Underwriting

1
Chapter Four

• Underwriting

2
Definitions

• Underwriting
• The process of selecting policy holders by
  recognizing and evaluating hazards, establishing
  prices and determining policy terms and
  conditions.
• Purpose
• To develop and maintain a profitable book of
  business.
• Book of Business
• All of the policies that an insurer has in force
  or some subgroup of those policies.
• Adverse Selection
• When people with the greatest probability of loss
  are the ones likely to purchase insurance.

3
The Underwriting Process

• Evaluating loss exposures
• Identifying, developing and evaluating
  alternatives
• Selecting an alternative-determining an
  appropriate premium
• Implementing decisions
• Monitoring exposures

4
Profile of Loss Exposures

• Physical hazard
• A tangible condition of property, persons or
  operations that increase frequency of severity of
  loss
• Moral hazard
• A condition that increases the likelihood that a
  person will intentionally cause loss or
  exaggerate loss
• Attitudinal hazard
• A condition of carelessness or indifference that
  increases the frequency or severity of loss
• Legal hazard
• A condition of the legal environment that
  increases loss frequency or severity

5
Sources of Information

• The producer
• The application
• Consumer investigative reports
• Government records
• Loss data

• Independent inspection reports
• Field marketing personnel
• Premium auditors
• Claim files
• Financial rating
• Production records

6
Underwriting Alternatives

• Accept the submission as is
• Reject the submission
• Make a counteroffer to accept subject to
  modification
• Major types of modification
• Require loss control measures
• Change rates, rating plans or policy limits
• Amend policy terms and conditions
• Use facultative reinsurance

7
Selecting an Alternative

• Accept, modify or reject
• Other factor
• Amount of underwriting authority required
• Premium of supporting business
• Mix of business
• Relationships with producer
• Regulatory constraints

8
Determining the Appropriate Premium

• Proper classification
• Personal insurance, workers compensation
  determines projected loss costs
• Major commercial insurance underwriter may have
  option to adjust premium on individual
  characteristics
• Most insurers operate subsidiary insurers with
  different rating plans
• For consumer lines, preferred-risk, standard risk
  and high risk in different subsidiary companies

9
Implementing the Decision

• Communicate with producer clearly, accept,
  modify, decline
• Place coverage in effect-binder, policy
• Record information about policy and applicant for
  accounting, statistical and monitoring purposes

10
Monitoring the Exposure

• Alert to changes in exposures
• Claim information
• Loss control reports
• Premium audit reports
• Evaluate entire book of business by
• Time
• Territory
• Producer
• Type of business

11
Types of Underwriters

• Line underwriters
• Responsible for implementing steps in the
  underwriting process
• Assist with determining appropriate coverage
• Provide service to producers and policy holders
• Staff underwriters
• Usually located in home office who assists
  underwriting management with making or
  implementing underwriting policy

12
Staff Underwriters Activities

• Research the market
• Research and develop coverages
• Evaluate underwriting experience
• Review and revise rating plans
• Formulate underwriting policy
• Develop underwriting guides
• Conduct underwriting audits
• Assist with education and training

13
Constraints of Underwriting Policy
Exhibit 4.2 Page 4.22
14
Financial Capacity

• Requires prudent use of financial capacity
• Effects of a catastrophe loss
• Inadequate rate levels
• Lines of coverage exceeding expected loss
  presumptions
• Regulation
• Necessary licenses
• Rate and form filings
• Insurance availability (market conditions)
• Rate adequacy and approvals
• Political pressure

15
Personnel and Physical Resources

• Specialists to market, underwrite, service and
  adjust losses
• True specialists exist in some lines boiler and
  machinery, aviation, ocean marine
• Location, location, location
• Information systems
• Insurance theory broad range of insurers to
  create widest range of exposure

16
Reinsurance

• What is reinsurance?
• Required by regulators for new companies
• Shifts financial consequence
• Availability, costs and excluded lines

17
Developing Underwriting Guides

• Help to insure that underwriting policy are made
  uniformly and consistently in all regions
• Below average, average, good risks
• Underwriting audits
• Assist with education and training of agents and
  staff

18
Underwriting Results

• Financial Measures
• Insurance Industry Trends
• Major catastrophic losses
• Premium volume
• Loss development delays
• Reserving practices

19
Underwriting Results Financial and Trade Bases
20
Loss Development Delay

• Occurrence and long tail claims
• IBNR
• Claims made
• Reserves

21
Loss Development Delay Calendar-Accident-Year
Basis
22
Non-Financial Measures

• Used to evaluate underwriting results
• Selection
• Product mix
• Pricing
• Accommodation risks
• Retention ratios
• Success ratios
• Service to producers standards