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Assignment No. 4

Northern Caribbean University

FNCE437: Risk Management & Insurance (K)

Darian Watts

June 9, 2021
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Assignment No. 4

When thinking of the aims and primary duty of an insurance company, individuals may

come to their own conclusion that the primary aim of all insurance companies is to financially

protect their clients. While this may be one of the tasks of an insurance company, the true aim of

all insurance companies is to make a substantial profit, even after fulfilling necessary task. In this

assignment, we’ll be looking into methods used in order to heighten the possibility of gain when

preparing insurance policies. In order to gain an understanding of this, a definition of

‘Underwriting’ will be presented, also, an explanation into three basic principles of underwriting,

and lastly, Identifying major sources of information available to Underwriters.

Underwriting is described as the process of choosing and categorizing applicants for

insurance with the primary goal of achieving an underwriting profit, according to the book

"Principles of Risk Management and Insurance" [CITATION Rej16 \p 46,127 \l 1033 ]. In simple

terms, Underwriting is reviewing the individual or their asset being insured, and finding both a

reasonable price for the policy, while also making a profit at the same time.

As with any successful business, insurance underwriters must follow principles when

underwriting. According to the book "Principles of Risk Management and Insurance," three basic

principles include, achieving an underwriting profit, selecting prospective insureds according to

the company's underwriting standards, and providing equity among policyholders [ CITATION

Rej16 \l 1033 ]. Very much self-explanatory, the primary objective, achieving an underwriting

profit is aimed at calculating a premium, which, after losses and expenses have been extracted, a

comfortable profit margin is still left behind for the insurance company. At times in order to

reject certain clients who may be deemed high risk, a very high premium will be presented to the

applicant, in the event that they do accept policy, the high premium should still render a profit
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despite the rate claims which may come with the said client. The second principle, selecting

prospective insureds, according to the company’s underwriting standards, in simple terms, is

linking clients with policies which match them. For example, a health insurance policy for a

client with a pre-existing condition, would more than likely have a very high premium rate while

also carrying multiple limitations in order to reduce the overall number of payments which the

insurance company would make in a given period of time, all with the intent of protecting the

insurance organization. And last but not least, providing equity among policyholders is ensuring

that the premium paid by an healthy individual in their mid-twenties, should not mirror the

premium of an individual in their elderly age. Another example would be the policy of an

individual with an early drivers license also shouldn’t mirror that of a more experienced driver.

The major sources of information available to underwriters as stated in the book

"Principles of Risk Management and Insurance" are as follow: Application, Agent’s report,

Inspection report, Physical inspection and Physical examination[ CITATION Rej16 \l 1033 ]. In the

Application, the applicant is expected to be as truthful as possible, as the underwriter reviews

this information and fashions the policy based on information presented on the application, in the

event that the information presented is false, claims submitted may be rejected. Another means

information which can be referred to is an Agent’s report, in this case this would be information

gathered from the Agent when submitting new applicants. In the case of a health insurance, a

medical report may be requested to be submitted with the application form, similarly an

Inspection report may be requested to be submitted in cases of property insurance, carrying

detailed information which is used by the underwriter when making their final decision. Physical

inspections, may be required in cases of vehicle insurance, to ensure clients do make claims for

damages which were existent before the policy was purchased. Physical Examinations, may be
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required in cases of a health insurance policy, one reason would be to identify if the applicant is

overweight, in such cases the client may be presented with a policy mirroring that of an

individual with Diabetes, due to high probability of an overweight individual developing

diabetes. All the mentioned sources of information all serve their purposes and aid underwriters

in either approving, or declining applicants.

In conclusion, this assignment has broadened my comprehension on insurance

underwriting, bringing to light the basic principles of underwriting, and also giving me an

awareness of the major sources of information available to underwriters. Hopefully, the

assignment's goal of informing the reader was also met.

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References

Rejda, G. E., & McNamara, M. J. (2016). Principles of Risk Management and Insurance (13th

ed.). Edinburgh Gate, Harlow, England: Pearson Education. Retrieved May 2021, from

Kin.