Learning Objectives :
Understand
1. Underwriting basics
2. The objectives & principles of underwriting
3. . Underwriting Life & non-life insurance business
Structure :
3.1 Underwriting basics
3.2 The objectives & principles of underwriting
2.3 Underwriting in Life insurance
3.4 Underwriting in non-life insurance
3.5 Key Terms
2.5 Activity
2.6 Summary
2.7 Suggested Readings / Web resources
1. Underwriting basics
History of underwriting –
Underwriting began in the UK when the
sailors wrote down details of the voyage and
the cargo on a slip & carried it the Lloyds
where the person read the risk & agreed to
cover them by writing below the risks. Thus
the insurer was known as ‘underwriter’.
The genesis of the insurance business also
evolved from the UK and the first insurers
were the Lloyd’s industries.
1. Underwriting basics
Underwriting defined –
Underwriting is the process of selecting &
classifying exposures and is directly
related to the pricing function of the
insurer.
The underwriter is responsible for
evaluation and acceptance /
rejection of risks
computation of premium.
If the risks are evaluated correctly,
pricing becomes effective & generates
business that lends financial stability to
the insurer.
1. Underwriting basics
Trade off –
Underwriting is the trade off between
business & survival.
If it sets high standards for risk
cover, it loses premium income that can cost
survival.
If premium charged is high, it can lose
to competition.
On the other hand loose standards for risk &
low premiums can attract business, but
result in failure of income to match the
large amount of claims!
1. Underwriting basics
The conflict –
The conflict between production &
underwriting is common in underwriting
similar to between sales and credit control
in other business.
If underwriting is too strict it harms
potential premium income and if it is loose,
income cannot match resultant quantum of
claims.
1. Underwriting basics
Two guiding principles –
‘Adverse selection’ and ‘Persistency’
are principles guiding prudent underwriting.
Underwriter has to guard against
adverse selection of risks, as there is a
tendency among those likely to be affected
by the happening of the event to go for
insurance.
Underwriter has to offer products that
consumers can afford and policies need to be
continuously renewed to assure continuous
income to the insurer.
2. The objectives & principles of underwriting
a] Product equitable to customer – insurer
to fully assess the risk and charge premium
accordingly.
b] Deliverable to the customer – it is
insurer’s job to offer products that
consumer accepts. If a product is a flop ,
the onus lies with insurer.
c] Financially feasible to the insurance
company – though underwriters do not
determine price, their contribution is as
vital as that of actuaries, as they put the
business of risk to work.
3. Underwriting in Life Insurance
Life insurance is mainly concerned with
mortality. Any impairment in personal
health, medical history, habits, family
history, occupation etc affect mortality
adversely.
Detailed data is collected on these
parameters and the insured is categorized
into Preferred, Standard or Sub-standard
class denoting higher degree of risk.
3. Underwriting in Life Insurance
The underwriting process
The process involves:
performing field underwriting
reviewing the application in the office
gathering additional information, if
required &
taking an underwriting decision.
3. Underwriting in Life Insurance
The underwriting process
Receiving proposals / applications.
The insured or the agent submit proposal
with required general & medical information.
The medical report
Is a formal examination in most cases. If
any deficiencies are noticed in this common
check up additional examinations are
requested.
3. Underwriting in Life Insurance
The underwriting process
Underwriting review.
Here the risk is evaluated by the
underwriter and appropriate rate of premium
offered. If the risk is unacceptable, a
person with cancer or HIV, the proposal may
get rejected.
Policy writing
Since life policies run for a long period,
or literally for the life of the insured,
thorough contracts are built into policies.
Generally automated systems are used.
3. Underwriting in Non-Life Insurance
is more complex than life insurance as
insurance ranges from small shops &
work shops to large MNCs,
variety & size of risks is wide,
operations cover many countries.
but principles remain recognizable.
The essence of the task is
evaluation the hazard associated with the
proposed risk .
3. Underwriting in Non-Life Insurance
evaluation of risk – contd.
For smaller proposals data in the proposal
form, plus a site visit can be adequate.
For larger proposals, we need
a] application containing the insurers
statements tailor made for each line of
insurance.
b] information from broker or agent
specially appointed for this purpose
c] review of history & past experience
of claims raised
d] inspections & surveys by experts.
3. Underwriting in Non-Life Insurance
Underwriting practices
Underwriting is normally completed by ‘ new
business department’ of the company. It uses
the policy & guidelines issued by the HQ.
They include -
• Acceptance of normal risks irrespective of
sums involved.
• Acceptance of normal risks up to a certain
sum of money.
• Acceptance of normal classes of business
but with prior approval of controlling
office.
3. Underwriting in Non-Life Insurance
Underwriting practices
• Acceptance of risks with prior approval as
above.
• Acceptance of risks subject to
underwriting safeguards.
• Procedural matters.
The risks in fire, marine and motor
insurance have generally high levels of
acceptance. While in case of jewellery,
baggage, personal accident the limits are
low. Higher limits are accepted after
approval of HQ
3. Underwriting in Non-Life Insurance
Underwriting practices – contd.
In case of buildings insurance break up of
values into parts of building, plant &
machinery, inventory, furniture etc is
required.
Insures can exclude damages from storm,
earthquake etc from cover.
Rates indicated by Tariff Advisory Committee
are minimum, firms are free to charge higher
premiums.
In case of comprehensive motor insurance
cover is subject to specified year of
manufacture.
There are many more such guidelines for
underwriting.
Key Terms
Adverse Selection.
Persistency.
Underwriting Philosophy.
Claims Experience.
Comprehensive Risks.
Activity
Visit insurance agent and obtain a copy
of recent life & non-life proposal
submitted to the insurance company by
him. Study them.
Next, visit the insurance company and
meet concerned managers to ascertain
how the underwriting decision was
arrived by them.
To summarize
Underwriting is the insurance function that
is responsible for assessing & classifying
the degree of risk a proposed insured or
group represents and making a decision
concerning coverage of that risk. The
underwriting is a trade off between the
business & survival. If the insurance
company sets high standards for risk, which
can be undertaken, the company may lose the
market and consequently , the potential
premium income, which can be threat to
survival.
To summarize – contd.
The conflict between production and
underwriting are common to insurance
companies. The two main principles of
underwriting are Adverse selection and
persistency.
The underwriter must always guard himself
against the adverse selection of risks. The
underwriting concerns for any insurer are –
product equitable to Customer, Deliverable
to the Customer, Financially feasible to the
Insurance Company.
To summarize – contd.
The underwriting process for life assurance
involves[1] performing field underwriting,
[2] reviewing the application in the office,
[3] gathering additional information, if
required and [4] taking and underwriting
decision.
In non life insurance underwriting practice
differs across products. The important
concerns are insurable interest, premium
loading, risk classification etc.
Suggested Readings
Practice of General Insurance – by Insurance
Institute of India, Mumbai 1999.
Genes Store, Insurer Company, Operations,
LOMA, 2000.
Essentials of Risk Management & Insurance –
by Vaughan & Vaughan - 2002
Web Resources
[Link]
[Link]
[Link]
The end !
Next Chapter Four
‘Claims Management”
Good luck!