Chapter 34 Exercises

Work these with the chapter's central habit of mind: when anyone claims technology is "disrupting" insurance, ask whose balance sheet carries the loss, what is the loss ratio rather than the growth rate, and what was actually automated — intake or judgment? 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 (§34.2) point you back to the relevant part of the chapter.

A. Recall and definitions

  1. † Define InsurTech in one sentence, and name the four types of player the chapter sorts the landscape into by what they disrupt. (§34.1)
  2. Define embedded insurance and give one original example that is not in the chapter. Why does the chapter say the underwriting decision often "moves upstream" when cover is embedded? (§34.2)
  3. † Distinguish a full-stack InsurTech carrier from a digital MGA in terms of who carries the loss. Why is that single distinction the most important one in the chapter? (§34.1, §34.2)
  4. Define API distribution in your own words, and explain what it means to say the underwriting in an API quote is "encoded ahead of time." (§34.4)
  5. Define peer-to-peer insurance, and state where the residual risk in such a model typically ends up. (§34.1, Key Terms)
  6. In one sentence each, state the three things the chapter says converged in the 2010s to make the InsurTech wave possible — and say which one turned out to be the unsound premise. (§34.1)
  7. What is basis risk in a parametric product, and why does it cut both ways for the insurer? (§34.3)

B. The MGA and embedded models

  1. † Explain the structural misalignment of incentive at the heart of the digital-MGA relationship: what does the MGA earn its money on, what does the carrier bear, and what term from Chapter 1 describes the problem? Then name three defenses a disciplined backing carrier uses. (§34.2)
  2. The chapter calls capital efficiency the "genius" of the MGA model and its danger to the backing carrier. Reconcile those two claims in a short paragraph. (§34.2)
  3. † Why does the chapter describe embedded insurance as a return, at scale, to class underwriting (Chapter 20)? What new way can the underwriting go wrong when it is embedded? (§34.2)
  4. A founder pitches you, an underwriter at a backing carrier, on granting their new digital MGA a wide pen and promises explosive premium growth in year one. Citing the chapter, give two reasons their year-one premium growth is not evidence the book is any good. (§34.2)

C. Parametric and usage-based products

  1. † A parametric hurricane policy pays \$250,000 if recorded sustained wind at the insured's location crosses 110 mph. (Figures illustrative.) Describe two distinct scenarios in which the basis risk shows up — one that hurts the insured, one that hurts the insurer. (§34.3)
  2. Why does parametric cover require insurable interest (Chapter 4) to be designed in carefully, and what does the structure risk being called if it is not? (§34.3)
  3. Usage-based auto insurance is said to attack adverse selection "at its root." Explain the mechanism: what proxy does it replace, and with what? Then name one limit the chapter insists on. (§34.3; Chapter 1)
  4. Which part of pricing a parametric wind cover is a job the catastrophe models of Chapter 30 handle well, and which part is judgment the model cannot supply? (§34.3)

D. The stumbles and the lesson

  1. † A full-stack InsurTech achieves an expense ratio far below the industry average yet posts an underwriting loss for several years running. Using combined ratio = loss ratio + expense ratio (Chapter 3), explain in three or four sentences exactly why the low expense ratio did not save it, and what would have. (§34.5)
  2. State, in one sentence, the chapter's "master lesson" of the InsurTech cycle. Then explain why "our customers love us" is not a rebuttal to it. (§34.5, §34.6)
  3. The chapter argues that "disruption of distribution is real; disruption of underwriting risk is mostly an illusion." Defend or challenge that claim, using the difference between the front door of the value chain and the carrying of risk. (§34.6)
  4. † Several InsurTechs that started as full-stack carriers pivoted to becoming digital MGAs, enablers, or heavy reinsurance buyers. The chapter calls this "the market teaching the lesson," not a failure. Explain what the market is correctly relocating, and why that is the right move from an underwriting standpoint. (§34.6)

E. Underwrite this / find the red flag

  1. Underwrite the encoded rule. You are building the referral rules for a small-commercial digital MGA's quote-in-seconds flow. For each of the following submissions, decide whether the system should (i) bind automatically, (ii) refer to a human, or (iii) decline outright — and give your one-line reason: (a) a clean 1,200-sq-ft hair salon in a benign class, no losses; (b) a welding/fabrication shop with two fire losses in five years; (c) a restaurant with a deep-fryer and a single small grease-fire claim three years ago; (d) a brand-new class of business the rate manual does not contain. (§34.4, §34.7)
  2. † Find the red flag. A backing carrier's dashboard shows a delegated digital-MGA book that grew premium 80% year over year, has a current-year reported loss ratio that looks "fine," books strong commission revenue, and has not been audited since the pen was granted. Name three things in that picture that should worry the carrier's underwriting management, and what number you would demand to see instead of the current-year loss ratio. (§34.2)
  3. Price the supplement — qualitatively. A broker asks whether a parametric wind supplement makes sense on top of a coastal account's 5% named-windstorm deductible (Chapter 12). Without inventing a premium, lay out the three things you would need to settle to price and structure it responsibly, drawing on the chapter and on Chapter 30. (§34.3)

F. Memo and ethics

  1. † Write the memo. In about 150–200 words, draft an internal note to your CUO recommending whether your mid-size regional carrier should partner with a digital MGA to enter a new small-commercial class via a quote-in-seconds platform. Take a position, and structure it around the chapter's three questions (whose loss ratio, growth vs. profitability, what is automated). (§34.1, §34.2, §34.7)
  2. Ethics dilemma. Your carrier's embedded-insurance partner — a large online retailer — proposes auto-enrolling every customer in a low-cost protection plan at checkout, pre-ticked, with an easy opt-out buried at the bottom of the page. It would be wildly profitable on volume. Lay out the tension between the commercial opportunity and the chapter's themes (especially insurance as a social function, Chapter 1), and state where you would draw the line and why. (§34.2; Chapter 1)
  3. An InsurTech markets usage-based auto insurance as "fairer because it prices how you actually drive." Identify one way that claim is genuinely true (it attacks adverse selection) and one way it raises a fairness question this book defers to Chapter 35. Why can both be true at once? (§34.3; preview of Chapter 35)
  4. Compliance. "The algorithm did it automatically" is offered as a defense when a regulator questions an API-delivered rate. Explain why that is not a defense, and list two things the regulator can demand to see. (§34.4; Chapter 4)

G. The Underwriting File

  1. † Underwriting-File extension. Could a digital MGA's quote-in-seconds platform have bound Harbor Steel? Walk through what would happen if the submission were dropped into such a flow: where the intake helps, the specific account features that should trip a referral rule, and the correct outcome. Then state why Harbor Steel is "for the small clean machine shop's flow's exception path, not its happy path." (§34.4, §34.7, The Underwriting File)
  2. A parametric wind supplement is noted on the Harbor Steel file as an option to raise with Meridian. Write the two or three sentences you would actually say to the broker proposing it — including the limit you must disclose (basis risk) and the fact that it supplements, not replaces, the indemnity program. (§34.3, The Underwriting File)
  3. The prior carrier non-renewed Harbor Steel and the account came to you via a human broker, not an app. Connect this to the chapter's argument: which kinds of risk does the InsurTech machine handle, and why is a non-renewed, multi-line, cat-exposed, loss-active account a paradigm case of the work that stays human? (§34.7, The Underwriting File; Chapter 1)