AINS 21 section B-2
Line underwriters evaluate new submissions and perform renewal underwriting, usually by working directly with producers and applicants Staff underwriters manage risk selection by working with line underwriters and coordinating decisions about precuts, pricing, and guidelines.
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Certificate of Insurance
A brief description of insurance coverage prepared by an insurer or its agent and commonly used by policyholders to provide evidence of insurance.
Hazard
A condition that increases the frequency or severity of a loss. 4 Categories: 1.)Physical 2.)Morale 3.) Moral 4.) Legal -Underwriters must understand the activities, operations, and character of every applicant To evaluate a submission, underwriters 1.) Weigh the need for information 2.) Gather necessary information
Predictive Modeling
A process in which historical data based on behaviors and events are blended with multiple variables and used to construct models of anticipated future outcomes.
Contingencies
A provision in an insurance rate losses that could not be anticipated in the loss data.
Machine Learning
AI in which computers continually teach themselves to make better decisions based on previous results and new data. -Can be applied to reveal relationships and trends not found through traditional ratemaking analysis which uses detailed models to model the data relationship.
Rating
Activity performed by underwriter. Pricing -> Determining the policy premium
Policyholder Surplus (PHS)
An insurers net worth (assets - liabilities)
Monitor Book of Business
Evaluating the quality and profibaiblity of all the business written for any group of policies. The evalution should ID specific problems for each type of insurance which can be subdivided (producer, line of business, territory, etc.) Additionally want to confirm that the premium volume covers fixed costs and overhead expenses for each book of business. Reviewing Books of Business can help determine: -Compliance with underwriting policy and detect changes in the type, volume, quality of the policies that ,ay require corrective action. Special attention is given to some boos of business when they are defined by these characteristics: -Class of business -Territories or geographic areas -Producers
Financial Rating Services
Financial Status provides info -Experian -Dun and Broadstreet -Standart and Poors -Provide credit rating.
Adverse Selection
In general, the tendency for people with the greatest probability of loss to be the ones most likely to purchase insurance.
Inspection Reports
Independent inspections or risk control reports provide underwriting information about: -The property physical condition -The business safety record -Policyholder management
Insurance Rating System
Insurance advisory organizations help develop rating systems by collecting: -Reliable loss data that insurers use in establishing their rates and premiums. -Insurance advisory organizations collect loss information from many insurers involving specific types of categories losses. -Insurance rating systems combined loss data from many insurers (approach based on law of large numbers) which makes the resulting loss data more reliable than an individual insurers data. Insurance advisory organizations than analyze the loss data to determine the average loss costs per exposure unit used in class rating.
Prospective Loss Costs
Loss data that are modified by loss development, trending, and credibility processes, but without considerations for profit and expenses.
Prospective loss costs
Loss data that are modified by loss development, trending, and credibility processes, but without considerations for profit and expenses. -Amount the insurer can expect to pay for future claims for each exposure unit.
Facultative Reinsurance
Reinsurance of individual loss exposures in which the primary insurer chooses which loss exposures to submit to the reinsurer, and the reinsurer can accept or reject any loss exposures submitted. -Not automatic and involves a separate transaction for each reinsured policy. The reinsurer evaluates each policy it is asked to reinsure. -Individually negotiated.
Develop Underwriting Alternatives
Second step in the underwriting process 4 major ways an underwriter can modify a submission through a counteroffer: 1.) Require implementation of additional risk control measures 2.)Change rates, plans, or policy limits 3.) Amend policy terms and conditions 4.) Use facultative reinsurance
Loss Development
The increase or decrease of incurred losses over time.
Underwriting authority
The scope of decisions that an underwriter can make without receiving approval from someone at a higher level. Usually reflect experience, knowledge, responsibilities, and types of insurance handled. Centralized= Strict, home office makes final decisions Decentralized = Autonomy is granted with extensive authority granted to field underwriters. Many insurers have a balance of both.
Exposure unit (unit of exposure)
The unit of measure (for example, area, gross receipts, payroll) used to determine an insurance policy premium. -Insurers typically use standardized exposure inits for rating most types of insurance (Ex. In homeowners, its are typically expressed as $1,000 of insured value. $400k house = 400 units) -Fundamental measure of loss exposure used in insurance rating.
