Chapter 14 Quiz

Twenty questions to check your grasp of personal-auto underwriting: the coverage parts, the rating factors and what they proxy for, the credit and telematics debates, the regulatory map, and the combined-ratio challenge. Answers are in the collapsed key at the bottom — try each question before you open it.

Multiple choice

  1. Which personal-auto coverage part is a third-party coverage that the state typically requires? a) Collision b) Comprehensive / other-than-collision c) Bodily-injury and property-damage liability d) Medical payments

  2. A vehicle symbol primarily prices: a) The driver's age and record b) The car's repair cost, theft attractiveness, and damageability c) The territory where the car is garaged d) The household's prior-insurance history

  3. The chapter's central claim about the driving record is that it is: a) The single strongest predictor of next year's loss b) A real factor, but a comparatively weak predictor relative to others like territory and credit c) Irrelevant to rating and used only for marketing d) Banned in most states

  4. A rating territory is powerful and politically sensitive mainly because it: a) Describes how the applicant actually drives b) Captures loss costs (traffic, theft, weather, litigation climate) that have nothing to do with the individual driver c) Is the same in every state by federal law d) Measures the driver's credit indirectly

  5. Across studies including a well-known Federal Trade Commission examination, the credit-based insurance score has been found to be: a) Weakly predictive and therefore rarely used b) Among the strongest predictors of future auto loss, often stronger than the driving record c) Predictive only for homeowners insurance, not auto d) Illegal under federal law

  6. Under the federal Fair Credit Reporting Act (FCRA), if an applicant is charged more because of credit- report information, the carrier must: a) Refund the difference b) Provide an adverse-action notice identifying the factors that drove the decision c) Re-underwrite the policy without credit d) Report the applicant to the state insurance department

  7. The fairness objection to credit-based insurance scores is best summarized as: a) The scores are not predictive of loss b) The scores are illegal in all fifty states c) Because credit correlates with income and, through history, with race, the factor can produce disparate outcomes — a proxy-discrimination concern — even with no intent d) The scores are too expensive for carriers to obtain

  8. Telematics can turn adverse selection in the carrier's favor mainly because: a) It is mandatory in every state b) Drivers most willing to enroll and share data are disproportionately the good drivers who expect the data to help them c) It eliminates the need to set any rate d) It hides the price from competitors

  9. A limitation of telematics the chapter stresses is that: a) It cannot measure mileage b) It measures behavior over a window, raises privacy questions, and can embed new proxy-discrimination problems (e.g., a braking penalty becoming a territory proxy) c) It is always less accurate than asking the applicant d) It is illegal under FCRA

  10. California's Proposition 103 is notable for requiring that the three most important auto rating factors be, in order: a) Credit score, vehicle value, and territory b) Driving record, annual miles driven, and years of driving experience c) Age, gender, and marital status d) Occupation, education, and prior insurance

  11. Michigan's auto-insurance history is the standing example of how the price is driven by: a) A ban on the driving record as a factor b) The coverage mandate itself — its uniquely generous, formerly unlimited PIP medical benefits c) A prohibition on physical-damage coverage d) Federal rate-setting

  12. Nonstandard auto is best described as: a) A different kind of insurance from standard auto b) The same coverage at a higher price, written for higher-risk drivers, backstopped by the state residual market c) Coverage available only to commercial fleets d) Insurance with no liability component

  13. The defining underwriting trap in nonstandard auto is to: a) Use credit where it is banned b) Treat "nonstandard" as one monolithic risk instead of classifying within a wide distribution c) Offer telematics to every applicant d) Decline every applicant with a lapse

  14. Personal auto frequently runs a combined ratio near or above 100% largely because: a) Investment income is banned in the line b) Loss costs (medical, repair, litigation) trend up continuously while rate increases lag approval and competition is fierce c) Carriers are forbidden from filing rate increases d) Comprehensive claims never occur

  15. Sensor-laden modern bumpers and windshields have, on net, raised one component of auto loss cost. Which? a) Theft frequency b) Repair severity — a minor fender-bender now costs far more because the bumper is full of radar and cameras c) Liability frequency d) Comprehensive frequency from hail

Short answer

  1. Explain why a personal-auto premium should be understood as the sum of several priced coverage parts rather than one number, and give one consequence of that fact for explaining a renewal increase to an applicant.

  2. Two applicants have identical, spotless driving records but very different premiums. Name three rating factors — none of them the driving record — that could account for the difference, and the loss mechanism each proxies for.

