Chapter 16 Exercises

Work these with the chapter's two habits of mind: think in excess layers — for every liability exposure ask "where does coverage start, where does it stop, and what falls through?" — and think in whole accounts — the household, not the policy, is the unit that makes money and the unit you must see to underwrite the catastrophe. 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 (§16.2) point you back to the relevant part of the chapter. All dollar figures are constructed teaching examples.

A. Recall and definitions

  1. † Define the personal umbrella in one sentence, and explain how excess liability differs from primary coverage. (§16.1)
  2. What is the underlying-limit requirement, and what is the "attachment point"? State the relationship between them. (§16.1, §16.2)
  3. † Define scheduled personal property, and list the four things scheduling does that blanket homeowners contents coverage cannot. (§16.6)
  4. Define high-net-worth (HNW) lines. Name three features of an affluent household that break the mass-market, class-based underwriting approach. (§16.5)
  5. Explain what it means for an umbrella to drop down, and what an insured pays when it does. (§16.3)
  6. List four principal exclusions of a personal umbrella, and give the reason each exists. (§16.3)
  7. Define agreed value as applied to personal valuable articles, and explain why a unique painting is best insured on this basis rather than on a replacement-cost basis. (§16.6)
  8. What is account rounding, and why is it both a profitability strategy and an underwriting control? (§16.5, §16.7)

B. Excess thinking — the liability stack

  1. † A household carries \$500,000 of underlying auto liability and a \$2 million personal umbrella. A \$3 million auto-liability judgment is entered against the insured. (a) How much does the underlying auto policy pay? (b) How much does the umbrella pay? (c) How much, if any, lands on the insured personally? Show the stack. (§16.1)
  2. Repeat Exercise 9, but the umbrella limit is \$5 million instead of \$2 million. How much now lands on the insured? What single change to the umbrella would have fully covered the judgment? (§16.1)
  3. † Explain why a \$1 million umbrella over a \$300,000 homeowners liability limit provides \$1,300,000 of total coverage for a covered home-liability claim, not \$1 million. What is the name for the \$300,000 level? (§16.1)
  4. An insured says, "I have a \$2 million umbrella, so I'm covered up to \$2 million for anything." Identify three separate ways that statement is wrong. (§16.1, §16.3)

C. The gap problem

  1. † An umbrella requires \$500,000 of underlying auto liability. The insured actually carries \$250,000. A \$1.5 million auto judgment arrives. Walk through, dollar by dollar, who pays what — and identify exactly where the gap is and who absorbs it. (§16.2)
  2. Explain why the gap problem is almost never created at new business and almost always created later. List three specific events that silently open a gap after the umbrella is issued. (§16.2)
  3. † A new umbrella underwriter says, "We verify the underlying limits at issuance, so we're fine." Write a two-sentence correction explaining the renewal-verification discipline and why it matters. (§16.2)
  4. The underlying-limit requirement is described in the chapter as "the umbrella's version of a deductible." Explain the analogy: what does raising the required underlying limit do to the umbrella's claim frequency, and why would you raise it for a household with a teen driver? (§16.2)

D. Underwrite this submission

  1. † Underwrite the umbrella. A household applies for a \$1 million personal umbrella. The application shows: two adults with clean records; a 16-year-old newly licensed driver; a home with an unfenced in-ground pool and a diving board; a 28-foot powerboat (no underlying watercraft policy listed on the schedule); and a Rottweiler with no bite history. Underlying auto is \$250,000; underlying homeowners liability is \$300,000. Identify the exposures that should change your underwriting, name at least three structural changes (not an outright decline) you would make to write it more safely, and flag the one item on the schedule that is a gap by construction. (§16.2, §16.4)
  2. A household with an auto, a home, and a \$1 million umbrella mentions, in passing, that they rent out "a few houses we've accumulated over the years" — it turns out to be nine rental units. Explain why this changes the risk, which umbrella exclusion is now in play, and what you would do. (§16.3, §16.4)
  3. † A retired couple with significant investable assets, no children at home, clean records, one modest home, and no pool, boat, or dog applies for an umbrella. They ask whether \$1 million is enough. Drawing on the "high-target" exposure, explain why their low-activity profile does not necessarily mean a low umbrella limit, and what you would recommend. (§16.4)
  4. A submission lists a household with a 19-year-old who keeps a car at college 300 miles away. Why is the youthful-driver exposure the chapter calls "far and away the dominant umbrella auto exposure" especially sharp here, and what underlying-limit move addresses it? (§16.2, §16.4)

