Underwriting and Ratemaking Chapter 5

Describe the approaches underwriters take to ensure the adequacy of policyholders' surplus.

1. Adhering to underwriting guidelines 2. Making certain that all loss exposures are correctly identified 3. Charging adequate premiums for the application that are accepter

Describe the goals of effective account selection by line underwriters,

1. Avoid adverse selection 2. Charge adequate premium for accounts with a higher-than-average chance of loss 3. Selecting better-than-average accounts for which the premium charged will be more than adequate 4. Rationing an insurers available capacity to obtain an optimum spread of loss exposures by location, class, size of risk and line of business.

Describe the approaches underwriters take to minimize the effects of adverse selection.

1. Carefully selecting the applicants whose loss exposures they are willing to insure 2. Charging appropriate premiums for the applicants they do accept with premiums that accurately reflect the loss exposures 3. Monitoring the application and books of business for unusual patterns of policy growth

Identify factors that influence staff underwriters to update rates and rating plans.

1. Changes in regulatory constraints 2. Changes in loss experience 3. Competition 4. Inflation

Provide examples of items for which staff underwriters engage in ongoing research to evaluate.

1. Effect of adding or deleting entire lines of business 2. Effect of expanding into additional states or retiring from state presently serviced 3. Optimal product mix in the book of business 4. Premium volume goals

What are the 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

Identify the elements listed in underwriting guidelines.

1. How underwriters should approach each application 2. Factors that should be considered by the underwriter for each type of insurance 3. The desirable and undesirable characteristics of applicants 4. The overall attitude toward applicants that exhibit those characteristics

On what insurance are insurance are loss costs typically based.

1. Insurance that is experience rated 2. Insurance that is retrospectively rated

Identify the responsibilities underwriting management entails.

1. Participating in insurer management 2. Arranging reinsurance 3. Delegating underwriting authority 4. Developing and enforcing underwriting guidelines 5. Monitoring underwriting results

List five principal sources of underwriting information.

1. Producers 2. Applications 3. Inspection reports 4. Government records 5. Financial rating services 6. Loss data 7. Field marketing personnel 8. Claim files

Identify items on which underwriting audits focus

1. Proper documentation 2. Adherence to procedure 3. Adherence to classification and rating practices 4. Conformation of selections decisions 5. The proper application of underwriting bulletin updates 6. Analyzing statistical results by o type of insurance o class of business o size of exposure

What are the four major ways an underwriter can modify a submission?

1. Require risk control measures 2. Change insurance rates, rating plans or policy limits 3. Amend policy terms and conditions 4. Use facultative reinsurance

Identify examples of events that trigger the monitoring of existing policies.

1. Substantive policy changes 2. Significant and unique losses 3. Preparation for renewal 4. Risk control and safety inspections 5. Premium audits

What factors, beyond the content of a submission itself, must an underwriter consider before selecting an underwriting alternative?

1. Underwriting authority 2. Supporting business 3. Mix of business 4. Producer relationships 5. Regulatory restrictions

Identify examples of items that may be included in underwriting guidelines:

1. Underwriting policy guidelines may include these categories o Standard market o Nonstandard market o Specialty market 2. Underwriting guidelines may include these items o systematic instructions for handling particular classes of commercial accounts o Specific hazards to evaluate o Alternatives to consider o Criteria to use when making the final decision o Ways to implement the decision o Methods to monitor the decision o Pricing instructions o Reinsurance related information

Explain why insurers often adjust data on historical loss costs in the ratemaking process

1. loss development 2. Incurred but not reported losses 3. Inflation 4. Taxes 5.And other continuously changing activity

List three examples of unfair discrimination.

1. refusing to issue, 2. canceling, 3. or non-renewing

XYZ Company is applying for building insurance. The rate is $0.50 per $100 of building insurance.XYZ would like to insure the building for $500,000. Calculate the premium.

A. ($0.50/ 100) * 500,000 = $2,500 B, $0.50 * ($500,000/100) = $2,500

A movie theater is applying for liability insurance. The rate is $0.30 per $1,000 tickets sold. The theater sold 50,000 tickets last year. Calculate the premium.

A. (0.30/1000) * 50,000 = $15.00 B. $0.30 * (50,000.1,000) = $15,00

What is the purpose of constant monitoring of underwriting results?

Constant monitoring of underwriting results enables underwriting management to adjust underwriting managers to adjust underwriting guidelines to accommodate changing conditions, goals and results.

Provide examples of the kinds of decisions made at an insurer's senior-management level.

Decisions at this level might determine what type of marketing system the insurer uses, office locations, the emphasis that will be placed on personal and commercial insurance.

Describe the approaches underwriters take to ensure that the policies of accepted applicants adhere to underwriting guidelines.

If loss exposures, risks, or policy limits on an application exceed an underwriter's authority, he or she will seek approval through supervisory management ranks within the underwriters department.

