AU 60 Practice Tests Questions
with All Correct Answers
The portion of net income that is held onto by a company and not distributed to
stockholders is called
Select one:
A. Paid-in capital.
B. Dividends.
C. Par value share.
D. Retained earnings. - Answer ✔ D. Retained earnings.
Bob's Manufacturing has been in business for one year. Which one of the following is
true regarding Bob's year-end financial statements?
Select one:
A. Change in cash on the statement of cash flow will be $0.
B. The fact that there are no prior year reports will have no impact on the financial
statements.
C. The beginning balance on the statement of changes in shareholders' equity will show
as $0.
D. Cash on the balance sheet will be shown as $0. - Answer ✔ C. The beginning
balance on the statement of changes in shareholders' equity will show as $0.
Which one of the following describes a section of the statement of cash flows?
Select one:
A. Cash flows from operating activities
B. Cash flows from premium activities
C. Cash flows from sales activities
D. Cash flows from income activities - Answer ✔ A. Cash flows from operating activities
Using trend analysis, an underwriter calculates the percentage change in certain items
over time. If ABC Company's sales increased from $20 million in 20X5 to $35 million in
20X6, what is the percentage change?
Select one:
A. 18%
B. 34%
C. 43%
D. 75% - Answer ✔ [(35-20)/20]*100 = 75% is the percentage change.
Underwriters must be careful when comparing financial statements using trend analysis
because false impressions about a company can be created. Which one of the following
might cause an underwriter to have a false impression about a company's health
because of an inventories increase on the financial statement?
,Select one:
A. The inventory increase was caused by obsolete or damaged inventory.
B. The inventory increase was caused by a change in the inventory valuation method.
C. The inventory increase was caused by robust sales and growth.
D. The inventory increase was caused by a decline in seasonal sales. - Answer ✔ B.
The inventory increase was caused by a change in the inventory valuation method
Which one of the following types of analysis helps an underwriter identify abnormal
values reported by an organization?
Select one:
A. Vertical analysis
B. Historical analysis
C. Ratio analysis
D. Trend analysis - Answer ✔ A. Vertical analysis
The process of analyzing the characteristics of policies within a book of business and
the trends of those characteristics is known as
Select one:
A. Retrocession.
B. Underwriting.
C. Reinsurance.
D. Reunderwriting. - Answer ✔ D. Reunderwriting
ABC Insurance Company sells property insurance. The company is reunderwriting its
book of business at midyear. The company hoped to retain 80% of policyowners. The
retention rate is 82% and the loss ratio on the retained business is 62%. The company
hoped to write $2.5M in premiums for the year, and the midyear value was $1.3M. The
new policy goal for the year was 6,000 and 3,500 new policies had been written at
midyear. The loss ratio goal for the year was 65 percent, and the loss ratio at midyear
was 68 percent. Assuming premium writings and losses are distributed uniformly over
the year, what should ABC Insurance Company conclude about its performance at
midyear?
A. The new policies sold goal was overly optimistic.
B. It would have been better to have a lower percentage of business retained.
C. New business is contributing negatively to the loss ratio.
D. The premiums written goal was overly optimistic. - Answer ✔ The retained business
has been beneficial to the company as its loss ratio (62 percent) is lower than the loss
ratio goal (65 percent).
C. New business is contributing negatively to the loss ratio.
Which one of the following statements regarding monthly report variations and quarterly
reports used in reunderwriting is true?
Select one:
A. Annual goals for the year must be apportioned evenly across the months.
,B. Corrective actions immediately impact the entire book of business.
C. By the end of the third quarter, it may be too late to improve that year's operating
results.
D. A catastrophe in a single month renders a monthly report for that month useless. -
Answer ✔ D. A catastrophe in a single month renders a monthly report for that month
useless.
One objective of a new business review as part of the reunderwriting process is to
determine if those insureds who have the greatest probability of loss are those who
have purchased insurance. This tendency, higher-than-average risks seeking insurance
at the average price, is called
Select one:
A. Moral hazard.
B. The underwriting cycle.
C. Morale hazard.
D. Adverse selection. - Answer ✔ D. Adverse selection.
Which one of the following statements about an underwriting audit is true?
Select one:
A. Typically, every policy is reviewed as part of the audit.
B. The performance of individual underwriters may be examined as part of the audit.
C. An underwriting audit is usually conducted by an outside firm.
D. As underwriting guidelines determine whether commercial applicants are accepted or
rejected, the judgment of commercial underwriters is not examined as part of the audit. -
Answer ✔ B. The performance of individual underwriters may be examined as part of
the audit.
A deteriorating loss ratio led the Vice President of Underwriting at RST Insurance
Company to order reunderwriting of RST property insurance policies. As part of the
process, she ordered a report to analyze results of smaller segments of the business.
