Chapter 29 Quiz
Twenty questions to check your grasp of portfolio management: fifteen multiple choice and five short answer. Answers are in the collapsed key at the bottom. All figures are illustrative.
Multiple choice
1. The defining shift from desk underwriting to portfolio management is the change from asking:
- A. "Is this risk priced adequately?" to "Is this risk legal?"
- B. "Is this risk any good?" to "What is this risk doing to my book?"
- C. "Should I bind or refer?" to "Should I bind or decline?"
- D. "What is the loss ratio?" to "What is the expense ratio?"
2. Diversifying a book across geography, industry, size, and line primarily reduces:
- A. the expected loss of each individual account
- B. the volatility of the book's aggregate result
- C. the premium the book can write
- D. the need for reinsurance
3. A book of 1,000 commercial property policies, none larger than \$4M, but all in the same named-windstorm county, is best described as:
- A. well diversified by size, so low risk
- B. a pool the law of large numbers will stabilize
- C. essentially one large correlated bet despite the policy count
- D. immune to catastrophe because no single account is large
4. Accumulation is best defined as:
- A. the total premium a book writes in a year
- B. the build-up of many policies' exposure to a single event, place, peril, or counterparty
- C. the reserve held for losses not yet paid
- D. the surplus an insurer accumulates over time
5. A book's blended loss ratio is 72%. Segmented, one class is at 112% and growing 22% a year. The most likely explanation for a deteriorating segment that is also fast-growing is:
- A. the segment is highly profitable and should be grown faster
- B. your price in that segment is soft, so you are winning the business the market priced higher for a reason (adverse selection)
- C. random noise that will reverse next year
- D. the segment is too small to matter
6. The retention ratio measures:
- A. the share of premium ceded to reinsurers
- B. the share of a book that renews from one term to the next
- C. the share of losses retained net of reinsurance
- D. the share of capital retained as surplus
7. "High retention in a soft market" can be a danger sign because:
- A. retention should always fall
- B. the good accounts are being picked off by cheaper competitors while the worse risks renew gratefully — adverse selection through the renewal book
- C. high retention always means overpricing
- D. it raises the expense ratio
8. The new-business penalty refers to the fact that:
- A. regulators penalize insurers for writing new business
- B. new business almost always runs a worse loss ratio than seasoned renewal business
- C. new business is always unprofitable and should be avoided
- D. brokers charge more to place new accounts
9. An undifferentiated growth target ("grow the book 10%") is dangerous mainly because:
- A. growth is always bad in insurance
- B. the fastest way to grow is to cut price or loosen standards, so growth-for-its-own-sake buys premium today at the cost of losses tomorrow
- C. it violates state rate-filing law
- D. it requires too much reinsurance
10. In a soft market, the disciplined portfolio manager generally should:
- A. follow the market down to protect growth and retention
- B. accept slower growth or controlled shrinkage, holding rate and terms
- C. exit the business entirely
- D. raise prices aggressively to maximize margin
11. The cycle's "lag" traps even experienced managers because:
- A. losses from underpriced soft-market business take two or three years to develop, so the worst business looks good on the day it is written
- B. regulators delay rate approvals
- C. reinsurance renews annually
- D. claims are always paid late
12. Which of the following is a portfolio referral trigger (as opposed to an authority trigger)?
- A. the account's premium exceeds the underwriter's dollar limit
- B. the account is outside the written guidelines
- C. the account would push a peril zone near its aggregate cap
- D. the account requires a signature above the underwriter's letter of authority
13. Portfolio appetite differs from individual risk appetite in that it asks:
- A. "Is this the kind of risk we write at all?"
- B. "Given what we already hold, do we have room for one more?"
- C. "Is the price adequate for this risk?"
- D. "Are the terms enforceable?"
14. A model reports that two of your lines are "uncorrelated." The judgment a human must add is:
- A. recomputing the correlation by hand
- B. asking what could make these supposedly independent lines lose together — something not in the historical data
- C. trusting the model fully, since it has more data
- D. ignoring the model entirely
15. Declining a sound, adequately-priced account "for portfolio reasons" is hard largely because:
- A. it is illegal in most states
- B. the cost (forgone premium) is immediate and visible while the benefit (a storm that does not break the book) is deferred and invisible
- C. it always damages the combined ratio
- D. brokers cannot be told the real reason
Short answer
16. In one or two sentences, explain why diversification changes a book's volatility but not the expected loss of any single risk in it.
17. Name the three numbers a portfolio manager should "read together, never one alone" when judging a segment, and give one trap that each number hides when read on its own.
18. A coastal book is concentrated in one hurricane zone. Explain, using Chapter 28's ideas, why that concentration is expensive every year even if no storm ever arrives.
19. State the three portfolio concentrations a manager must check on the Harbor Steel account before it "fits the book," and the disposition the chapter reaches.
20. Explain why portfolio discipline is described as a fiduciary obligation and not merely a profit discipline — tie it to the book's social-function theme.