Assignment 4 The Underwriting Function Review Questions
Some underwriting guides contain systematic instructions for handling particular classes of commercial accounts. Describe the instructions such guides might include.
"Such underwriting guides identify - specific hazards to evaluate - alternatives to consider - criteria to use when making the final decision, ways to implement the decision - methods to monitor the decision. The guides may also provide pricing instructions and reinsurance-related information."
Describe the approaches underwriters take to minimize the effects of adverse selection.
*Carefully selecting the applicants whose lose exposures they were willing to insure. *Charging appropriate premiums for the applicants that they do accept with premiums that accurately reflect the loss exposures *Monitoring applications and books of business for unusual patterns of policy growth or loss.
List the six general steps in the underwriting process.
*Evaluate the submission *Develop underwriting alternatives *Select an underwriting alternative *Determine an appropriate premium *Implement the underwriting decision *Monitor underwriting decisions"
Explain why underwriters may not review all available sources of information when evaluating a submission.
*a submission may not justify expensive research.
Describe the approaches underwriters take to ensure the adequacy of policy-holders' surplus.
*adhering to underwriting guidelines *making certain that all loss exposures are correctly identified *charging adequate premiums for the applications that are accepted.
Describe the goals of effective account selection by line underwriters.
*avoiding adverse selection *charging adequate premiums for accounts with a higher-than-average chance of loss *selecting better-than-average accounts for which the premium charged will be more than adequate. *rationing an insurer's available capacity to obtain an optimum spread of loss exposures by location, class, size of risk, and line of business.
Underwriters monitor books of business to evaluate the quality and profitability of business written for a group of policies. Describe one other potential benefit to monitoring a book of business.
*can also help determine compliance with underwriting policy and may detect changes in the type, volume, and quality of policies that may require corrective action.
List five principal sources of underwriting information.
*producers *insurance applications *inspection reports *government records *financial rating services
Identify four ways that regulation may affect underwriting policy.
- Insurers must be licenses to write insurance in each state in which they do business - Rates, rules, and forms must be filed with state regulators - Underwriting guidelines are required to be filed in some states - If consumer groups believe that the insurance industry has not adequately served certain geographic areas, regulatory focus on insurance availability can lead to requirements to extend coverage to loss exposures that an insurer might otherwise not write"
List four major modifications that an underwriter might recommend to make a submission more acceptable.
- Require loss control measures - Change insurance rates, rating plans, or policy limits - Amend policy terms and conditions - Use facultative reinsurance"
Describe what an underwriter would conclude about each of the following combined ratios: a. A combined ratio of exactly 100 percent b. A combined ratio of greater than 100 percent c. A combined ratio of less than 100 percent
- They are breaking even, no profit - They are losing money on their underwriting activities - They are making an underwriting profit" "
Describe the factors, beyond the content of a submission itself, an underwriter must consider before selecting an underwriting alternative.
- Underwriting authority - Supporting business - Mix of business - Producer relationships - Regulatory restrictions"
Describe how insurers communicate underwriting authority through underwriting guidelines.
A notation next to a specific classification in the underwriting guide might indicate that a senior underwriter must review and approve an application from that classification before it is processed further. Depending on the concerns that underwriting management places on a classification, underwriting approval might be required from the line underwriter's branch manger or a staff underwriter at the home office
Explain why it is important for the underwriter to correctly classify each loss exposure in a submission when determining the appropriate premium.
Accurate classification ensures a pooling of loss exposures whose expected loss frequency and loss severity are similar. Misclassification can produce adverse results, including insufficient premium to cover losses and expenses, inability to sell policies because prices are higher than competitors' prices, and charges that the insurer has violated regulations prohibiting unfair trade practices
An insurer decides to make its underwriting criteria more restrictive. Explain how this change affects premium volume and the insurer's combined ratio.
An insurer that becomes more restrictive in its underwriting criteria will usually see a reduction in premiums written. Because incurred losses remain outstanding from the prior period that had a less restrictive underwriting policy, the loss ratio component of the combined ratio will likely deteriorate. With this reduction in premiums written, the expense ratio will increase, even though the insurer's underwriting expenses might have remained relatively unchanged
Describe the components of an insurer's financial capacity.
An insurer's financial capacity refers to the relationship between premiums written and the size of the policyholders' surplus or the insurer's net worth
Explain how compliance with underwriting guidelines ensures adherence to reinsurance treaty limitations.
Compliance with underwriting guidelines ensures that coverage limits and accepted loss exposures will not exceed the insurer's treaty reinsurance, because staff underwriters reflect those treaty limitations in the guidelines.
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 and management rans within the underwriting department.
Describe what insurers use the combined ratio to measure.
Insurers use the combined ratio to measure the success of underwriting activities
Distinguish between the activities of line underwriters and those of staff underwriters.
Line Underwriters: *evaluate individual accounts for acceptability and execute underwriting policy by following practices and procedures outlined by staff underwriters. Staff Underwriters: *work closely with underwriting management
Describe the potential advantages of using predictive modeling in making underwriting decisions.
Predictive modeling can provide a consistent way to review individual applications that improves for the overall profitability of a book of business. It can also help in managing a large book of business for which conducting an in-depth underwriting review on every account would be too costly
Explain how pricing standards benefit insurers.
Pricing standards enable insurers to determine levels of premium adequacy by comparing premiums charged to the established pricing standards. Insurers also track the extent to which their underwriters deviate from the insurer's established pricing for specific classifications. This information might be useful in determining the extent to which the underwriter's book of business is underpriced or overpriced and where pricing adjustments might be made, should market conditions change
Explain how rapid premium growth can cause insurers to experience excessive premium-to-surplus ratios.
Rapid premium growth results in a reduction in policyholders' surplus to pay for expenses generated by that growth, because of conservative statutory accounting principles used in insurance. This constraint often precludes premium expansion unless the insurer purchases reinsurance or obtains more capital
Describe the types of underlying insurance forms that may concern reinsurers.
Reinsurers may expressly exclude reinsurance coverance for loss exposures covered by underlying manuscript forms developed for a particular insured or covered by underlying forms developed independently of an advisory organization
Contrast routine underwriting decisions with non-routine underwriting decisions.
Routine decisions are those for which the line underwriter clearly has decision-making authority according to the underwriting guidelines. Non-routine decisions involve submissions that fall outside the underwriter's authority
Explain how staff underwriters are involved in the development of coverage forms.
Staff underwriters work cooperatively with the actuarial and legal departments to develop new coverages and modify existing coverage forms developed by advisory organizations
List some aspects of an insurer's operations that are affected by the underwriting cycle.
The underwriting cycle affects premium levels, capital allocation strategies, investment strategies, and insurer profitability
Explain how underwriting guidelines provide a structure for underwriting decisions.
Underwriting guidelines provide a structure for underwriting decisions by identifying the major considerations underwriters should evaluate for each type of insurance the insurer writes.
Explain how underwriting audits provide staff underwriters with information on the effectiveness of existing underwriting guidelines.
Underwriting guidelines that are not being followed may be either outdated or considered unrealistic, which could indicate that a critical review for updates is required.
Explain why it is important that underwriters operate within their assigned levels of underwriting authority.
compliance with levels of authority ensures that the insurer accepts applicants within its underwriting policy