Chapter 15 Exercises

Work these the way a homeowners underwriter works a desk: identify the form before you price anything, read the whole peril picture for the location (covered and excluded), and never assume the catastrophe most likely to destroy a home is the one the standard policy responds to. 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 (§15.5) point you back to the relevant part of the chapter. All dollar figures are illustrative teaching examples.

A. Recall and definitions

  1. † Name the three homeowners forms this chapter owns (HO-3, HO-5, HO-6) and state, in one phrase each, what distinguishes them — the peril basis for the first two, the type of insured for the third. (§15.1)
  2. Define replacement cost and actual cash value (ACV) and state, in one sentence, the difference in what the insured collects. (§15.2)
  3. List the four COPE elements and give one homeowners-specific example of each. (§15.2)
  4. † Define a catastrophe peril and explain, using the word independent, why it breaks the law of large numbers when ordinary perils do not. (§15.5)
  5. State which of the four catastrophe perils are covered by the standard homeowners policy and which are excluded. (§15.5)
  6. Define the NFIP and state the one fact about it that most surprises homeowners (the flood exclusion in their homeowners policy). (§15.6)
  7. Define a named-storm/wind deductible and explain how it differs structurally from an all-other-perils deductible. (§15.7)
  8. Define insurance to value (ITV) and explain why the rebuild cost — not the purchase or market price — is the number that matters. (§15.4)

B. The forms and coverage

  1. Explain the practical difference between open-peril and named-peril coverage at claim time — who bears the burden of proof under each. Why does HO-3 use open-peril for the dwelling but named-peril for the contents? (§15.1)
  2. † An applicant with a serious jewelry and fine-art collection wants the cheapest homeowners form. What do you warn them about Coverage C and special sublimits, and what is the fix? (§15.1)
  3. A condominium unit-owner asks why they need an HO-6 at all when "the building is insured by the association." Explain what HO-6 covers that the master policy does not, and why you must read the master policy to underwrite the unit. (§15.1)
  4. The chapter calls homeowners "a package of property and liability" and warns against letting the property exposure dominate the read. Name three liability hazards on a residential risk that can produce a six-figure claim, and say why the property-focused underwriter misses them. (§15.1)

C. Valuation and ITV

  1. † A roof costs \$28,000 to replace new. It is 12 years old with a 20-year expected life. Compute the ACV settlement (straight-line depreciation) and the replacement-cost settlement, and state how much the insured funds themselves under each. (§15.2)
  2. Explain why writing full replacement cost on a thirty-year-old roof violates the spirit of the insurability principle from Chapter 1, and name the endorsement an underwriter uses instead on an aging dwelling. (§15.2; Ch. 1)
  3. † (Price this risk.) A dwelling has a full replacement cost of \$600,000 and an 80% coinsurance requirement. The homeowner carries Coverage A of \$420,000. A partial loss costs \$120,000 to repair. Compute the coinsurance-reduced recovery (ignore the deductible), and state in one sentence how the homeowner experiences the result. (§15.4)
  4. Distinguish extended replacement cost from guaranteed replacement cost, and explain why an underwriter would offer guaranteed RC only on a home whose ITV they fully trust. (§15.4)
  5. † Explain demand surge and why it makes a Coverage A limit that was adequate at policy inception inadequate after a regional catastrophe. Connect it to why limits must be revisited at renewal. (§15.4)
  6. The chapter calls chronic underinsurance "a portfolio problem before it is a claims problem." Explain how a systematically under-insured book under-collects premium relative to its true catastrophe exposure. (§15.4)

