develop and maintain a profitable

Main Purpose of underwriting

book of business for the insurer

guard against adverse selection

ensure adequate policyholder's
Other purposes of Underwriting
surplus
enforce underwriting guidelines

carefully selecting applicants

Guarding against Adverse charging appropriate premiums
Selection looking for unusual patterns of
growth/loss

must have adequate policyholders'

surplus if it wishes to increase it written
Ensuring Adequate premium volume - limited by regulatory
Policyholder's Surplus guidelines and insurers' own constraint
make sure loss exposures are correctly
identified

responsible for implementing

Line Underwriters
steps in underwriting process
 assists management in forming
Staff Underwriters underwriting policy (usually in
HO)

Select Insureds - must meet the criteria established in

underwriting guidelines
Classify and price accounts - grouping accounts
with similar attributes
Line Underwriting Activities Recommend or provide coverage - inquiring about
the insured's risk management program
Managing a book of business
Support producers and customers
coordinating with marketing efforts

researching the market

formulating underwriting policy
revising underwriting guidelines
evaluating loss experiences
researching and developing coverage forms
Staff Underwriting Activities reviewing and revising pricing plans
arranging treaty reinsurance
assisting others with complex accounts
conducting underwriting audits
participating in industry associations
conducting education and training

financial capacity
regulation
Underwriting Policy Constraints
Personnel
reinsurance

is the relationship between premiums written

and surplus (surplus is an insurer's net worth)
NAIC has developed financial ratio used to
Financial Capacity identify insurers that should receive
additional solvency surveillance - premium-
to-surplus ratio (too high above 300) and
return on equity
 insurers must be licensed in each state in which they
write insurance
rate/forms must be field with state regulators
Ways Regulation affects some states specifically require underwriting
guidelines to be filed
Underwriting Policy regulators perform market conduct exams
focus on insurance availability can lead to
requirements to extend coverage
regulation is not applied uniformly across states

used to communicate underwriting

policy to underwriters
continually updated to reflect policy
Underwriting Guidelines changes
consider trade secrets because they
specify attributes of accounts that the
insurers are willing to insure

provide for structured decisions - provide major considerations

underwriters should evaluate for each type of insurance
Ensure Uniformity and consistency - include acceptable approaches to
evaluating applicants and desirability of a type of risk
Synthesize insights and experience

Purpose of Guidelines
Distinguish between routine and non-routine decisions
avoid duplication of efforts - past solutions should apply to all similar
situations that might arise in the future
Ensure adherence to reinsurance treaties and planned rate levels - staff
underwriters reflect treaty limitations in the guidelines
Support policy preparation and compliance
provide a basis for predictive models

achieve consistency in the application of

underwriting standards
Provide line underwriters with strategies to
Purpose of Underwriting Audits improve future underwriting decisions
Monitor statistics for books of business
provide staff underwriter with information on
effectiveness of underwriting guidelines

Evaluate the submission

Develop underwriting alternatives
Steps in the Underwriting select an underwriting alternative
Process determine appropriate premium
implement the decision
monitor the decision
 submission's loss exposures and
associated hazards
weight the need for information against
Steps in the Underwriting
the cost of obtaining it
Process: Evaluate the Submission gather the necessary information from
various sources paying close attention
to a submissions hazards

Physical
Moral - intentional cause or
exaggerated loss
Types of Hazards
Morale - carelessness of indifference
Legal - condition of legal
environment

accept submission as is, reject or

Develop Underwriting
accept the submission with
Alternatives
modifications

require risk control measures

change insurance rates, limits or
rating plan
Modifications
amend policy terms and
conditions
use facultative reinsurance

Underwriting authority
supporting business
Selecting Underwriting
mix of business
Alternative
producer relationships
regulatory restrictions
 must ensure each loss exposure is
properly classified so it is properly rated
Determining Appropriate
accurate classification ensures a pooling
Premium of loss exposures whose expected loss
frequency and severity are similar

Communicating decision - to
producer
issue documents - may issue a
Implement the Decision
binder and possibly a certificate
of insurance
record information

individual policies must be monitored

for substantial changes and unique
losses
Monitor Underwriting Decision books of business must be monitored to
evaluate quality and profitability (poor
loss ratio in a particular class of business
can indicate inadequate pricing)

financial and nonfinancial

financial measures not always
reliable in short term
Measuring Underwriting Results
nonfinancial measures can be used
to evaluate actions of underwriters
and underwriting departments

combined ratio - sum of loss ratio and

expense ratio - over 100% = a loss
Financial Measures changes in premium volume, major
catastrophic losses and delay in loss
reporting can distort the combined ratio
 selection
product line or business mix
pricing
accommodated accounts
Nonfinancial Measure Retention ratio
hit ratio
service to produces
premium to underwriter

insurers often establish selection

goals for underwriters to ensure
Nonfinancial Measure: Selection
the quality of the book of
business does not deteriorate

building a proper mix requires

Nonfinancial Measure: product
underwriters have aknowledge of
or line of business mix
insurer's business goals

pricing standards enable insurers

Nonfinancial Measure: Pricing to determine levels of premium
adequacy

accepting substandard
Nonfinancial Measure:
exposures in returns for more
Accommodated accounts
profitable accounts
 percentage of expiring policies an
insurer renews, measured by policy
Nonfinancial Measure: Retention count, premium volume or both - low
Ratio retention rate might indicate poor
service to producers, noncompetitive
pricing or unfavorable claim service

ratio of policies written to those that have been

quoted to applicants. High hit ratio might indicate:
Competition is easing
rates are inadequate
Nonfinancial Measure: Hit Ratio coverage is broad than other insurers
the underwriter has the skill set of production
underwriting
selection criteria are deteriorating

requires establishing a set of

Nonfinancial Measure: Service to minimum acceptable standards
Producers for certain types of service to
producers

management uses this measures

Nonfinancial Measure:Premium to
to determine if underwriters are
Underwriter
assuming their share of work