.Describe the role of insurance advisory organizations in ratemaking.

Insurance advisory organizations work with insurers ij developing insurances rating systems. Examples include ISO and NCCI.

When evaluating an insurer's loss experience, what products do staff underwriters usually target for analysis?

Insurance products that have losses greater than those anticipated are usually targeted for analysis.

Explain how to calculoat5 a commercial insurance premium using the rate and exposure unit.

Insurers use standardized exposure units for rating most types of insurance. Group policy holder's exposure units into rating class. Multiply rate by number exposure units (considering how rates are expressed ie per 100, per 1000 etc.) Sum the resulting amounts

Describe the use of exposure units in insurance rating.

Insurers use standardized exposure units for rating most types of insurance. Group policy holder's exposure units into rating class. Multiply rate by number exposure units (considering how rates are expressed ie per 100, per 1000 etc.) Sum the resulting amounts.

Describe the line underwriter responsibility of account classification.

Line underwriters are responsible for account classification, which is the process of grouping accounts with similar attributes so that they can be priced appropriately. The price charged must not only be adequate to permit the insurer to continue to write profitable business, but also it must be competitive, The line underwriter must be sure that the account characteristics just ivy the adjustment and must document and must document that the account complies with the insurer's individual rating plan filoed with regulatory authorities.

How do line underwriters respond to requests from producers and applicants who want to know how coverage will respond to a particular type of loss?

Line underwriters response to these requests(usually through the producer by explaining the types of losses the coverage forms are designed to cover and the endorsements that must be added to provide the coverage desired.

Identify the purpose of a market conduct evaluation:

Market conduct examinations are a process of evaluating used by state insurance departments to determine that an insurers practices and procedures are ii compliance with state laws and regulations and to help ensure equitable treatment of insureds and claimants.

Identify the primary factors that influence the authority given to an underwriter.

The authority given to an underwriter usually reflects the underwriters experience and responsibilities, and types of insurance handled.

What is the basic premise of an insurance classification system?

The basic premise of an insurance classification and rating system is that insureds with similar characteristics have similar potential loss frequency.

Judge whether the rate increase implemented by the insurer is an example of fair or unfair discrimination.

The key is whether it is solely on the basis of location. The example is written to suggest that territory is the sole reason given. Therefore I believe that the example is unfair discrimination.

Identify examples of goals for a book of business that a line underwriter works to help achieve.

The line underwriter works to ensure that each book of business achieves established goals such as product mix, loss ratio and written premium,

Identify the purpose of requiring an insurer to provide notification to the insured of cancellation or nonrenewal within a specific period.

This notice is intended to give the insured an opportunity to replace the coverage.

What is the purpose of scheduled rating plans?

To award debits and credits baled 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. In sum, to make the premium more accurately reflect the characteristics of the risk.

What is the distinction between treaty reinsurance and facultative reinsurance?

Treaty reinsurance applies to an entire line or class of business and is typically prorata (designed to share a percentage of premium and losses. Facultative reinsurance is typically done for a specific policy or insured. The coverage is triggered by an event such as a large loss, or the breaching of an aggregate occurrence loss limit. Facultative may be pro rata or excess, but is most often arranged on an excess basis.

Provide two examples of exposure units.

Type of Insurance Auto Commercial Property General Liability Homeowners Workers Compensation Typical Exposure Units Each vehicle Each 100 of insured value Each 1,000 of gross sales Each 1,000 of square feet of area Each 1,000 of payroll Each 1,000 of admission receipts Each 1,000 of insured value Each 100 of payroll

Why might an underwriter vary from the manual when determining premium?

Underwriters vary from the manual rate to reflect the reality of actual exposures to loss, the specific characteristics of those exposures, and competitive market influences.

What is the difference between fair discrimination and unfair discrimination in insurance underwriting?

Unfair discrimination is refusing to issue, canceling, or non-renewing coverage for an applicant or insured solely on the basis of geographic location, marital status, or race. Fair discrimination involves other ways grouping applicants into classes in ways that allows policies to be appropriately priced in a way that reflects their exposure to risk.

Explain how staff underwriters are involved in the development of coverage forms.

When an insurer develops its own forms, staff underwriters collaborate with the insurer's actuarial and legal departments. Insurers develop new coverage forms to meet changing consumer needs and competitive pressures. Additionally, insurers modify existing coverage forms created by advisory organizations so that the coverage being provided by the insurer will respond as anticipated.

Describe how underwriters use the Insurance Servivces Office (ISO) Lines Manual (CLM) to determine premiums.

When calculating the premium for commercial accounts, underwriters typically determine the insured's business operation and then find the appropriate rating classification in the applicable classification table.

Explain why line underwriters have an active interest in ensuring that procucers and insureds' needs are met.

because customer service activities and underwriting are often interwoven, the line underwriters have an active interest in ensuring that producer and insured needs are met Line underwriters are usually directly inivolve3d with producers in preparing policy quotations.