Chapter 3 - Underwriting

What can be done to get insurance if an underwriter rejects an application for personal auto insurance?

Residual markets or shared markets provide auto insurance to people who cannot obtain coverage in the voluntary market.45-47

Audit

A review of the work of line underwriters by the staff underwriters to see whether the underwriting guidelines are being followed. 42

Last year, Small Insurance Company had premiums of $100,000. Small had insured losses of $80,000 and expenses of $30,000. What was small's expense ratio?

$30,000 / $100,000 x 100 = 30% 30-31

Last year, Small Insurance Company had premiums of $100,000. Small had insured losses of $80,000 and expenses of $30,000. What was Small's loss ratio?

$80,000 / $100,000 x 100 = 80% 30-31

What are the steps in the underwriting process?

1) Gathering the necessary information. 2) Analyzing the information. 3) Identifying the options. 4) Evaluating the options. 5) Choosing the best option. 6) Acting on the decision. 32

What options does an underwriter have besides accepting or rejecting a submission?

1) Loss control program can be a condition to coverage. 2) Modifying coverage - giving the applicant less insurance than requested. 3) Modifying the Price. 38-39

What two major tasks are performed by underwriters?

1) Protect the insurance company against adverse selection. 2) Consider all reasonable options that might be available. 27

How does a commercial underwriter use each of the following? Underwriting Guide

1) Provides specific guidance about how underwriters should analyze all of the various types of applicants they might encounter. 2) States limits of underwriting authority. 34-38

What information is considered by staff underwriters who are developing the insurance company's underwriting guidelines?

1) Regulation - Insurance companies must comply with all legal requirements, and many insurance regulations affect underwriting and pricing decisions. 2) Price competition - conditions in the marketplace often play a role in determining a quote. 3) Competition from new insurance products - BOP example. 4) A need for new insurance products - - New types of loss exposures require new types of coverages. Example: Solar heated homes, electric cars. What guidelines would be prepared to help them make appropriate decisions. . 5) Feedback from the field - Input from producers, policyholders, and public determines what changes in policies, procedure, or pricing. The underwriting staff must then properly communicate and implement these changes to make certain that the recommendations result in the outcomes that were planned. 42-44

How does a commercial underwriter use each of the following? Financial Reports

1) To see If a business faces financial problems - maintenance programs might suffer cutbacks, and it might have more claims. 2) To make sure that the applicant can pay the insurance premiums. 34-38

What three general choices does an underwriter have in dealing with a submission?

1) Yes - accepting the application and providing coverage requested by the applicant. 2) No - rejecting the application and refusing to provide the applicant with any insurance coverage. 3) Maybe - Accepting the application subject to modification. 29

Last year, Small Insurance Company had premiums of $100,000. Small had insured losses of $80,000 and expenses of $30,000. What was Small's combined loss and expense ratio?

80% + 30% = 110% combined loss and expense ratio. 30-31

Last year, Small Insurance Company had premiums of $100,000. Small had insured losses of $80,000 and expenses of $30,000. Did Small have an underwriting profit or an underwriting loss? Explain.

80% + 30% = 110% combined loss and expense ratio. An underwriting loss, which occurs when the combined ratio is greater than 100%. 30-31

Underwriting guide / manual/ guidelines / manual of underwriting policy

A database that communicates staff underwriters' guidelines to the line underwriters who must follow them. It details the underwriting practices of the insurance company and provides specific guidance about how underwriters should analyze all of the various types of applicants they might encounter. 38

What information might be found in a loss control report?

A description of the operations and hazards of the applicant's business as they relate to the type of insurance the applicant is requesting, and can include safety programs and other measures to control the hazards. In addition to a description of strengths and weaknesses, the report also makes recommendations for improvement. The loss control report varies according to the type of insurance. 33

Branch office, regional office

A local insurance company office, usually located away from the home office, providing service to accounts in a limited geographical area. 32

Reinsurance

An agreement with another insurer with which a risk is shared, thereby reducing uncertainty by transferring some risks and sharing losses. One insurance company can transfer or cede some of the risk to another insurance company, and it will pay a portion of the premium to the reinsurer who shares the risk. 41

How does a commercial underwriter use each of the following? Application

An application provides much of the information an underwriter needs to evaluate a request for insurance. Example: An auto insurance application, important pieces of information include a description of each vehicle to be covered, where the vehicles are parked when they are not being used, what specific coverages are requested, and what dollar limits of coverages are wanted. 34-38

Home office

An insurance company's headquarters. 32

Commercial underwriter

Analyzes requests for insurance from businesses and other organizations. 32

Residual market, shared market

Applicants rejected by underwriters in the voluntary market might find insurance available through residual market programs such as auto insurance plans and FAIR plans. Some residual market programs have been formed by government bodies to provide insurance for those who could not otherwise get it. 45

Voluntary market

Applications accepted or rejected voluntarily (without regulatory constraint) by insurance companies. 45

Mutual insurance companies

Are owned by their policyholders. Profits, or dividends, earned by a mutual insurance company might be returned to policyholders. 29

How does a commercial underwriter use each of the following? Loss Control Report

Contains an evaluation of whether or not the company is a desirable prospect for insurance. 34-38

What can be done to get insurance if an underwriter rejects an application for fire insurance on a house?

