UNIVERSITY OF ILLINOIS AT URBANA-CHAMPAIGNCollege of Commerce and Business AdministrationDEPARTMENT OF FINANCEFirst ExamFinance 341Name:_______________________ Spring, 2001Maximum Number of Points: 30For this exam, you may use either the State Farm Car Policy we used in Finance 260 or the Personal Auto Policy included as Appendix B in the text. To make sure you are graded fairly, please circle the policy you are using for this exam:State Farm Car Policy Personal Auto PolicyTrue/False and Multiple Choice Questions - Circle the appropriate answer (1 point each). 1. The auto insurance policy provides coverage if a person T Fwithout a license is driving your car as long as you gave that person permission. 2. Retrocession is a term that applies when a reinsurer obtains TFreinsurance on its book of business.3. An insurance company operating without a license from TFthe state is considered an alien insurer.4. If the son of a Homeowners insurance policyholder were to TFsubmit a claim for a loss when his property was stolen from his dorm room, it would be a first party claim.5. Public adjusters work for insurance companies to help TFsettle claims with policyholders.6. Darcie Kiper described several Industry Trends that are affecting the process of underwriting. Which of the following trends did she mention(circle all that apply)?A. The increased use of cell phones in cars.B. The need to provide service 24 hours a day.C. The use of computers to make some underwriting decisions. D. Stricter rate regulation in CaliforniaE. The increase in natural disaster claims7. GEICO advertises that "a 15 minute phone call can save you up to 25%on your auto insurance." Which Philosophy of Marketing Management does this representA. Production conceptB. Product conceptC. Sales conceptD. Marketing concept 8. Which of the following causes of loss would be covered under the Building and Personal Property coverage Broad Form? (Circle all that apply.) A. TheftB. Flood damageC. Wind damageD. An airplane falling on the roofE. None of the above9. Vandals push a tree in your front yard over and it lands on your car. Both the tree and car are damaged. In this situation, which policy will pay for this loss?A. Only your Personal Auto Policy (or State Farm Car Policy) will payB. Only your Homeowners 3 Special Form will payC. Both policies will payD. Neither policy will pay10. Which types of agents have legal ownership of policy expirations?A. Exclusive agentsB. Direct writersC. Independent agentsD. None of the aboveShort Answer/Calculation Questions (2 points each).11. CNA writes a $50 million Building and Personal Property policy on a store. CNA purchases two reinsurance policies. One is a quota share policy that cedes 60% of each loss. The other is a per-risk excess reinsurance policy of $15 million excess of $5 million. (The quota share policy "inures to the benefit of" the per-risk excess policy.) A $40 million covered loss occurs. Indicate how much each of the insurers will pay:CNA ________________Quota Share Reinsurer ________________Per-risk Excess Reinsurer ________________12. You are an automobile insurance underwriter trying to decide what to do about the following policyholder. This policyholder is a single 28 year old female. She has been insured with you for 3 years, paying an annual premium of $800 per year. In the first year, there was one small property damage claim in which your company paid a $500 loss. In the second year, there were no claims on this policy, but you see on the Motor Vehicle Report you ordered, your insured received two speeding tickets. In the last year there was another accident that caused $5,000 in bodily injury to a passenger in the insured's car. This insured has no other insurance with your company. List your options inthis situation and indicate what you would recommend.13. Wal-Mart is building a new store near the airport in Savoy. Recently theconstruction site was severely damaged by vandals. The cost of the damage is estimated to be $100,000. If Wal-Mart had a Building and Personal Property policy in force, would this loss be covered? Explain.14. Calculate the indicated gross premium based on the following information:Loss frequency 8%Loss severity 5100Fixed expenses 55Variable expenses (including profit) 18% 15. You are the Vice President for Underwriting for a major personal lines insurer. A management level committee has determined that the use of credit reports for underwriting automobile and homeowners insurance would increase profitability. List two External Constraints on Achieving Objectives that would apply to adopting this change for your company. Explain your choices.16. You are the underwriter for a mid-sized auto insurance company. A customer (named Paul) has contacted your department to request that unmarried couples living together should qualify for lower insurance rates. You study this request and decide to recommend that your company not give unmarried couples a discount. List two valid reasonsto support your position. 17. An insurance company has the following experience for 2000:Written Premium $675 millionEarned Premium 650 "Incurred Losses 470 "Loss Adjustment Expenses 58 "Underwriting Expenses 155 "Net Investment Income 52 "Calculate the Operating Ratio using Net Investment Income and the Trade Basis Combined Ratio.18. In an insurance company has the following experience during the year 2000:Written premium $1,000,000Earned premium 950,000Expected loss ratio 70%Accident year 2000 paid losses 350,000Calculate the loss reserve for accident year 2000 based on the expected loss ratio method.For questions 19-20, use the Cumulative Loss Payment data listed below to fill in the missing data on the next two tables. Assume that there is no further loss development after 48 months.Cumulative Loss Payments(000 omitted)Development Age (Months)Accident Year 12 24 36 481997 150 480 576 6051998 180 666 8661999 240 7922000 30019.Paid Loss Development FactorsLink FactorsAccident Year 12-24 24-36 36-481997 ? 1.200 1.0501998 3.700 1.3001999 3.300Average ? ? 1.050Age-Ultimate ? 1.313 1.05020.Estimated Loss Reserves Based on Average Paid Loss Development FactorsAccidentYearPaid toDateAge toUltimateUltimateLossesLoss Reserve1997 605 1.000 605 01998 866 1.050 910 441999 792 1.313 ? ?2000 ? ? ? ?Total ? - ?