UNDERWRITING
Made by
Druvansh Dua-157213
Sushruti Shubham-157254
CONCEPT
– Insurance underwriters evaluate the risk and exposures of potential clients
– They first decide whether to accept the risk or not
– If the risk is to be accepted they decide how much coverage the client should
receive and how much they should pay for it
– It involves measuring risk exposure and determining the premium that needs to
be charged to insure that risk The function of the underwriter is to acquire or to
write business that will bring money to the insurance company and also protect
the company’s book of business, from risks that they reckon, will make a loss.
The underwriters may either
– Decline the risk
– May provide a quotation in which the premiums have been suitably
loaded or
– May provide a quotation in which various exclusions have been
stipulated which restrict the circumstances under which a claim
could become payable.
Features of Underwriting
– To determine the level of risk presented by the proposer
– To classify risk based upon the risk characteristics
– To ensure that the insurance business is conducted on sound lines
Purpose
– Underwriting purpose We begin with examining the purpose of
underwriting. There are two purposes
i. To prevent anti-selection or selection against the insurer
ii. To classify risks and ensure equity among risks
– The term selection of risks refers to the process of evaluating each
proposal for life insurance in terms of the degree of risk it
represents and then deciding whether or not to grant insurance
and on what terms.
– Anti-selection is the tendency of people, who suspect or know
that their chance of experiencing a loss is high, to seek out
insurance eagerly and to gain in the process.
– Equity among risks Let us now consider equity among risks. The
term “Equity” means that applicants who are exposed to similar
degrees of risk must be placed in the same premium class.
Classification of Risks
i. Standard lives -These consist of those whose anticipated mortality corresponds to the
standard lives.
ii. Preferred risks -These are the ones whose anticipated mortality is significantly lower
than standard lives and hence could be charged a lower premium.
iii. Substandard lives -These are the ones whose anticipated mortality is higher than the
average or standard lives, but are still considered to be insurable. They may be accepted for
insurance with higher (or extra) premiums or subjected to certain restrictions.
iv. Declined lives -These are the ones whose impairments and anticipated extra mortality
are so great that they could not be provided insurance coverage at an affordable cost.
Sometimes an individual's proposal may also be temporarily declined if he or she has been
exposed to a recent medical event, like an operation.
The underwriters maxim
– Achieves maximum profitability
– Does not lose quality business
– Deals appropriately with poor quality business
– Obtain new quality business
– Develop new products /product extensions
– Obtain information/ feedback from the customers, intermediaries
and the market in general
– Identify target segments which will contribute to building a
profitable, quality portfolio
– Maintain robust risk inspection/survey programmes for the
existing portfolio
a. Ensuring that portfolio quality is maintained and policy terms are
related to the quality of risk
b. Providing risk improvement advice to customers where applicable
Develop streamlined systems at the minimum expense to achieve the
maximum degree of account control and service to the customers.
Maintain tight control of expenses to ensure that optimum
competitiveness and profitability are achieved.
Step 2
Step 1
Classification
Selection of risks
and rating
Step 4
Step 3
Retention and
Policy forms
reinsurance
Selection of Risks
– Decides whether to accept or not accept a particular receipt.it
involves
– Securing factual information from the proposer via the proposal
form
– Deciding on a course of action
– It also involves examining material disclosures in the proposal
forms and the supporting documents such as the inspection
reports , valuation reports appraisals or bills that certify the value
of the property , or the medical reports that verify the health
condition of the individual.
Classification of the risks and
rating
– Purpose is to separate risks into homogenous groups to which the rates has been
assigned
– Rating is the process of calculating a price to cover up the future cost of insurance claims
and expenses which includes a margin of profit.
Rating is determined by
– Past trends and changes in the current environment
– Utilise the skills and expertise by the actuaries, who use the data collected by the insurers
– Use experts such as engineers and surveyors to make site inspection reports and then
evaluate the risks
– After a thorough examination then the final rates are decided.
Policy forms
– After accepting the risk and assigning a proper classification the
underwriter issues an insurance policy
– The underwriter must be familiar with the different types of
policies as should be able to modify the form with additional
necessary warranties, clauses and special conditions which may be
needed to fit the underwriting requirements and so that the policy
is issued correctly.
Retention and Reinsurance
– Reinsurance ensures that no one insurer is overburdened while
offering the covers to the policyholders
– Catastrophic large losses or a series of losses and unexpected
liabilities can create risks and affect the profitability of the insurer
and thus a decision needs to be taken while underwriting on the
amount that will be retained in the insurer’s books and on the
method of appropriate reinsurance for the balance
Why it is essential ??
– Therefore reinsurance becomes an essential part of the
underwriting as it will help the insurer to
– Expand the underwriting capacity
– Maintain the earnings stability
– Reduce the requirements of creating the large reserves
Types of underwriters
Property and causality underwriters
– Fire underwriters
– Marine underwriters
– Motor underwriters
– Miscellaneous underwriters
Personal line and commercial lines underwriters
– Life and health underwriters
– Group underwriters
– Liability underwriters
Importance of Underwriting
For Insurers
– Risk reduction
– Risk improvement
– Risk transfer
For Insured
Helps them to appreciate the magnitude of risk that is being proposed to be
covered and the suggestions given to reduce the risk , which if implemented will
improve the insurability and reduce various hazards.
Agents and brokers
– Help to match the needs of the consumers with the standards set up by the insurers
– Appreciate the philosophy of the insurer
– Improve the loss profile
– Give customer satisfaction
– Help in business growth
Society
Paves the way for sustained and organised growth of risk taking in the country which will contribute
to the growth of the economy.
