Chapter 40 Exercises

This is the capstone, so these exercises ask you to assemble and defend, not just recall. Work them with the file in front of you: at every point where a number or a term appears, ask can I trace this, and could I defend it to an auditor? Items marked with a dagger (†) have worked solutions in Appendix: Answers to Selected Exercises; the rest are for discussion, self-test, or your instructor. Section references like (§40.5) point back to the chapter; cross-references like (Ch.11) point to an earlier chapter the capstone synthesizes.

A. Recall and definitions

  1. † Define the complete underwriting file in one sentence, and state the principle that explains why it is built in the order it is read (inputs → analysis → decision). (§40.1)
  2. Define bound coverage and distinguish it from a quote. Who is on risk in each case? (§40.7)
  3. What is a coverage recommendation memo, and which single line in it makes the difference between an underwriting memo and a sales document? (§40.5)
  4. † List, in order, the thirteen sections of the assembled file skeleton, and say in a phrase what each contributes. (§40.1)
  5. Define a subjectivity (owned by Ch.13) in the context of binding, and explain what "condition precedent" means for when coverage attaches. (§40.7)
  6. Name the six themes of the book and, for each, give the one Harbor Steel fact in the capstone that advances it. (Conclusion)

B. Assembling and synthesizing the file

  1. The chapter says "a pile of correct analyses is not a decision." Explain, using two specific Harbor Steel layers (e.g., the assessment grade and the cat-model result), what synthesis adds beyond the individual analyses. (§40.1)
  2. † A trainee assembles a file that opens with "Recommendation: bind" and then presents the analysis. What is wrong with that order, and what would an auditor infer from it? Rewrite the opening logic correctly. (§40.1)
  3. Walk the file as an auditor and list four places where Harbor Steel involved a judgment call (a credit, a debit, an override, a subjectivity, or an exception). For each, state the one sentence the file must contain. (§40.1)
  4. The file contains three internal contradictions (model vs. underwriter; application vs. loss run; portfolio "tight" vs. cat model "fits"). For each, write the one-sentence resolution the file should record. (§40.1, §40.6, §40.7)

C. The risk-assessment summary

  1. † Compress the Harbor Steel assessment into a single defensible paragraph that leads with the grade, names the drivers, and states the controls that change it. (§40.2)
  2. The assessment calls the grade "controllable." Explain what that word commits you to later in the file, and trace it to a specific subjectivity. (§40.2, §40.7)
  3. Why does the capstone insist you "summarize the verdict, not the data" in the assessment section? What goes wrong if the assessment summary is just a list of every loss? (§40.2)

D. The pricing rationale ("price this risk")

  1. † Using the illustrative build in the chapter — manual rate \$4.50, experience adjustment \$0.45, net schedule debit \$0.80 per \$1,000 of value — compute the indicated property rate and the indicated building premium on the \$20M building. Label every figure as illustrative. (§40.3)
  2. † A reviewer challenges your net schedule debit. Write the two-sentence justification the file should contain, naming the debit drivers and the credit offsets. (§40.3, Ch.11)
  3. The experience adjustment on the property line is small despite two fires in five years. Explain why, using the word credibility (Ch.10). Why would letting the two fires drive a large frequency debit be a mistake? (§40.3, Ch.10)
  4. Price-discipline / find-the-mistake: A peer prices Harbor Steel by accepting the model's 7/10 score and applying a flat "high-risk" surcharge instead of building the rate. Name two things wrong with using the score as the price. (§40.3, Ch.32)

E. The terms and conditions

  1. † For each of these Harbor Steel terms, state the financial job and the behavioral job it does: (a) the 5% named-windstorm deductible; (b) the ACV roof endorsement; (c) the return-to-work credit; (d) the mandatory telematics. (§40.4, Ch.12)
  2. Show that the property terms and the cat model are internally consistent. Which single term appears in both, and what does it do in each place? (§40.4, §40.6, Ch.30)
  3. The umbrella has an underlying-limit requirement. Explain what it must match, and what breaks if the primary GL limit is written below it. (§40.4, Ch.16)

F. Find the red flag

  1. † Reviewing a different assembled file (not Harbor Steel), you find: a 12% schedule credit with no stated reason; a recommendation memo with no residual-risk line; and a bind with the subjectivities listed only in an email, not in the binder. Identify the red flag in each and state the fix. (§40.1, §40.5, §40.7)
  2. A file binds an account at terms that contradict the cat model's deductible assumption (the model assumed 5%; the binder says 2%). Why is this dangerous, and which number is "real" once the binder issues? (§40.4, §40.6)
  3. An assembled file's pricing is adequate, the terms are sound, and the risk grades well — but the portfolio sign-off is missing. Explain why this file is not yet bindable for a \$20M coastal property, and what one check is absent. (§40.6)

G. The memo and defending the decision (write it)

  1. † Write the Harbor Steel coverage recommendation memo to the nine-part skeleton in §40.5. Keep it to one page. State the recommendation at its real strength, name the residual risks, and disclose the override. (§40.5)
  2. Write the three-to-five-sentence script you would say to defend the model override to an underwriting committee: what the model scored, what it could not see, the terms that make the override prudent, and the cross-check. (§40.7, Ch.32)
  3. The broker (Meridian) calls and asks you to drop the infrared-scan subjectivity "to make binding easier." Write the two-sentence response that keeps the relationship and the discipline. (§40.7, Ch.39)
  4. † Write a short non-renewal-trigger memo: list four specific events that would move Harbor Steel from "renew at adequate terms" to "re-price or non-renew" at the next term, and tie each to a residual risk. (§40.7)

H. Ethics and the social function

  1. † An analytics colleague proposes adding a new model feature that improves the Gini but turns out to correlate with the racial composition of the insured's ZIP code. Using the capstone's compliance rule (risk-based basis only) and Ch.35, explain why you would not let that feature drive the Harbor Steel price, even if it "predicts." (§40.5, Ch.35)
  2. Harbor Steel's prior carrier non-renewed it; your carrier bound it (with conditions). Frame this as the book's "insurance serves a social function" theme: what did the underwriter's craft accomplish that a pure decline would not — and where is the limit of that argument (when should a risk genuinely be declined)? (Conclusion, Ch.1)
  3. Is it ethical to bind an account while documenting that you expect the roof might not be replaced on time? Argue both sides, then state where the line falls between "honest, conditioned underwriting" and "writing a risk you know is impaired." (§40.7)

I. The Underwriting File (capstone extensions)

  1. † Assemble the one-page index to the complete Harbor Steel file: list the thirteen sections and, for each, the single most important fact or decision it records. This is your interview leave-behind. (§40.1, The Underwriting File)
  2. The capstone disposition is "bind, with conditions." Construct the counterfactual: change exactly one fact in the file (e.g., remove the signed roof contract, or fill the Port Hadley zone aggregate) such that the disposition flips to "decline" or "modify further." Explain the chain. (§40.7, §40.6)
  3. A year after binding, Harbor Steel has replaced the roof and run clean on property, but the pending products claim has developed adversely and a new welder injury appeared. Write the two-paragraph renewal assessment: what you keep, what you re-price, what you condition, and what you would say to Meridian. (§40.7, Ch.39)
  4. † Defend the file as a teaching artifact: explain to a new trainee why the Harbor Steel file is built to "defend itself without you in the room," and identify the three features of the file that make that possible. (§40.1, epigraph)