E. High-net-worth and scheduling

  1. † A \$12 million custom home with imported stone and irreplaceable hand-plastered walls is submitted. Explain why a standard homeowners cost-per-square-foot valuation is dangerous here, name the valuation basis an HNW carrier would use instead, and connect the danger to the insurance-to-value problem from Chapter 15. (§16.5; Ch. 15)
  2. A household's engagement ring is worth \$15,000. Their homeowners policy has \$200,000 of contents coverage but a \$2,000 special limit on jewelry theft. The ring is stolen. (a) What does the homeowners policy pay? (b) What would a scheduled personal-articles floater have paid? (c) Name two ways the floater is broader than the blanket coverage beyond the limit itself. (§16.6)
  3. † Price/structure this risk. A client owns a fine-art collection currently appraised at \$600,000, growing as they buy, with individual pieces ranging from \$5,000 to \$120,000. Compare itemized scheduling against blanket scheduled coverage for this collection: state one advantage of each, and recommend an approach with your reasoning. (§16.6)
  4. Explain the "stale appraisal on appreciating property" trap, and the opposite "over-scheduling depreciating property" trap. Why does each matter, and what discipline addresses both? (§16.6)
  5. Give the rule of thumb for when to schedule an item versus leaving it in the blanket homeowners contents. Apply it to: (a) a \$400 watch; (b) a \$15,000 ring; (c) a \$30,000 painting; (d) a \$200,000 coin collection that changes monthly. (§16.6)

F. Find the red flag

  1. † Find the red flag. An umbrella renewal crosses your desk. Nothing has changed on the umbrella itself. But the attached underlying schedule, compared to last year's, shows the auto liability dropped from \$500,000 to \$250,000 and the previously-listed watercraft policy is gone (the schedule still notes a boat under "household exposures"). What are the two red flags, what claim scenario does each expose the insured to, and what do you do before renewing? (§16.2, §16.4)
  2. A household schedules a watch at \$45,000. The supporting appraisal is eight years old, the watch is a model known to have appreciated sharply, and the insured has recently asked twice about "how claims on scheduled items work." Identify what is and isn't a concern here, and separate the legitimate underwriting issue from an unfounded suspicion. (§16.6; Ch. 1 on moral hazard)
  3. An umbrella application answers "no" to pool, "no" to dog, and "no" to business pursuits — but the home's listed square footage, the several scheduled luxury vehicles, and the occupation ("real estate developer") suggest a household with far more exposure than the umbrella questions captured. What is the red flag, and what is the underwriter's move? (§16.3, §16.4)

G. Memo and communication

  1. † Write the memo. A household believes their personal umbrella will cover a lawsuit arising from a side business they run out of the home (a small catering operation). In a short memo to the household's agent, explain why the personal umbrella will not respond, which exclusion applies, and what coverage the household actually needs. Keep it clear and non-condescending. (§16.3)
  2. Draft three sentences you would say to a household that carries an auto and a home but no umbrella, to explain — without scaring or overselling — why the umbrella is "the cheapest important coverage they will ever buy." (§16.1)

H. Ethics

  1. † Ethics dilemma. Your carrier's umbrella guidelines surcharge households with certain dog breeds. A long-standing, well-managed client with a clean record owns one of the listed breeds, with no bite history, a fenced yard, and an otherwise spotless account. The surcharge is material. Walk through the tension: when is a breed-based rule defensible risk classification, and when does it shade into pricing by reputation rather than conduct? What would you check before applying or waiving it, and how does this connect to the fair-vs-unfair-discrimination line? (§16.4; Ch. 4, Ch. 35)
  2. The "high-target" logic says a household with visible wealth needs a higher umbrella limit because the same accident generates a larger demand against a defendant known to have deep pockets. Is charging more for this risk-based or is it pricing people for their wealth? Argue both sides honestly, then state where you would draw the line. (§16.4; Ch. 35)

I. The Underwriting File

  1. † Underwriting-File extension. Harbor Steel's program includes a \$10 million commercial umbrella. Using only what this chapter and earlier chapters establish, (a) explain what underlying liability coverages the umbrella will sit above, (b) explain why the umbrella underwriter will insist on a full \$1 million combined-single-limit on the 12-unit auto fleet, and (c) state what new condition the umbrella adds to the account's subjectivities. Do not price the umbrella or pre-empt the capstone. (§16.2; The Underwriting File)
  2. Explain why the owner-operator's personal umbrella (over their personal auto and coastal home) must be kept entirely separate from Harbor Steel's commercial umbrella, and what would go wrong if the household relied on the personal umbrella to cover a business liability claim. (§16.3; The Underwriting File)
  3. The chapter says even a \$10 million commercial umbrella "could be tested" by Harbor Steel's exposures. Identify the two exposures from the frozen file that most threaten a high umbrella limit, and explain why each is a severity (not frequency) concern. (§16.4; The Underwriting File)

J. Synthesis

  1. Reconcile two claims the chapter makes: that the umbrella's premium is so small that "pricing precision" barely matters, and that the umbrella requires real underwriting discipline. If not pricing, what is the discipline, and why does it matter to the book's combined ratio? (§16.1, §16.4, §16.7)
  2. † The chapter calls account rounding "the rare case where growth and the combined ratio point the same direction." Explain the two mechanisms (one affecting the loss ratio, one the expense ratio), then state the single condition under which rounding would worsen the combined ratio. (§16.7; Ch. 3)
  3. HNW underwriting is described as "a stepping stone between personal and commercial lines." Name three specific commercial-lines skills (with the chapter they appear in) that the HNW account exercises in miniature, and explain the parallel for each. (§16.5)