Gather new information
Underwriters compile information from many sources to develop a profile of submission and pay close attention to a submissions hazards to determine whether those hazards are typical of similarly classified accounts. The principal sources of underwriting information: 1.) Producers 2. Applications 3.) Inspection reports 4.) Government records 5.) Financial rating services 6.) Loss data 7.) Claims files
Remember, insurers calculate premium by determining the insureds rate from a rate manual and multiplying the rate by the number of exposure units. Exposure units are based on the type of coverage and for commercial insured, the type of business. ->
Various factors can either increase or decrease the standard rate for a particular insured.
Purpose of Reinsurance include:
1.) Stabilizing insurers loss experience 2.) Provide protection v. CAT losses 3.) Allow insurer to provide a large amount of coverage under one policy 4.) Provide the insurer with additional UW information and expertise Treaty v. Facultative
Retrospective Rating Plan
A rating plan that adjusts the insureds premium for the current policy period based on the insured loss experience during the current period; paid losses or incurred losses may be used to determine loss experience.
Individual rate, or specific rate
A type of insurance rate that reflects the unique characteristics of an insured or the insured's property. -used when an insured cannot be assigned to a class. (Ex. Fire insurance for a large unique factory building) -Underwriter inspects building using point system that adds or subtracts points. -The number if points determines an insurance rate for that particular building. The ate is applied per $100 of insurance to determine the premium for fire insurance. -Judgement rating is also a type of individual rating.
Underwriting Guidelines
A written manual that communicates an insurer's underwriting policy and that specifies the attributes of an account that an insurer is willing to insure.
Final Rate
The price per exposure unit determined by adjusting the prospective loss costs for expenses, profits, and contingencies. Final Rate x the number of exposure units = Final insurance premium
Rate
The price per exposure unit for insurance coverage. "Unit Price" for insurance. -Typically, an insurer has a separate rate in its rate manual for each of the rating classifications it uses. -Rating classifications are based on characteristics of the insured and the loss exposures being insured.
Law of Large Numbers
A mathematical principle stating that as the number of similar, but independent exposure units increase, the relative accuracy of predictions about the future outcomes (losses) also increases. Ex.) Insurance advisory organizations gather loss data from many insurers to produce reliable data.
Insurance advisory organization
An independent corporation that works with and on behalf of insurers that purchase or subscribe to their services, which include developing prospective loss costs and standard policy forms. Work with insurers to develop insurance rating systems Ex.) ISO: Provides analytical and decision support products/services to Property and Casualty insurers.
Trending
A statistical technique for analyzing environmental changes and projecting such changes into the future.
Catastrophe Model
A type of computer program that estimates losses from future potential catastrophic events.
Staff Underwriter
-Underwriter who assists underwriting management with making and implementing underwriting policy -Work with line underwriters and coordinate decisions about products, pricing, and guidelines. -Work closely with management to perform activities essential to profitable risk selection such as: 1.)Perform market research: Adding or deleting entire lines of business, expanding into/leaving certain states, determining optimal mix for Book of Business, examine goals. 2.) Formulating underwriting policy: Formulate underwriting policy 3.) Revising underwriting guidelines to reflect changes in underwriting policy: Guidelines for specific accounts or specific hazards to consider 4.) Evaluating loss experience: Research loss data to determine specific source of loss. Research loss experience which reveal trends. 5.)Research a d develop coverage forms: Work with actuarial and legal department to meet consumer needs and competitive pressures. Modify forms so coverage will respond as anticipated. 6.) Reviewing and Revising Pricing Plans: To develop prospective loss cost 7.) Assisting others with complex accounts: Serve as consultants to other underwriters as they have line underwriting experience. Typically work complex accounts. 8..) Conducting underwriting audits
Remember, insurance rates, the basic price of insurance for each unit of exposure, are developed through insurance rating systems established by insurers and independent insurance advisory organizations. Typically, insurance rating systems are based on insurers 'Loss Costs'. Insurance advisory organizations develop loss cost information by using either class or individual rating methodologies to analyze and categorize insureds. In determining the final rate for a particular loss exposure, an insurer adds an allowance for expenses and profits to the basic rate that has been developed from lost costs. The insurers UW department then determines the final premium by multiplying the final rate by the number of exposure units.
