Underwriting

Introduction

The underwriting process is an essential part of any insurance

application. When an individual applies for insurance coverage, he or
she is essentially asking the insurance company to take on the
potential risk of having to pay a claim in future.
In some cases, such as with life or medical insurance, such claims can
be quite high. Therefore, it is important that the insurance company
does not take on too great a risk when considering an applicant for
coverage.
Therefore underwriting is critically important function and is performed
each time an insurance application is taken.
Its purpose is to determine whether or not the insurer will accept the
risk.
Introduction

Underwriting refers to the process of issuing insurance. In this process, an

insurance underwriter will evaluate the risk and potential exposure of
potential insured.
Underwriter evaluates the risks of insuring a particular person or asset and
uses that information to set premiums pricing for insurance policies.
The business model is to collect more in premium and investment income
than is paid out in losses, and to also offer a competitive price which
consumers will accept.

Profit can be reduced to a simple equation:

profit = earned premiums + investment income - incurred loss -

underwriting expenses
Principles

Generally underwriting consists of two components, risk

assessment and pricing. There are basics principles which are
applied in the concept of underwriting;
The primary objective of underwriting is to attain an underwriting
profit.
The underwriter constantly strives to select certain types of
applicant and reject others to obtain a profitable portfolio of
business.
The underwriter should select only those insured whose actual
loss experience is not likely to exceed the loss experienced
assumed in the rating structure.
Principles

Equitable rates Non Biased

Balance in assuming risks across all lines of business
Underwriting Factors

Insurable Interest
Business Activities
Size of Group
Sum Insured
Deductible
Loss History
Annual Revenue
Documentation
Other Factors
Risk and Hazards

Pure Risks
Speculative Risks
Physical Hazard
Moral Hazard
Underwriting Steps

Evaluating loss exposure.

In this step information is gathered about an
applicants loss exposure.
The underwriter must understand the activities,
operations and character of applicant.
An underwriter can gather information through
application containing the insureds statement.
Underwriting Steps

Determining underwriting alternatives.

There are three underwriting alternatives which
are;
Accept the submission as is,
Reject the submission and,
Make a counteroffer to accept the submission
subject to certain modifications
Underwriting Steps

Four major types of modifications are;

Loss control measures to reduce hazards
Change insurance rates, rating plans or policy
limits.
Amend policy terms and conditions.
Use facultative reinsurance.
Underwriting Steps

Selecting an underwriting alternative.

The underwriter must decide whether to accept
the submission as offered, accept it with
modifications or reject it.
Rejection is sometimes unavoidable, however,
rejections produce neither premium nor
commission, only expenses.
Underwriting Steps

Determining the appropriate premium.

Underwriters must ensure that each loss exposure
is properly classified so that it is properly rated.
Missclassification can produce adverse result,
including insufficient premium to cover losses and
expense and inability to sell policies because
prices are higher than competitors.
Underwriting Steps

Implementing the underwriting decision.

Implementing underwriting decision generally
involves three steps;-
Contact the producer (and others involved) with
the decision, good or bad.
Put coverage into effect.
Record the policy and applicant information for
accounting, statistical and monitoring processes.
Underwriting Steps

Monitoring the loss exposures.

After an underwriting decision has been made on
a new business submission or a renewal, the
underwriter must monitor activity on the
individual policies to ensures that satisfactory
results are achieved.
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