This report is a snapshot at a given point in time that provides data on specific
characteristics of the policies in the book of business. This report is called a(n)
Select one:
A. New business review.
B. Risk profile.
C. Underwriting audit.
D. Special event review. - Answer ✔ B. Risk profile
Green Pastures Insurance Company insures farms and small businesses. The company
also has some business auto policies that account for less than ten percent of written
premiums. Green Pastures sold its auto insurance business to BusCar Insurance.
BusCar Insurance immediately decided to reunderwrite these policies to determine the
risk characteristics compared to the risk profile it expected. This reunderwriting is a(n)
Select one:
A. Special event review.
B. Loss review.
, C. New business review.
D. Underwriting audit. - Answer ✔ A. Special event review
JKL Insurance Company entered into a new state as part of an expansion strategy.
Four independent agencies were appointed to market JKL coverages. JKL was
unaware that many insurers had stopped writing workers compensation in the new state
because of rate inadequacy. The new agents, needing a carrier that was accepting
workers compensation, sold a large quantity of JKL workers compensation insurance.
As workers compensation is a liability line, there was no early indication of any problem.
The year-end results for this line, however, were horrendous. Which of the following
sources of information could JKL have used to provide an early warning that there was
a problem?
Select one:
A. Special event review.
B. Underwriting audit
C. Quarterly report
D. New business review - Answer ✔ D. New business review
An insurance company must have adequate policyholders' surplus if it wishes to
Select one:
A. Avoid adverse selection.
B. Generate premiums that exceed losses.
C. Produce profitable business.
D. Increase its written premium volume. - Answer ✔ D. Increase its written premium
volume.
Which one of the following is the term used to refer to a situation that occurs because
people with the greatest probability of loss are the ones most likely to purchase
insurance?
Select one:
A. Probable maximum loss
B. Adverse selection
C. Risk inconsistency
D. Spread of risk - Answer ✔ B. Adverse selection
To achieve profitability, the underwriting process serves which one of the following
additional purposes?
Select one:
A. Guarding against adverse selection
B. Selecting accounts with a lower-than-average chance of loss.
C. Transferring the risks of individuals and businesses
D. Charging fair premiums for applications that are accepted - Answer ✔ A. Guarding
against adverse selection
The purpose of underwriting is to
Select one:
with All Correct Answers
The portion of net income that is held onto by a company and not distributed to
stockholders is called
Select one:
A. Paid-in capital.
B. Dividends.
C. Par value share.
D. Retained earnings. - Answer ✔ D. Retained earnings.
Bob's Manufacturing has been in business for one year. Which one of the following is
true regarding Bob's year-end financial statements?
Select one:
A. Change in cash on the statement of cash flow will be $0.
B. The fact that there are no prior year reports will have no impact on the financial
statements.
C. The beginning balance on the statement of changes in shareholders' equity will show
as $0.
D. Cash on the balance sheet will be shown as $0. - Answer ✔ C. The beginning
balance on the statement of changes in shareholders' equity will show as $0.
Which one of the following describes a section of the statement of cash flows?
Select one:
A. Cash flows from operating activities
B. Cash flows from premium activities
C. Cash flows from sales activities
D. Cash flows from income activities - Answer ✔ A. Cash flows from operating activities
Using trend analysis, an underwriter calculates the percentage change in certain items
over time. If ABC Company's sales increased from $20 million in 20X5 to $35 million in
20X6, what is the percentage change?
Select one:
A. 18%
B. 34%
C. 43%
D. 75% - Answer ✔ [(35-20)/20]*100 = 75% is the percentage change.
Underwriters must be careful when comparing financial statements using trend analysis
because false impressions about a company can be created. Which one of the following
might cause an underwriter to have a false impression about a company's health
because of an inventories increase on the financial statement?
,Select one:
A. The inventory increase was caused by obsolete or damaged inventory.
B. The inventory increase was caused by a change in the inventory valuation method.
C. The inventory increase was caused by robust sales and growth.
D. The inventory increase was caused by a decline in seasonal sales. - Answer ✔ B.
The inventory increase was caused by a change in the inventory valuation method
Which one of the following types of analysis helps an underwriter identify abnormal
values reported by an organization?