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Remember, insurers and independent devilry organizations develop rates through insurance rating systems. Insurance advisory organizations gather historical loss costs from insurers to develop prospective loss costs. Insurers are grouped with others who have similar characteristics in a rating class to capture potential loss frequency and severity of the group. When an insured cannot be grouped, they are individually rated. Insurers add their alliance for their expenses, profits, and contingencies to the basic rate to arrive at the final rate they charge insured for a particular loss exposure. After the rate has been calculated, it is multiplied by the number of exposure units to determine the final insurance premium.
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Remember, modifying a policy to exclude certain causes of loss, add or increase a deductible, or make any other change could ensure its acceptability. Also, an insurer may be able to transfer a portion of an otherwise acceptable liability to a facultative reinsurer. An alternative to facultative reinsurance is agency reinsurance, which is when the insurance is divided among several insurers.
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Remember, the underwriter relies on the producer more than any source because they have personal contact with the applicant, their business operations, reputation, and has determined their coverage needs.
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Underwriters use many tools to help evaluate, select, and price submissions 1.) Telematics 2.) Predictive analytics 3.) Predictive modeling 4.) CAT modeling
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Insurers underwriting activities include
1.) Line underwriting 2.) Staff underwriting These activities enable the insurers to avoid adverse selection, maintain adequate policy holder surplus and enforce underwriting guidelines, all of which contribute to the primary underwriting goal of sustaining profitable growth.
Steps in the Underwriting Process
1. Evaluate the submission 2. Develop underwriting alternatives 3. Select an underwriting alternative 4. Determine an appropriate premium 5. Implement the underwriting decision 6. Monitor the underwriting decision
Rate Development Process
1.) Insurance advisory organization or insurer gather historical loss costs 2.) Insurer advisory organization or insurer establishes prospective loss costs 3.)Insurer enters loss cost information into rating system 4.)Insurers adjust for expenses, profits, and contingencies 5.)Insurer determines final rate 6.)Insurer multiplies final rate by the number of exposure units = final premium
To meet its goals, an insurer must adjust its underwriting rules and standard to respond to shifting market conditions, which is implemented by underwriting management. Underwriting management entails various activities:
1.) Participating in the overall management of the insurer: In making broad business decisions that will contribute to goals. UW goals must support overall company goals. 2.) Arranging reinsurance (Facultative v. Treaty) 3.) Delegating UW authority 4.) Developing and implementing UW guidelines: That reflect the insurers's overall UW objectives. 5.) Monitoring UW results: To determine whether the UW guidelines had the desired effect.
The underwriting process incorporates these underlying concepts
1.) The purpose of underwriting is to develop and maintain a profitable Book of Business 2.) Underwriting includes line underwriting activities and staff underwriting activities 3.) Levels of underwriting authority are based on knowledge and experience 4.) underwriting policy should support an insurers mission
Selecting an underwriting alternative (to make a submission acceptable)
3rd step in the underwriting process Includes: weighing submissions, positive/negative features. -Loss exposures contemplated in the rate, risk control measures, and management commitment to loss prevention. Additional factors to consider: -UW authority -Supporting businesses -Mix of business -Producer/UW relationship: Should be baed on mutually shared goals -Regulatory restrictions: Federal and State
Determine an appropriate premium
4th step on the underwriting process Must ensure that each loss exposure is properly classified so that it is properly rated. -For most personal insurance and some commercial, proper classification automatically determines the premium -For some types, the underwriter may have the option of adjusting the premium based on the accounts loss exposures.
Implementing the underwriting decision
5th step of the underwriting process Generally involves 3 tasks: 1.) Communicate the decision 2.) Issue documents: Certificate of insurance 3.) Record information: Issuance, accounting, statistical, and monitoring purposes.
