Introduction to Underwriting

Individual Rating Plans

Modify the premium to reflect more accurately an insured's own exposures to loss

Home Office Underwriter

The person to whom underwriters in the branch or local office refer applications or questions that are beyond their authority to handle

Producer

The person who sells insurance to the public

Insured

The person, business, or organization covered by an insurance policy

Rate

The price per exposure unit for an insurance coverage

Depreciation

The reduction in value that results from wear and tear

Cash Flow Marketing

The reliance on investment income to offset expected underwriting losses arising from the low prices being charged for insurance

Treaty Reinsurance

A reinsurance contract that obligates the re-insurer to accept all policies that are ceded and fall within the agreement *Think blanket coverage

Speculative Risk

A risk for which there are three possible outcomes: loss, neither loss nor gain, and gain

Pure Risk

A risk for which there is no possibility of gain

General Liability Insurance

Insurance that covers the insured's liability to third parties for property damage or bodily injury arising out of the insured's premises, operations in progress, products and completed operations

Occurrence Basis

A policy that provides coverage for accidents that occur during the policy period

Multi-line insurer

(aka. multiple line insurer) They write coverage for more than one line of insurance

Underwriting

- The process of deciding which risks are acceptable - The determining the premium to be charged and the terms and conditions of the insurance contract - Monitoring each of those decisions

Supervisor Construction

1. Noncombustible- exterior walls and floors and roof constructed of, and supported y, metal, asbestos, gypsum, or other noncombustible materials 2. Masonry Noncombustible- exterior walls constructed of masonry materials and floors and roof of metal or other noncombustible materials 3. Fire Resistive- exterior walls and floors and roof constructed of masonry or other fire resistive materials

Mixed (Masonry/Frame)

A combination of both frame and masonry construction shall be classed and coded as frame when the exterior walls of frame construction (including gables) exceed 33 1/3% of the total exterior wall area; otherwise class and code as masonry

Line of Insurance

A major segment of insurance

Commisions

A percentage of the premiums to compensate them for their marketing efforts

Warranty

A promise by the insured to do something or to fulfill a particular condition

COPE

Acronym made up of the initials of the four most important factors in both personal and commercial property underwriting: construction, occupancy, protection, and external exposures. Refers to factors underwriters consider when evaluating an account for property insurance coverage

Physical Hazards

All tangible characteristics of a loss exposure that increase the frequency or the severity of a loss

Judgement Rating

Allows underwriters to determine premium themselves

Guaranteed Replacement Cost

Although insurers' forms vary guaranteed replacement cost coverage generally promises to provide coverage for the full cost of replacing the dwelling, even if that costs exceeds the coverage; A-dwelling limit; provides coverage above the policy's coverage limit.

Attractive Nuisance

An artificial condition on a property that is certain to attract children

Joint Venture

An association (usually temporary) of two or more separate legal entities combined to accomplish a particular transaction or operation

Hazard

Anything that tends to increase the probable severity or frequency of losses

Experience Rating

Bases an insured's current premium on that insured's previous loss experience

Objective Information

Consists of verifiable facts that have been recorded

Subjective Information

Consists of relevant opinion or impressions of various characteristics of the risk Underwriters need to be careful in making decisions based on the insured's character or reputation because this type of evaluation is usually subjective. Declining an insurance application because a neighbor says, "he drinks" is a very questionable decision. However, two DUIs on the applicants MVR represent objective, factual information.

Submission

Consists of the application for insurance and the Loss supporting insurance

Contingency ( contingent) Commission

Contingent upon the production of a certain volume of profitable business

Vehicle Identification Number (VIN)

Each private passenger auto has its own seventeen-digit vehicle identification number

Moral Hazard

Exists when an insured or a potential insured might intentionally cause a loss

Masonry

Exterior walls constructed of masonry materials such as adobe, brick, concrete, gypsum block, hollow concrete block, stone, tile, or similar materials and floors and roof of combustible construction