  3. State the credit-based-insurance-score controversy in your own words: the empirical case for the factor and the fairness case against it. Why does the book decline to resolve the tension?

  4. Explain how telematics changes personal-auto underwriting from pricing proxies to pricing measured behavior, and give one good risk it can "rescue" that the static factors mislabel — plus one limit of that rescue.

  5. A personal-auto manager proposes holding rate flat to grow market share while the loss trend climbs. Explain, in combined-ratio and rate-adequacy terms, why this is dangerous and when the consequence shows up.

Answer key (try the questions first) **Multiple choice** 1. **c** — Liability (bodily injury and property damage to others) is the third-party coverage that financial-responsibility laws require. (§14.1) 2. **b** — The vehicle symbol is the physical-damage relativity for the car: repair cost, theft, and damageability. (§14.2) 3. **b** — The chapter's title and thesis: the record is real but weak; most drivers (including most who will crash next year) have clean records, so it is a lagging, low-frequency signal. (§14.2) 4. **b** — Territory captures geographic loss costs disconnected from the individual driver, which is exactly why it is powerful *and* contested. (§14.2, §14.5) 5. **b** — A well-established (Tier-2) finding: credit-based insurance scores are among the strongest predictors, frequently stronger than the record; no fabricated effect size is claimed. (§14.3) 6. **b** — FCRA requires adverse-action notice identifying the factors. (§14.3) 7. **c** — The proxy-discrimination concern: credit correlates with income and, historically, race, so it can produce disparate outcomes without intent. (§14.3; Ch. 35) 8. **b** — Self-selection: good drivers enroll because they expect the data to help them, so the enrolled pool skews favorable. (§14.4) 9. **b** — Behavior in a window can change; privacy is unresolved; braking penalties can re-create territory/ demographic proxies. (§14.4) 10. **b** — Proposition 103 mandates driving record, annual miles, and years of experience as the top three factors. (§14.5) 11. **b** — Michigan's formerly unlimited PIP medical benefit — the coverage mandate — drove its high premiums; the 2019–2020 reform let drivers choose lower limits. (§14.5) 12. **b** — Same coverage, higher price, higher-risk drivers, residual-market backstop. (§14.6) 13. **b** — The opportunity *and* the trap: nonstandard is a wide distribution; win it by classifying within it. (§14.6) 14. **b** — Loss-cost trend up, rate approval lagging, fierce price competition. (§14.7) 15. **b** — Repair severity has risen as sensors/ADAS made minor collisions expensive to fix. (§14.2, §14.7) **Short answer** (model points) 16. The premium is built from separately priced parts — third-party liability and UM/UIM (driven by people, injury, and litigation), first-party physical damage (driven by the car). A consequence: a renewal can rise because *one* part moved (a territory theft trend, a repair-cost jump on the model, a liability- severity trend) even though the insured's own driving did not change — and the underwriter should be able to say which part moved. (§14.1) 17. Any three of: rating territory (traffic/theft/litigation climate), vehicle symbol (repair/theft cost), prior-insurance lapse or low prior limits (behavioral + selection signal), use/mileage (exposure), driver *class* beyond the record (age), and — where permitted — credit-based insurance score (financial- management behavior correlated with claiming). Each is named with its loss mechanism. (§14.2, §14.3) 18. *For:* the score is strongly predictive and validated against insurance loss; pricing to predicted loss is the basis of insurance, and ignoring a strong predictor invites adverse selection. *Against:* credit correlates with income and, through history, race, so the factor can produce disparate outcomes — proxy discrimination — even with no intent. The book holds it open because both are true at once; it is the central actuarial-vs-social-fairness tension of Chapter 35. (§14.3) 19. Telematics measures mileage, time of day, braking, acceleration, and distraction directly, so the carrier can price the actual driver rather than the demographic cell. It can rescue, e.g., the careful young low-mileage driver whom the age factor over-penalizes. The limit: behavior in a monitoring window can change afterward, and self-selection means non-participants are not safely assumed average. (§14.4) 20. Holding rate flat while the loss trend climbs pushes the loss ratio — and thus the combined ratio — up toward and past 100%, an underwriting loss. It is seductive because the consequence is *delayed*: premium and market share look good for a few quarters, and the losses the inadequate rate guaranteed arrive a year or two later as a deteriorating loss ratio that takes years to fix. It is a failure of rate adequacy (Chapter 11). (§14.7)