Monitoring the underwriting process
6th Step of the underwing process: After decision has been made on new submission or renewal the underwriter must perform 2 tasks to ensure that satisfactory results are achieved. 1.) Monitor activity for individual policies 2.) Monitor books of business
Underwriting policy (underwriting philosophy)
A guide to individual and aggregate policy selection that supports an insurer's mission statement. Often developed within the context of the market they serve and it translates goals and missions into specific strategies that determine Book of business. Underwriting goals based on type of business, class, territory, forms, etc.
Actuary
A person who uses mathematical methods to analyze loss data for various purposes such as developing insurance rates or set claim reserves.
Class Rating
A rating approach that uses rates reflecting the average probability os loss for businesses within large groups of similar risks; the predetermined method used for rating commercial properties. -All members of a class are changed the same rate, although premium will be different based on the number of exposure units. -Grouping enables insurers to take advantage of policy. Class should be big enough to reflect the law of large numbers but small enough that all members should share characteristics related to frequency and severity of loss.
Experience Rating
A rating plan that adjusts the premium for the current policy period to recognize the loss experience of the insured organization during past policy periods.
Schedule Rating
A rating plan that awards debits and credits based on specific categories, such as the care and condition of the premises or the training and selection of employees, to modify the final premium to reflect factors that the class rate does not include.
Treaty Reinsurance
A reinsurance agreement that covers an entire class or portfolio of loss exposures and provides that the primary insurer's individual loss exposures that fall within the treaty are automatically reinsured. Policies are not selected individually Because the treaty is based on all eligible insurance written by the primary insurer, the reinsurer is more concerned with the group of insureds as a whole than with the individual accounts that compose the group.
Loss run
A report detailing an insured's history of claims that have occurred over a specific period, valued as of a specific date. (Loss data) Remember, the loss experience of a commercial policy holder might be extensive enough to be statistically significant on its own.
Rate manual
A resource for classifying accounts and developing premiums for given types of insurance; includes necessary rules, factors, and guidelines to apply those rates.
Underwriting audit
A review of underwriting files to ensure that individual underwriters are adhering to underwriting guidelines. -Conducted by staff underwriters Focus on: -Proper documentation -Adherence to producers, classification, and rating practices, and conformity of selection decisions to underwriting guidelines. -Also monitor statistical results on location, line, and size of exposure, class of business. (Data shows extent to which goals are met but not if guidelines helped).
Underwriting audit
A review of underwriting files to ensure that individual underwriters are adhering to underwriting guidelines. Constant monitoring of the underwriting results enables underwriting management to adjust underwriting guidelines to accommodate changing conditions, goals, and results. Monitor UW results.
Underwriter
An insurer employee who evaluates applicants for insurance, selects those that are acceptable to the insurer, prices coverage, and determines policy terms and conditions. -Evaluate renewal policies and certain policy changes such as request to add a new location to a property -Applications, renewals, and policy changes to which the underwriting process is applied are generally referred to as underwriting submissions. -Underwriting decision making is automated by underwriting systems.
Loss Exposure
Any condition or situation that presents a possibility of loss, whether or not an actual loss occurs.
Remember, a rate increase compensates the insurer for potential increase in loss severity or frequency, while a decrease might prevent a desirable applicant from buying coverage from a competitor.
Changing the following may name a submission more acceptable: -Policy Limits -Experience Rating -Schedule rating -Retrospective rating plan
Remember, other factors can affect policy premium. Manual or class rates usually serve was a standard for a type of insurance (Homeowners or commercial auto) and are intended to represent the average risk in a class. However, there are many variations from the average. Underwriters vary from the manual to reflect the reality of actual exposures to loss, the specific characteristics of those exposures, and competitive market influences. -Underwriters can use experience or schedule rating to reflect the differences between the applicant and the average risk. -Underwriters apply experience rating or scheduled rating credit to better than average risks and experience or scheduled debits to wore than average risks. -->
Example) Underwriter may apply 10% premium reduction to a better than average risk and a 5% increase to a worse than average risk. Other factors that affect final premium: -Minimum premium -Increased limit factors for liability -Additional coverage charges for certain coverage options -Good student discount -Fire protection systems
Application
Insurance applications provide general information to process, rate, and underwrite the applicants loss exposure.
Judgement Rating
Rating used by underwriters to rate one-of-a-kind risks. Used when there is no established premium determine systems. -"UW judgement" -Underwriter usually has experience covering comparable exposures and a resulting sense of what premium should be applied.
