The Underwriting and Rating Process

Adverse selection

Results when someone who has a high probability of loss seeks to buy insurance to a much greater degree than someone with a relatively low probability of loss.

Loss Costs

Also called "pure premium" loss costs reflect past claims (historical loss costs) and estimated future claims (prospective loss costs)

Expenses

Include commissions to its producers, employee salaries, office expenses, taxes, and other costs of doing business.

Class Rating

Most commonly used with high-volume insurance coverages, such as auto and homeowners insurance.

Earned Premium

Portion of a policy's premium that applies to the expired portion of the policy. The unearned potion of the premium that has been paid is kept in "unearned premium reserve."

Deposit Premium/ Provisional Premium

Premium paid at the beginning of the policy period based on an estimate of the extent of operations that will be insured during the policy period.

The property & casualty underwriting process generally involves all the following steps EXCEPT: a. monitoring underwriting results b. risk analysis by the producer c. making the underwriting decision d. agency underwriting.

d. agency underwriting.

Agency Underwriter

A specialized type of insurance agency whose agents or brokers have been granted underwriting authority by an insurer. It acts as an insurance agent for the insurer, while working as the intermediary between insurers, producers, and/or policyholders.

Bob wants to insure the building for its full value. An underwriter has determined that the fire insurance rate for Bob based on his building's risk profile is $10 per unity of exposure. What is Bob's premium?

$1000 ($10 x 100 exposure units)

With fire insurance, each $1000 of property value is a unit of exposure. Bob's building is valued at $100000. How many units does Bob's fire insurance represent?

100 exposure units

If an insurer has written premiums of $100 million and incurred expenses of $25 million what is the insurer's expense ratio for that period?

25%

An insurer has a 105% combined ratio. Is this a profit or a loss?

5% underwriting loss.

An insurer has a 95% combined ratio. Is this a profit or a loss?

5% underwriting profit.

If an insurer with earned premiums of $100 million has incurred losses of $70 million what is the insurer's loss ratio?

70 percent.

If an insurer has a 70 percent loss ratio and a 25 percent expense ratio- what is it's combined ratio?

95 %

Binder

A legal agreement issued by either an agent/an insurer to provide temporary evidence of insurance until a policy can be issued.

Loss Control Report

A report that describes what the applicant has done to reduce the possibility or severity of a major loss, and is usually included in every inspection report.

Motor Vehicle Record (MVR)

A report that provides details about an auto insurance applicant's driving history including violations of traffic laws as well as accidents and license suspensions or restrictions.

Inspection Report

A report that summarizes the condition, size, shape, and special features of the building to be insured.

3 Decisions of an Underwriter

Accept the application if it clearly meets all underwriting guidelines, reject the application if it clearly fails to qualify, accept the application with stipulations if it is a borderline risk.

Class rating

All insureds with similar characteristics are charged the same rates. They're based on the loss statistics of a large number of insureds that fall into the same rating class because they have approximately the same exposure to loss.

Combined ratio/Combined loss/Expense Ratio

An insurer's profitability is determined by this. It is the sum of its loss ratio and expense ratio.

Written Binder

Clearly identifies: the insurer with which the coverage is bound, the type of policy, the amount of insurance, the covered peril(S) and when it begins and ends.

Loss Ratio

Compares the insurer's incurred losses with its earned premiums over a certain period.

How is loss ratio calculated?

Dividing Incurred losses by earned premiums.

How is an insurer's expense ratio calculated?

Dividing incurred expenses by written premiums.

Barbara Pays a $720 premium for an auto policy that provides coverage for six months, which means about $4 of that premium is earned each day during the policy period. If the policy is cancelled after 100 days, how much is the earned premium and how much will the insurer have to refund of the unearned premium?

Earned premium is $400 and unearned to be returned to insured is $320.

Certificate of Insurance

Evidence that the party required to furnish the document does in fact have the required insurance.

True/False: Individuals/Companies with poor credit records are less likely to have insurance claims, exaggerate losses, and even have more accidents than those with good credit.

False: Individuals/companies with poor credit records are more likely.

Adverse selection

Homeowners who live in areas subject to flooding are much more interested in flood insurance then those who live outside a flood plain is an example of:

Expense Ratio

Important measure of an insurer's financial health which compares the insurer's incurred expenses with its written premium during a certain period.

Profits and Contingencies

If an insurer's actual results are as predicted or better, the insurer will earn a profit. If actual results are a worse than predicted during a given time period, the insurer may still break even on it's underwriting operations.

Ratio that is too low may indicate:

Insurer is charging too much premium for the coverage it is providing. `

Ratio that is too high may indicate:

Insurer is not charging enough premium.

Three ratios in evaluating the results of an insurance company's underwriting.

Loss ratio, expense ratio, and combined ratio.

Loss Reserve

Reflects an estimate of the amount that it will eventually pay in settling the claim.

Agency Underwriter

Reviews applications to determine if they applicant qualifies for coverage.

Insurance Premium

What the policyholder pays to the insurance company in exchange for receiving insurance coverage. Generally equals the insurance rate times the number of exposure units.

Insurance rate

The price of insurance for each unit of exposure.

Underwriting

The process by which an insurer reviews a completed application to determine whether the requested insurance will be issued and, if it is, at what premium.

Individual Rating

Used when every insured is unique and could not readily be placed into a class with other similar insureds. Also called specific rates, they are used with property insurance on complex commercial buildings.

Underwriter's key job.

Watch for adverse selection.

Underwriters of property/casualty insurance policies commonly use all the following sources of information when deciding to accept or reject a risk EXCEPT: a. genealogical records b. loss history data c. credit report d. motor vehicle record

a. genealogical records.

Loss costs, a key component of property and casualty insurance rates, reflect the insurer's: a. commissions payable to producers and underwriting expenses b. past claims and estimated future claims c. actual claims paid during the policy period d. expenses during the previous policy year

b. past claims and estimated future claims

Property & casualty insurance rates are based on all the following components EXCEPT: a. expenses b. loss cost data c. competitors rates d. margin for profits & contingencies.

c. competitors rates

Resources underwriters use to analyze risks:

completed application, agency report, loss history data, motor vehicle record (MVR), inspection report and photos (as required), loss control report, and credit information (if applicable).

Components of property and casualty inruance rates:

loss costs, expenses, a margin for profits and contingencies.