's deductible from \$10,000 to \$100,000. The broker expects the premium to drop by \$90,000. Explain, in terms of the expected loss in the retained layer, why that expectation is wrong, and describe what the credit should be built from. (§12.1)
  3. A sophisticated insured with \$60M in revenue and a large, stable frequency of small workers'-comp claims asks for a \$500,000-per-claim large-deductible program. Give two reasons this can be a good structure for both parties, and the single biggest risk it creates for the insurer. (§12.2)
  4. † Explain why an underwriter looking at a large-deductible account's loss runs is reading a "censored" loss history, and what two questions the underwriter must ask that the loss runs cannot answer. (§12.2)
  5. An insured wants an aggregate deductible with no per-occurrence component. Explain the behavioral risk this creates once the insured's retained losses approach the aggregate, and a structure that fixes it. (§12.1)

C. Limits and sublimits

  1. A general-liability policy is written at \$1,000,000 per occurrence / \$2,000,000 aggregate. The insured suffers covered occurrences of \$900,000, \$1,300,000, and \$700,000 in one policy year. † Compute what the insurer pays on each occurrence and the total, and identify exactly where the insured is left uncovered. (§12.3)
  2. You are writing a commercial property account whose price is being driven up almost entirely by a flood exposure the insured insists on covering. Describe two different structural ways to make the account writable, and state what each one protects the insurer from. (§12.3)
  3. † Explain the design difference between handling a wind peril with a 5% percentage deductible and handling a flood peril with a \$2,000,000 sublimit. One caps the insurer's top exposure; the other forces the insured to retain its bottom slice — match each to the right tool and say when you'd use which. (§12.1, §12.3)

D. Coinsurance (price this risk / calculation)

  1. † A building's full value at the time of loss is \$8,000,000. The policy carries an 80% coinsurance clause and a \$50,000 deductible. The insured carried \$4,800,000 of insurance. A partial fire causes a \$1,000,000 loss. Compute the loss payment, identify the coinsurance penalty in dollars, and explain why the insured collected less than \$1,000,000 even though the loss was far below its limit. (§12.4)
  2. Using the same building (\$8,000,000 value, 80% coinsurance, \$50,000 deductible), suppose the insured had instead carried \$6,400,000 of insurance and suffered the same \$1,000,000 loss. Compute the payment and explain why there is now no penalty. (§12.4)
  3. † An insured proposes shaving its declared building value from \$10M to \$7M to save premium, reasoning that it will "never suffer a total loss anyway." Explain, with the coinsurance mechanism, why this is a worse bet than the insured thinks — and explain the underwriter's parallel exposure if you accept the under-stated value. (§12.4)
  4. Explain how writing a property on an agreed-value basis (Chapter 19) changes the coinsurance picture, and the one circumstance in which you would most want to use it. (§12.4)

E. Endorsements and manuscripting

  1. For each, state whether it is a restrictive or broadening endorsement and the underwriting purpose it serves: (a) an ACV settlement on an aging roof; (b) additional-insured status for a customer; (c) exclusion of a discontinued product line's completed operations; (d) ordinance-or-law coverage on an old building. (§12.5)
  2. † "Find the structuring move." A submission is an otherwise-clean manufacturing account with one problem: a single past product line generated several liability claims before it was discontinued. The model recommends a decline. Describe the restrictive endorsement that turns this into a qualified yes, and write the one-sentence explanation you'd give the broker. (§12.5)
  3. Explain why manuscripting is described as "the most powerful and the most dangerous tool in this chapter." Name the contract-law doctrine (from Chapter 4) that makes a drafting ambiguity dangerous to the insurer. (§12.6)
  4. Give two reasons a genuinely novel, manuscript-heavy risk so often ends up in the surplus-lines market (Chapter 4) rather than the admitted market. (§12.6)

F. Binders, coverage letters, and a short memo

  1. † You intend to write a property risk with an ACV-roof restriction and a 5% wind deductible, subject to a roof-replacement warranty. The binder your assistant drafts lists the wind deductible but omits the ACV-roof restriction. A storm destroys the roof three days later. What coverage applies, why, and what is the lesson about binders? (§12.7)
  2. Memo. Draft a short coverage letter (8–12 sentences) for a coastal commercial property risk. Include the property limit, the AOP and named-windstorm deductibles, an agreed-value basis, an ACV-roof restriction, and two subjectivities. Make every term explicit enough that no dispute could later arise about what was offered. (§12.5, §12.7)

G. Ethics, judgment, and the bigger picture

  1. Ethics dilemma. A broker pushes you to match a competitor's quote that carries a flat \$50,000 deductible on the wind peril for a coastal account — a structure you believe is badly mispriced for the catastrophe exposure. The broker implies you'll lose the whole account, and the relationship, if you won't match it. Lay out the case for holding your structure, the case for matching, and what you would actually do. Tie your answer to the combined ratio and to the duty you owe your own book. (§12.1; Ch. 1, Ch. 3)
  2. † A teammate argues that the coinsurance clause is "just a way to penalize customers who don't read the fine print," and proposes dropping it to be more customer-friendly. Make the honest case for why coinsurance exists (the adverse-selection logic), and then make the honest case for the customer- friendly alternative that achieves the same goal without the claim-time surprise. (§12.4; Ch. 1)
  3. The chapter says a senior underwriter "rarely declines a risk outright." Reconcile this with the discipline of rate adequacy (Chapter 11): when is restructuring a risk the right move, and when is "I'll structure around it" just a way of talking yourself into a bad account? (§12.1–§12.6; Ch. 11)

H. The Underwriting File (extension)

  1. † Open the Harbor Steel file to the terms you drafted this chapter. List every structural feature you set (deductibles, the wind deductible, the roof endorsement, the property valuation basis, the period-of-indemnity note, the sublimits), and for each, state in one line what risk it manages and what behavior, if any, it engineers. (The Underwriting File)
  2. The Harbor Steel building wears its original 1994 roof. You attached an ACV-roof endorsement until a warranted replacement. Explain why this is fairer to both parties than either (a) declining the account over the roof or (b) writing the roof at replacement cost and pricing as if a full roof loss were certain. What earns the insured back full coverage? (§12.5, The Underwriting File)
  3. The 5% named-windstorm deductible on Harbor Steel's \$20M building means the insured retains \$1,000,000 of any named-storm loss. Explain the three distinct things this single term accomplishes for the insurer, and name the one chapter (ahead) where this catastrophe exposure gets ceded rather than retained. (§12.1, The Underwriting File)
  4. Harbor Steel's terms are drafted this chapter but the decision is not yet made. Name the four subjectivities that will condition the quote in Chapter 13, and explain why "drafting the terms" and "deciding to put them on the table" are genuinely separate underwriting steps. (The Underwriting File; preview of Ch. 13)