THE UNDERWRITING CYCLE

Amit Kumar-21 Gunakar Mani-22 Prem Prakash-23 Saurav Chakraborty-24 Preity Sangeeta Ekka-25

UNDERWRITING
It is a process where experts decide which policy to accept and which policy to reject. Underwriters accepts those policy which can be profitable for the business and rejects those policy which can be harmful. Although they accepts these policies but keep the premium very high. the fundamental objective of underwriting is to produce a profitable business.

BASIC UNSERWRITING PRINCIPLES

The basic goal of underwriting is produce a profitable volume of business. It may be a large

volume of business with low unit profit or a smaller volume with a larger unit of profit. To achieve this, three basic principles are followed. 1. Selection of insureds according to the companys underwriting standards. It means that only those insureds are selected whose actual loss experience will not exceed the expected loss experience. The basic purpose is to reduce adversely selection against.

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2. The second principle is to have a proper

balance within each rate classification. This means that a below-average insured in an under writing class should be offset by an above-average insured, so that on balance, the class or manual rate for the group as a whole will be adequate for paying all claims and expenses.

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3. A final underwriting principle is equity among the policy owners. It means that equitable rates must be charged. For example. A group of 20Yr old persons and a group of 80Yr old persons should not pay the same premium rates.

Source of Underwriting Information

The type of information varies by type of insurance. In property insurance, both physical features of the property and personal characteristics of the applicants is considered. Physical features include type of construction, quality of fire protection, water supply etc. and personal characteristics include living habit, moral character, past records etc.

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Underwriting information can be obtained from variety of sources.
Application
Agents report Inspection report Physical inspection Physical examination and attending physicians

report Medical Information Bureau(MIB)

The Hard Market

In a hard insurance market rates are up, new exclusions

may be imposed, and limits may be reduced. In addition, certain coverage readily available before the change may no longer be available, and certain types of businesses may find it difficult, or impossible, to find acceptable insurance arrangements. The current hard insurance market is all of this and more. Causes of hard market:
War Terrorism Natural calamities Economic meltdown (any catastrophic events)

Soft Market
Soft markets typically are marked by new

entrants into the business, dropping prices, generous underwriting provisions, and aggressive discounting. Causes of soft market: Competition High growth rate of the economy Optimistic situation

Enjoy the soft market if you are a buyer, hope it ends soon if you are a seller, and whoever you are, remember that medical expense will drive the next hard market.

The Underwriting Cycle

Cyclical fluctuations.

Toggles between hard market and soft market.

The underwriters decide on their policies according

to the market conditions.

Combined Ratio

It is a measure of profitability for an insurance

company measuring how well it is performing.

Property/Casualty insurance cycle

A dominant factor in the P/C insurance cycle is intense

competition within the industry. Premium rates drop as insurance companies compete vigorously to increase market share. As the market softens to the point that profits diminish or vanish completely, the capital needed to underwrite new business is depleted. In the up phase of the cycle, competition is less intense, underwriting standards become more stringent, the supply of insurance is limited due to the depletion of capital and, as a result, premiums rise. The prospect of higher profits draws more capital into the marketplace leading to more competition and the inevitable down phase of the cycle.

CONCLUION
We see that the insurance industry undergoes

a phase of transition between hard market and soft market and follows a cyclical pattern. The underwriters has to do a great deal of work in assessing the risk factors and estimating the appropriate premium to cover that risk so that the company does not face loss in business.