Chapter 5 The Underwriting Process

On What are Insurance Loss Costs Typically Based

An elaborate classification system in which similar loss exposures are combined into the same rating classification

Physical Hazard

A tangible characteristic of property, persons, or operations that tends to increase the frequency or severity of loss.

Binder

A temporary written or oral agreement to provide insurance coverage until a formal written policy is issued.

Catastrophe Model

A type of computer program that estimates losses from future potential catastrophic events.

Hazard

A condition that increases the frequency or severity of a loss.

Steps in the Underwriting Process

1) Evaluate the submission 2) Develop the underwriting alternatives 3) Select an underwriting alternative 4) Determine an appropriate premium 5) Implement the underwriting decision 6) Monitor the underwriting decision

Majors Ways an Underwriter Can Modify a Submission

1) Require risk control measures 2) Change insruance rates, rating plans, or policy limits 3) Amend policy terms and conditions 4) Use faculative reinsurance

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.

Morale Hazard (Attitudinal Hazard)

A condition of carelessness or indifference that increases the frequency or severity of loss.

Legal Hazard

A condition of the legal environment that increases loss frequency or severity.

Moral Hazard

A condition that increases the likelihood that a person will intentionally cause or exaggerate a loss.

Predictive Modeling

A process in which historical data absed on behaviors and events is blended with multiple variables and used to contruct models of anticipated future outcomes.

Counteroffer

A proposal an oferree makes to an offeror that varies in some material way from the original offer, resulting in rejection of the original offer and constituting a new offer.

Retrospective Rating

A ratemaking technique that adjusts the insured's premium for the current policy period based on the insured's loss experience during the current period; paid losses or incurred losses may be used to determine loss experience.

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.

Expert Systems or Knowledge-Based Systems

Computer software programs that supplement the underwriting decision-making process. These systems ask for the information necessary to make an underwriting decision, ensuring that no information is overlooked.

Principal Sources of Underwriting Information

Producers, applications inspection reports, government records, financial rating services, loss data, field marketing personnel, & claim files

Examples of Events that Trigger the Monitoring of Existing Policies

Substantive policy changes, significant and unique losses, preparation for renewal, risk control and safety inspections, & premium audits

Predictive Analytics

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.

Mix of Business

The distribution of individual policies that compose the book of business of a producer, territory, state, or region among the various lines and classifications.

Factors an Underwriter Must Consider Before Selecting an Underwriting Alternative

Underwriting authority, supporting business, mix of business, producer relationships, & regulatory restrictions