Masonry Veneer

Exterior walls of combustible construction veneered with brick or stone

Frame

Exterior walls of wood or other combustible construction, including wood, stucco on wood, or plaster on combustible supports

Scheduling Rating

Gives underwriters the flexibility to adjust premiums based on their assessment of the management and safety program of the insured

Class Rating

Groups insureds with similar loss-causing characteristics into classes for pricing purposes

Vehicle Series Rating Program

ISO's program of adjusting the symbol to reflect loss experience

Proper Coverage

Insurance protection that meets a need

External Exposures

Loss arise from conditions outside the property being insured Think everything that is yours is insured - your home, things inside your home, your pool - but your neighbor is an external factor

Soft Market

The period of the underwriting cycle when prices are low and selection standards are lax

Diary System

Notifies underwriters to review a file at a certain time Underwriters might use their diary system to remind them of: (1) an upcoming policy renewal for which information must be obtained for pricing, (2) an auto policy with a youth who is reaching driving age, and (3) there are usually more premium dollars and therefore a greater commission, and (4) often, overall policy production expenses are lower.

Adverse Selection

Occurs when people or organizations with an above-average probability of loss purchase insurance to a greater extent than people or organizations with average or below- average probabilities of loss

Manuscript Policy

One prepared specifically for an insured

Mutual Insurance Company

Owned by its policyholders

Stock Insurance Company

Owned by stockholders who have invested in the company by purchasing shares of stock

Underwriting Assistants

Persons who assist in the underwriting process but are not underwriters themselves

Inland Marine Floaters

Policies providing specific instructions on items such as jewelry, furs, coin, collections, or artwork *Cross-reference with Floater which Reflects the mobile nature of the property insured. Takes into consideration the (1) property value, (2) where the property is kept when not in use, (3) whether the property has been evaluated by a qualified appraiser, (4) how attractive the property is to thieves, (5) what protective devices are in place, (6) whether there have been prior losses, (7) whether the insured exhibits traits that would imply that a moral or morale hazard exists, (8) whether the insured is financially stable and (9) whether the insured has supplied an exacting description of the property that can be used to subsequently identify the property

Consumer Investigative Reports

Provide the same kind of information about applicants for personal lines insurance that loss control reports provide on applicants for commercial insurance

Motor Vehicle Reports

Record a driver's accidents and violations over the past three to five years and show the status of the applicant's license

Reunderwriting

Reevaluating the desirability of a piece of business that has previously been accepted

Eligibility

Refers to the ability of an underwriter to provide coverage based on the manual rules filed with the state insurance department

Book of Businesses

Refers to the collection of all the policies written by an insurer. Ex: all the policies written by a producer or in a certain territory or state

Protection Class

Refers to the rating given to the public fire protection of a community or municipality

Acceptability

Refers to the underwriting desirability of an eligible risk based on an insurer's underwriting guidelines

Underwriter

Refers to those working in insurance who make underwriting decisions on a daily basis *Little Reminder - Underwriters help people and businesses handle risks they cannot avoid

Morale Hazard

Reflects carelessness or an indifference to loss, often resulting from or aggravated by the insured's knowledge that insurance will cover losses

Location Multiplier

Reflects the geographical differences in building costs

Price New Symbol

Reflects the manufacturer's suggested retail price for the car

Fair Credit Reporting Act

Regulates the gathering of insurance information. It is intended to prevent abuse of the information and to protect cnsumers

Facultative Reinsurance

Reinsurance in which the re-insurer individually underwrites each risk *Think case specific coverage

Actual Cash Value (ACV)

Replacement cost less the reduction in value from depreciation and obsolescence

Classification Reports

Similar to consumer investigate reports but they address only objective information

Loss Control Recommendations

Suggestions made by the loss control representative to improve the applicant's desirability as an insured

Accomodations

The acceptance of an otherwise unacceptable piece of business as a favor to a producer; pieces of business that are accepted as exceptions to an insurer's underwriting guide *Accommodations should be made when circumstances warrant them. Underwriters might choose to use some decision-making flexibility but should not exceed the authority granted them. Accommodations should be recorded and tracked so that promised concessions can be realized, such as the producer offering the balance of an account on renewal.