Government Records
Some provide underwriting information: -Motor vehicle report -Criminal court record -Civil court records (suits filed, mortgages, liens, business license, property tax records, US SEC fillings, bankruptcy filings)
Predictive Analysis
Statistical and analytical techniques used to develop models that predict future events or behaviors.
Information Efficiency
The balance that underwriters must maintain between the hazards presented by the account and the information needed to underwrite it. -Underwriters apply this to weigh the need for information against the cost to obtain it -Small premium= Maybe little research needed. Info may also be categorized as: essential, desirable, or available, when determining whether it should be obtained.
Loss Costs
The portion of the rate that covers projected claim payments and loss adjusting expenses. Typically, insurance rating systems are primarily based on insurers lost costs. Portion of rate that covers 'projected' claim payments and LAE's
Ratemaking
The process insurers use to calculate insurance rates, which are a premium component. -Use internal and external data -Analysis performed by actuaries -Outcomes improved by: Predictive modeling and machine learning applications. Improved by predictive modeling and machine learning applications.
Developing and enforcing guidelines
UW management develops the guidelines the underwriter uses in the UW process. These guidelines help underwriters make consistent decisions that enable the insurer to meet its additional UW goals. Based on guidelines, UW's evaluate applications they receive, decide how to handle the application, and act on those decisions. UW management extends beyond the development of UW guidelines. This may require additional training and if there are changes in the guidelines, they must be communicated clearly.
Monitor individual policies
Underwriter must be alert to changes in insureds loss exposures. -Changes in narrative of insureds business could significantly increase/decrease loss exposures. Existing policies are monitored in response to any these triggering events: 1.) Substrative policy change: Adding new property or driver 2.) Significant and unique losses Losses provide the underwriter with an opportunity to review the account to determine whether the loss is the type the underwriter expected 3.)Preparing for renewal: Underwriter must determine if any changes have occurred and if so, repeats the underwriting process 4.)Risk control and safety inspections: A risk control/safety inspection might have contained recommendations that were required for policy issuance. A follow up investigation could determine whether they were met. 5.) Premium Audit: Usually lag behind a policy renewal for several months. The audit report could disclose larger loss exposures than originally contemplated, unacceptable operations, new products, new operations, or financial problems.
Line Underwriter
Underwriter who is primarily responsible for implementing the steps in the underwriting process. -Evaluate new submissions and perform renewal underwriting usually by working directly with insurance producer and applicants. -Make decisions according to underrating guidelines outlined by staff underwriters Activities include: 1.) Selecting insureds: Often by evaluating customer generated data (predictive analysis, generated linear models, credit sourcing models) Also monitor realtime data though IoT devices. 2.) Classifying and Pricing accounts: Grouping similar accounts so they can be priced competitively while still making a profit and adequate policy holder surplus. Often driven by data driven decision making. 3.) Recommending and providing coverage: Line underwriters make sure accounts are adequately protected through non insurance techniques such as risk control or risk retention so that coverage gaps can be addressed. Also provide requested coverage. Also explain the types of losses covered and the endorsements that can be added to provide coverage not available in the standard policy. 4.) Managing a book of business: Work to ensure that each book of business achieves established goals (product mix, loss ratios, and written premium) 5.) Supporting producers and customers: Line underwriters have a vested interest in ensuring that produces and insured needs are met. Line underwriters usually work directly with producers to prepare policy quotes. 6.) Coordinating with marketing efforts: An insurers marketing efforts and underwriting should be compatible.
Front-line underwriters
Underwriting authority granted to agents who represent them. Make initial underwriting decisions about applications and then forward those applications that meet underwriting guidelines to the company underwritier. Agents usually have the authority to accept applications and bind coverage for the insurer if the applicant clearly meets the guidelines and if the limit of insurance is within a predetermined amount. Authority for agents is based on loss experience with insurer and premium volume.
Underwriting authority
the scope of decisions that an underwriter can make without receiving approval from someone at a higher level. Staff underwriters conducts underwriting audits ton line underwrites to ensure adherence to underwriting guidelines.