Select one:
A. Vertical analysis
B. Historical analysis
C. Ratio analysis
D. Trend analysis - Answer ✔ A. Vertical analysis
The process of analyzing the characteristics of policies within a book of business and
the trends of those characteristics is known as
Select one:
A. Retrocession.
B. Underwriting.
C. Reinsurance.
D. Reunderwriting. - Answer ✔ D. Reunderwriting
ABC Insurance Company sells property insurance. The company is reunderwriting its
book of business at midyear. The company hoped to retain 80% of policyowners. The
retention rate is 82% and the loss ratio on the retained business is 62%. The company
hoped to write $2.5M in premiums for the year, and the midyear value was $1.3M. The
new policy goal for the year was 6,000 and 3,500 new policies had been written at
midyear. The loss ratio goal for the year was 65 percent, and the loss ratio at midyear
was 68 percent. Assuming premium writings and losses are distributed uniformly over
the year, what should ABC Insurance Company conclude about its performance at
midyear?
A. The new policies sold goal was overly optimistic.
B. It would have been better to have a lower percentage of business retained.
C. New business is contributing negatively to the loss ratio.
D. The premiums written goal was overly optimistic. - Answer ✔ The retained business
has been beneficial to the company as its loss ratio (62 percent) is lower than the loss
ratio goal (65 percent).
C. New business is contributing negatively to the loss ratio.
Which one of the following statements regarding monthly report variations and quarterly
reports used in reunderwriting is true?
Select one:
A. Annual goals for the year must be apportioned evenly across the months.
,B. Corrective actions immediately impact the entire book of business.
C. By the end of the third quarter, it may be too late to improve that year's operating
results.
D. A catastrophe in a single month renders a monthly report for that month useless. -
Answer ✔ D. A catastrophe in a single month renders a monthly report for that month
useless.
One objective of a new business review as part of the reunderwriting process is to
determine if those insureds who have the greatest probability of loss are those who
have purchased insurance. This tendency, higher-than-average risks seeking insurance
at the average price, is called
Select one:
A. Moral hazard.
B. The underwriting cycle.
C. Morale hazard.
D. Adverse selection. - Answer ✔ D. Adverse selection.
Which one of the following statements about an underwriting audit is true?
Select one:
A. Typically, every policy is reviewed as part of the audit.
B. The performance of individual underwriters may be examined as part of the audit.
C. An underwriting audit is usually conducted by an outside firm.
D. As underwriting guidelines determine whether commercial applicants are accepted or
rejected, the judgment of commercial underwriters is not examined as part of the audit. -
Answer ✔ B. The performance of individual underwriters may be examined as part of
the audit.
A deteriorating loss ratio led the Vice President of Underwriting at RST Insurance
Company to order reunderwriting of RST property insurance policies. As part of the
process, she ordered a report to analyze results of smaller segments of the business.
This report is a snapshot at a given point in time that provides data on specific
characteristics of the policies in the book of business. This report is called a(n)
Select one:
A. New business review.
B. Risk profile.
C. Underwriting audit.
D. Special event review. - Answer ✔ B. Risk profile
Green Pastures Insurance Company insures farms and small businesses. The company
also has some business auto policies that account for less than ten percent of written
premiums. Green Pastures sold its auto insurance business to BusCar Insurance.
BusCar Insurance immediately decided to reunderwrite these policies to determine the
risk characteristics compared to the risk profile it expected. This reunderwriting is a(n)
Select one:
A. Special event review.
B. Loss review.
, C. New business review.
D. Underwriting audit. - Answer ✔ A. Special event review
JKL Insurance Company entered into a new state as part of an expansion strategy.
Four independent agencies were appointed to market JKL coverages. JKL was
unaware that many insurers had stopped writing workers compensation in the new state
because of rate inadequacy. The new agents, needing a carrier that was accepting
workers compensation, sold a large quantity of JKL workers compensation insurance.
As workers compensation is a liability line, there was no early indication of any problem.
The year-end results for this line, however, were horrendous. Which of the following
sources of information could JKL have used to provide an early warning that there was
a problem?
Select one:
A. Special event review.
B. Underwriting audit
C. Quarterly report
D. New business review - Answer ✔ D. New business review
An insurance company must have adequate policyholders' surplus if it wishes to
Select one:
A. Avoid adverse selection.
B. Generate premiums that exceed losses.
C. Produce profitable business.
D. Increase its written premium volume. - Answer ✔ D. Increase its written premium
volume.
Which one of the following is the term used to refer to a situation that occurs because
people with the greatest probability of loss are the ones most likely to purchase
insurance?
Select one:
A. Probable maximum loss
B. Adverse selection
C. Risk inconsistency
D. Spread of risk - Answer ✔ B. Adverse selection
To achieve profitability, the underwriting process serves which one of the following
additional purposes?
Select one:
A. Guarding against adverse selection
B. Selecting accounts with a lower-than-average chance of loss.
C. Transferring the risks of individuals and businesses
D. Charging fair premiums for applications that are accepted - Answer ✔ A. Guarding
against adverse selection
The purpose of underwriting is to
Select one:
