Chapter 38 Exercises

Work these as a leader would, not as a line underwriter: ask of every situation what system produced this, and what lever — appetite, authority, audit, or team — would fix it? 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 (§38.3) point you back to the relevant part of the chapter.

A. Recall and definitions

  1. † Name the four levers through which an underwriting leader runs the function, and say in one phrase what each controls. (§38.1)
  2. Define a risk-appetite statement in one sentence, and explain what makes one usable by a line underwriter versus merely true. (§38.2)
  3. † Define a letter of authority and list at least five things a real one specifies. (§38.3)
  4. Distinguish the underwriting audit from the premium audit (Ch. 22) and the market conduct exam (Ch. 4). Who owns each? (§38.4)
  5. What is the chief underwriting officer (CUO) accountable for, and how does that differ from what an underwriting manager is accountable for? (§38.7)
  6. Explain the four-tier class structure — target, accept, restrict, decline — and why "restrict" is the tier where most underwriting judgment lives. (§38.2)
  7. Name the three "lines of defense" in underwriting governance and say what each does. (§38.7)

B. Appetite

  1. † Rewrite this board-level appetite line so a line underwriter could actually apply it to a submission: "We have a moderate appetite for coastal commercial property." Add at least three concrete boundaries. (§38.2)
  2. A carrier's "light manufacturing" book has quietly become 40% heavy metal fabrication over three years, with no single account having tripped an alarm. Name the failure (§38.2), explain the mechanism, and say what metric a leader should have been watching besides the loss ratio. (§38.2, §38.5)
  3. † Explain how setting appetite fights adverse selection (Ch. 1) at the portfolio level, in a way that pricing a single file cannot. (§38.2)
  4. Classify each into target / accept / restrict / decline for a regional middle-market carrier, and justify each in one line: (a) a clean office building, (b) Harbor Steel, (c) a fireworks manufacturer, (d) a well-run machine shop with one small loss. (§38.2)

C. Authority and the referral grid

  1. † Build a four-row referral grid (line UW / senior UW / manager / CUO) across these characteristics: property limit, appetite tier, loss history, and pricing-vs-technical. Then route Harbor Steel through it and name every cell it trips. (§38.3)
  2. A line underwriter binds a \$30M account their letter caps at \$5M; the account looks fine and never has a loss. Identify two distinct problems — one about this account, one about the system — and explain why "no loss" does not make it okay. (§38.3)
  3. Explain under-delegation and give three specific ways setting authority too low makes a book less safe and a team less capable over time. (§38.3)
  4. † A broker complains that your shop is slow because "everything gets referred." Diagnose whether this is an authority-calibration problem or a competence problem, and describe how you'd tell the difference and what you'd change. (§38.3, and Ch. 39 on the broker relationship)

D. The underwriting audit

  1. † Design the sampling plan for an annual underwriting audit of a commercial book where 5% of accounts hold 50% of the premium. How would you split random vs. targeted sampling, and why would pure random sampling mislead you here? (§38.4)
  2. An audited file is a well-selected, well-priced account that scores "pass with findings" for an undocumented price basis and an unexplained model override. Explain why a finding is not the same as a bad account, and state precisely what the audit is protecting. (§38.4, and Ch. 13 on documentation)
  3. † Find the red flag. A leader reviews an audit summary: file-pass rate is a healthy 94%, but the "rate adequacy" dimension fails on 22% of files and the failures cluster in two underwriters and one class. What does this pattern most likely mean, and what are your next three actions? (§38.4, §38.5)
  4. Explain the "audit-as-punishment" failure mode: what goes wrong with the data an audit produces when findings are used primarily to discipline, and what posture should a leader take instead? (§38.4)
  5. Where can an automated audit (a model scanning 100% of bound policies) outperform a human file reviewer, and where can it not? Tie your answer to the Harbor Steel override in Chapter 32. (§38.4, Ch. 32)

E. The manager's combined ratio

  1. † A book grew 30% this year at a reported combined ratio of 92%; rate is down 6 points, hit ratio is up 15 points, and new business is now 35% of the book in two restricted classes. Explain why this is dangerous despite the good number, and name four leading indicators you would watch. (§38.5)
  2. Price this decision. A leader can hit a growth target by shaving the team's average rate 5% to win more accounts. The current book runs at a 98% combined ratio. Walk through, in words and a simple illustrative calculation, why "we'll make it up on volume" is the wrong move, and what the marginal account would have to satisfy for growth to be worth pursuing. (§38.5)
  3. † List four leading indicators of the combined ratio and explain, for each, why it leads — i.e., why it moves before the reported combined ratio does. (§38.5)
  4. Reconcile this apparent contradiction: the chapter says the combined ratio "tells the truth," yet also warns a leader not to manage by staring at it. Resolve it in two or three sentences. (§38.5, Ch. 3)

F. Building the team and the CUO

  1. † You can hire one of two candidates: Candidate A knows the property rate plan cold but "finds a way to make deals work"; Candidate B has thinner product knowledge but a record of honest, well-documented declines. Who do you hire, and what does the choice reveal about what can and cannot be trained? (§38.6)
  2. Explain why a quarterly calibration session enforces an appetite statement more effectively than re-circulating the statement. What three things does calibration accomplish at once? (§38.6)
  3. The chapter says the CUO's true mark of seniority "is not the authority to say yes to anything; it is the willingness to build and submit to the governance that can say no to them." Explain what this means and why a CUO who resents the second and third lines of defense is a warning sign. (§38.7)
  4. Write the memo. In 150–250 words, write a short memo from an underwriting manager to the team explaining a decision to tighten appetite in a hot class and raise rate, knowing the reported combined ratio will get worse before it gets better. Make the case in a way that protects morale and reinforces the right culture. (§38.5, §38.6)

G. Ethics and judgment

  1. † Ethics dilemma. Your highest-producing underwriter consistently lands large accounts and hits every growth target — but the audit shows their files are thinly documented and several were bound just below technical price with no recorded rationale. The producers love them; the loss ratio on their book "looks fine" (it is only two years old). As the leader, what do you do, and how do you weigh present production against a risk you cannot yet see in the numbers? (§38.4, §38.5, §38.6)
  2. An underwriting culture rewards bound premium loudly and is silent on disciplined declines. Explain, using the book's first theme (underwriting is judgment) and the adverse-selection concept, what kind of book this culture will produce over a full underwriting cycle — and the single change a leader could make to bend it. (§38.6, Ch. 1)

H. The Underwriting File

  1. † Underwriting-File extension. Route Harbor Steel through this chapter's referral grid (§38.3) and name every cell it trips. Then state, in your own words, why the appetite call — not the technical analysis — is the decision that belongs to the CUO. (§38.3, §38.7, The Underwriting File)
  2. The Harbor Steel file is "approved at authority" but coverage is not yet bound. Explain the difference between authority granted and conditions met, list the open subjectivities the file is waiting on, and say which chapter must close them. (The Underwriting File; Ch. 39; Ch. 40)
  3. Suppose, at the CUO appetite call, the Port Hadley zone aggregate is already at its cat cap (Ch. 30) and Meridian is the source of a third of the coastal book (Ch. 29). Write the two-sentence appetite decision you would make as CUO, and name the one lever from this chapter you would pull to make room if you still wanted the account. (§38.2, §38.7, The Underwriting File)