3.5 insurable interest & 3.6 underwriting

the agent is responsible for __________ by using pre-established criteria

field underwriting

insurance companies employ ________ who ultimately decide whether to accept or reject the applications sent in by producers or agents on the basis of company underwriting standards

underwriters

incurred loss

include amounts paid and reserved on claims for covered losses and various expenses related to handling claims

combined ratio =

loss ratio + expense ratio

combined ratio characteristics

- 100% is breakeven point - < 100% = underwriting profit - > 100% = underwriting loss

loss ration characteristic

-compares company's operations year over year

underwriting: process of evaluating a risk

-field underwriting is performed by the agent or producer -company underwriters decide if a policy is to be issued

an insurance company evaluates its income and expenses for given periods of time to measure its financial performance. they also look for trends that may have occurred over an extended period of time. an insurer uses three ratios to evaluate performance:

-loss ratio -expense ratio -combined ratio

characteristics of insurable risk

-risk of financial loss -may be present at the time of application and MUST be present at the time of loss

characteristics of a binder

-temporary insurance -usually given by the agent: verbal or in writing -can be canceled by the company -does not guarantee a policy will be issued -automatically ends if a policy is issued by the underwriter

there are multiple sources of information used in the underwriting process to evaluate risks

-the client application for insurance -inspection services -credit scores from Equifax or Transunion -government bureaus, such as the Bureau of Motor Vehicles -insurance industry bureaus, such as the Automated Property Loss Underwriting System -financial information services, such as Standard & Poor's -previous insurers -the insurance company claim files

coverage under the binder will end at the later of:

-the effective date of the policy, if issued -the effective date of a formal cancellation notice from the insurance company -when no cancellation notice is sent, the expiration date of the binder (e.g. 30, 60, or 90 days)

example of insurable interest

a new car - a bank or an auto financing department has an insurable interest and could lose money if the car is stolen

underwriting expenses include

advertising, commissions, salaries, other administrative costs, and regulatory costs such as taxes and licensing fees

underwriting expenses

are the costs to acquire and to keep policies

A _______ is a ________ oral or written statement made by the agent that gives the insured immediate coverage for a specified time

binder, temporary

expense ratio

is calculated by dividing underwriting expenses by the amount of written premium, it is an indicator of the cost of doing business

loss ratio

is calculated by the dividing the amount of incurred losses by the amount of earned premium

insurable interest

is often defined as "legitimate risk of financial loss in the person or thing being insured."

written premium

is the gross amount of premium income received from insureds

earned premium

is the premium the company actually earned by providing insurance protection for the designated period

application

is the primary source of underwriting information

underwriting

is the process of evaluating the risk and exposures of potential clients

combined ratio

is the sum of the loss and the expense ratio

example of a binder

suppose John gets an oral statement from his agent on July 6th that he is "bound" effective on that date for 90 days. On July 14th, John has a loss that would have been covered under the policy. On July 21st, the insurance company reviews the application and decides not to issue the policy. Because the agent issued a _____, John will have coverage for this loss