D. Rating factors

  1. Of the four rating-factor families (location, dwelling characteristics, claims history, credit), which is the most powerful in homeowners and why is it more powerful than its equivalent in personal auto? (§15.3)
  2. † (Find the red flag.) An application shows a 2,800-square-foot custom home, a requested Coverage A of \$240,000, three water claims in four years, and a roof installed in 1998. Identify at least three red flags and say, for each, what you would do about it. (§15.2, §15.3, §15.4)
  3. Explain what a pattern of small frequent non-weather claims tells you that a single large weather claim does not. Tie your answer to the credibility logic of Chapter 10 and the small-sample problem of a single dwelling. (§15.3; Ch. 10)
  4. † (Compliance.) A colleague wants to use a credit-based insurance score to rate a homeowners book that spans several states, including California and Massachusetts. What do you tell them about where the factor is restricted, and what does the FCRA require when an unfavorable score raises a premium? (§15.3)

E. The catastrophe perils and flood

  1. † For each of hurricane, wildfire, earthquake, and flood, state whether it is covered or excluded by the standard homeowners policy and name the underwriter's main lever for managing it. (§15.5)
  2. Explain the wind-versus-water dispute that follows every major hurricane landfall. Why does the coverage structure (wind covered, surge excluded) guarantee these disputes will arise? (§15.5, §15.6)
  3. † Using the insurability criteria from Chapter 1 and the concept of adverse selection, explain in a short paragraph why the private market historically refused to write flood and why a federal program (the NFIP) had to fill the gap. (§15.6; Ch. 1)
  4. The NFIP "made flood available but did not close the protection gap." Name three limits of the NFIP that explain why most flood loss is still uninsured. (§15.6)
  5. † (Underwrite this submission.) A coastal home, \$700,000 rebuild cost, hip roof installed three years ago, sits in a designated high-risk flood zone, and the application says nothing about flood coverage. The homeowners wind exposure prices cleanly. State your decision and the conditions you attach, and explain which single peril is the most probable total-loss scenario and whether your policy covers it. (§15.5, §15.6, §15.7)
  6. Explain why earthquake is excluded from the standard homeowners policy and handled by a separate policy with a large percentage deductible, and why this produces a large protection gap in seismic regions. (§15.5)

F. The hardening market and the social function

  1. Name four levers a carrier pulls when a catastrophe-exposed homeowners market hardens, and say what each one actually does to the carrier's exposure. (§15.7)
  2. † Explain why a percentage named-storm deductible does two jobs at once, and compute the deductible a homeowner absorbs on a \$450,000 dwelling with a 5% named-storm deductible. (§15.7; Ch. 1)
  3. (Ethics dilemma.) A regulator is holding your coastal rates below the level your catastrophe models say the risk demands, in the name of affordability. Your combined-ratio discipline (Chapter 3) says the book is now inadequate. Lay out the genuine tension on both sides — the case for letting rates rise and the case for holding them down — and explain why there is no costless answer. (§15.7; Ch. 3, Ch. 35)
  4. † (Short memo.) Write a three-to-five-sentence note to a coastal homeowner whose policy you are non-renewing because the zone has reached its accumulation limit. Decline to renew honestly and without burning the relationship; mention the FAIR Plan / residual market as a fallback. (§15.7)
  5. Explain what it means when a state's FAIR Plan or coastal residual market swells, and why that is both a safety net and a warning sign at the same time. (§15.7)

G. The Underwriting File

  1. † The Harbor Steel owner's coastal home is "the catastrophe problem in miniature." List the three ways the chapter says the home rhymes with the commercial plant (the named-storm peril, the wind-versus-water exclusion structure, the percentage deductible / accumulation), and explain the single transferable lesson the aside teaches about scale. (The Underwriting File)
  2. The owner's home faces hurricane, and its HO-3 covers hurricane wind — yet the chapter still flags a gap. Identify the gap, name the two ways it could be filled, and explain why it is the most probable total-loss scenario on that coast. (The Underwriting File, §15.6)
  3. (Underwriting-File extension.) Without pre-empting the commercial property pricing built later in the book, write the two-sentence catastrophe note you would add to the Harbor Steel file from this chapter: what the personal-lines aside confirms about the named-storm peril and the Port Hadley accumulation, and what it explicitly does not settle about the commercial account. (The Underwriting File)