Risk

The chance of loss or the subject of insurance

Unprotected

The classification used for residences in geographical areas with neither fire hydrants nor fire companies readily available

Rating Plan

The collection of rates and the rules, definitions, discounts, surcharges, and so forth used in applying the rates

Replacement Cost

The cost to replace property with materials of similar quality; replacement cost coverage alone will pay for replacement (or repair) up to the policy limits.

Underwriting Cycle/ Underwriting Profit Cycle

The cyclical fluctuation of insurance prices and selection standards

Hit Ratio

The percentage of quoted business that is written aka Written-to-quoted ratio - binded vs. quoted A hit ratio that is too low might mean that the insurer's rates are not competitive or that the insurer is unwilling to match coverage provided by other insurers.

Exposure Base

The denomination in which the exposure unit is expressed

Account Credit

The discount offered to insureds who purchase two different policies (such as an auto policy and a homeowners policy) with the same company

Underwriting Factors

The factors that an underwriter considers when evaluating a submission/ making an underwriting decision

Rating Factors

The factors that an underwriter considers when evaluating a submission; the items of information necessary to price an insurance policy

Exposure Unit

The fundamental measure of the loss exposure assumed by the insurer

Insurer

The insurance company

Primary Insurer/Re-insured/Ceding Company

The insurance company transferring the chance of loss

Reinsurer

The insurer to which the chance of loss is transferred

Hard Market/ Tight Market

The period of the underwriting cycle when prices are high and selection standards are strict

Driving Under the Influence (DUI)

The legal charge for alcohol-impaired (or drunk) driving. Most insurers prefer not to write drivers with DUI convictions

Premium

The money that an insured pays for coverage aka. consideration

Decentralization of Underwriting Authority

The movement away from vesting all underwriting authority in one office, department, or person

Loss Frequency

The number of losses

Customer Services Representatives (CSRs)

The persons within the producer's office who primarily work with insureds and underwriters after the producer has made the sale CSRs usually perform the following tasks: (1) aiding policyholders with service needs and policy changes, (2) processing renewals and status changes, (3) completing and submitting applications for insurance, (4) receiving office machine and procedures training, (5) preparing and requesting binders, (6) alerting clients to pending policy cancellations and non-renewals, (7) creating and maintaining computer/manual files, (8) contacting the branch office of insurers to solve problems, (9) attending seminars and classes and taking exams, and (10) using and working with clerical services.

Retention

The portion of the loss that insurance will not cover and for which the insured will be responsible Example: Deductible

Account Selling

The practice of soliciting and writing all of a prospect's insurance coverages

Underwriting by Exception

The screening of applications by computer or by an underwriting assistant. During this process, the underwriter doesn't handle clearly acceptable and clearly unacceptable applications

Insurance

The system in which a person, business, or organization transfers risk to an insurance company, which then reimburses the insured for covered losses.

Loss Severity

The total dollar amount of losses; difficult to control but might be managed in the sense that reduced loss frequency also mitigates loss severity

Reinsurance

The transfer of part of the chance of loss from one insure to another

Weight to horsepower ratio or weight to engine displacement ratio

The weight of the vehicle relative to the horsepower rating of the engine --> used to evaluate whether an auto (or watercraft) is high performance

Individual Rates

These reflect each insured's own loss-causing characteristics - The decisions underwriters make must comply with the rules contained in the rating manual, whether the manual is filed by the service organization or the insurance company

Staff Underwriters

They decide on many risks by preparing guidelines that line underwriters apply

Line Underwriters

They select individual risks

Rating Symbol

Used in rating; Determined by adjusting the price new symbol based on the physical damage loss experience of that vehicle model

Loss Control Representative (LCR)

Usually an employee of the insurance company whose job involves visiting and inspecting applicants' and insureds' business

Credit Reports

Verify an applicant's financial condition and provide other valuable information

Loss exposure aka. Exposure

a condition of susceptibility or vulnerability to loss