FAIR or Fair Access to Insurance Requirements is a residual market program available for property insurance. 42-44

FAIR plans

Fair Access to Insurance Requirements. Residual market for individuals or businesses who have been unable to obtain property insurance on their personal or business property in the voluntary market. 47

Rater, rating clerk

Handles the important job of calculating insurance premiums with the aid of a calculator and a rating manual 39

File

Includes most of the information concerning a particular prospect, applicant, or policyholder. A file for commercial accounts usually includes the information page (or declarations) of all policies (but not the entire policy), loss control reports, claim reports, and all correspondence. The underwriter needs the file to take action on any specific account. 34

Profits

Income that exceeds expenses. All or part of an insurer's profits may be paid to stockholders/policyholders as dividends. 31

Loss control survey

Inspections 33

Contingencies

Involve unpredictable or extraordinary events that might draw upon an insurance company's assets. Example: Hurricane Andrew 31

Motor vehicle report, motor vehicle record, MVR

Lists the moving violations and serious accidents that a driver has had in the past several years. 34

Describe the activities performed by each of the following: Staff Underwriters

Make decisions on an insurance companies entire set of accounts. Staff underwriters look at the big picture to determine what kinds of insurance their insurance company should sell, t whom its should sell, and at what price it should sell. 41-44

Describe the activities performed by each of the following: Line underwriters.

Make decisions on individual applicants or insureds, based on underwriting guidelines published by staff underwriters. 41-44

Underwriting gain, underwriting profit

Occurs when the combined loss and expense ratio is less than 100 percent. 30

Underwriting loss

Occurs when the combined ratio is greater than 100 percent. 30

Why do most insurance companies buy reinsurance?

One insurance company can transfer "cede" some of the risk to another insurance company, and it will pay a portion of the premium to the reinsurer who shares the risk. 41

Loss control representative

Or safety engineer, performs loss control surveys (or inspections) and writes loss control reports. 33

Stock insurance companies

Owned by stockholders who have invested in the company by purchasing shares of stock. Their reason for making this investment is to earn a return on the investment. Stockholders or shareholders hope that the value of the stock will increase so that it can be sold at a higher price. They also receive a share of the profits, or dividends, earned by the insurance company's underwriting and investment activities. 29

Underwriters try to protect against adverse selection. Why are consumers most likely to purchase insurance when the risk is high relative to the premium?

People who are most likely to have losses are most likely to buy insurance. But when a loss is almost certain, the insurance company must charge a premium that might be as high as the expected loss. Nobody would buy insurance at that price, so there could be no sharing of losses. 27-28

Dividends to policyholders

Profits distributed to policyholders. 29

Dividends to stockholders

Profits distributed to stockholders. 29

Loss control report

Provides a firsthand picture of the applicant for the underwriter, describing the operations and hazards of the applicant's business as they relate to the type of insurance the applicant is requesting. Also describes safety programs and other measures to control the hazards. Also makes recommendations for improvement. 33

Dun and Bradstreet Report (D&B)

Reports on the history of the company and the background of its owners and managers, describes its operations, outlines its paying record, analyzes its financial condition, and assigns a credit rating. 36

Automobile insurance plans, assigned risk plans

Residual market programs providing auto insurance to people who cannot obtain coverage in the voluntary market. 46

Adverse selection

The increasing likelihood that consumers will purchase insurance when the premium is low relative to the risk, so insurance seems like a good buy. Insurers, on the other hand, are increasingly interested in selling insurance when the risk is low relative to the premium. 28

Underwriting authority

The limit on decisions an underwriter can make without receiving approval from someone at a higher level. If an application exceeds an underwriter's underwriting authority, an underwriting decision to accept he application must ultimately be made by a superior with higher underwriting authority. 38

Loss ratio

The percent of premiums that goes to pay claims. 30

Expense ratio

The percent of premiums that goes to pay the insurance company's operating expenses. 30

Manual premium

The premium determined from the rating manual, not including discounts or surcharges. 38

Combined loss and expense ratio

The sum of the loss ratio and the expense ratio. 30

Underwriters try to protect against adverse selection. Why are insurers most interested in selling insurance when the premium is high relative to the risk?

The underwriter's task is to try to assure that the group's collective losses are in balance with the premium income derived from the group. 27-28

Underwriters try to protect against adverse selection. What can underwriters do to protect insurers against adverse selection?

Underwriters guard against adverse selection by rejecting applications from those prospects who seem likely to have losses that would be too costly in relation to the premium they would pay. 27-28