Module 8: The Underwriting Function

Setting return thresholds

Response to limited capacity. If the insurer wants a 10% return on equity and a product is expected to generate 12% return, the insurer should expand into this venture if no better opportunity is available.

Evaluation Tools: Predictive Analytics

statistical and analytical techniques used to develop models that predict future events or behaviors

Underwriting Process

steps to determine which submissions will be accepted, for what amount of insurance, at what price, and under what conditions. Also considering book of business.

Premium-to-surplus-ratio

A capacity ratio that indicates an insurer's financial strength by relating net written premiums to policyholders' surplus. Considered too high when it's greater than 3:1.

Market Conduct Examination

An analysis of an insurer's practices in four operational areas: sales and advertising, underwriting, ratemaking, and claim handling.

Advisory Organizations

An independent organization that works with and on behalf of insurers that purchase or subscribe to its services. Helps develop commonly used coverage forms.

Adverse Selection

In general, the tendency for people with the greatest probability of loss to be the ones most likely to purchase insurance. Ex: person with beach house purchases windstorm coverage right before hurricane season.

Government Records as a source of UW info

Motor vehicle Criminal Civil Mortgages, business licenses, tax records, SEC filings, bankruptcy filings

How do underwriters minimize effects of adverse selection?

Select loss exposures they're willing to insure, charging adequate premiums for the loss exposures, and monitoring books of business for unusual growth or loss.

Inspection Reports as a source of UW info

aka risk control reports. Physical condition, safety record, management.

Reinsurance in Underwriting Policy

availability and cost. Reinsurance may exclude types of insurance/classes of business or be too expensive.

Standard Market

average to better-than-average accounts for which the standard premium is at least adequate

Production Underwriter

blend roles of special agents or field representatives with line underwriters. Confer with producers and assist them with developing accounts the insurer wants.

Trending

A statistical technique for analyzing environmental changes and projecting such changes into the future.

Underwriting Guidelines

A written manual that communicates an insurer's underwriting policy and that specifies the attributes of an account that an insurer is willing to insure.

Underwriting Profit

income an insurer earns from premiums paid by policyholders minus incurred losses and underwriting expenses

UW Guidelines: Synthesize Insights and Experience

staff underwriters can include approaches taken in underwriting particular classifications/lines of business. Repository for insurer's cumulative expertise.

UW Guidelines: Ensure Uniformity and Consistency

submissions that are identical should elicit the same response from different underwriters.

Staff Underwriters

underwriter who is usually in the home office who assists management with making and implementing underwriting policy. Manage the risk selection process and coordinate with other depts.

Feedback from Underwriting Audit

- Are procedures being followed? - Are procedures current and realistic? Do they need to be revised?

Underwriting Policy Contents

- Composition of book of business - Lines/classes of business - Amount of business - Rating philosophy/forms - Territories

Benefits of Predictive Modeling

- Consistent - Can improve profitability of a book - Can help manage a large book where individual, in-depth reviews are costly

Constraints on Underwriting Policy

- Financial Capacity - Reinsurance - Regulation - Personnel

How does underwriting help achieve profitability?

- Guarding against adverse selection - Ensuring adequate policyholders' surplus - Enforcing underwriting guidelines

How does regulation impact underwriting policy ?

- Insurers must be licensed - Rates, rules and forms must be filed - Some states must file UW guidelines - Can require coverage for unfavorable loss exposures - May have to withdraw if rate increases don't go through

How do predictive models in UW work?

- Variables of risk are developed to rank the likelihood of loss - Based on UW guidelines, loss experience (internal and industry) and UW expertise - The ranking developed by the variables is a predictive measure of future profit potential based on the account's characteristics

How are audited files selected?

- random - files with notable claims

How is underwriting authority granted?

-Underwriting experience/Positive Results - Producer experience, results, contracts -MGAs familiar with local conditions

Steps of 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 6. Monitor the underwriting decision

Line authorization guide

A document that provides the minimum and maximum line a primary insurer can retain on a loss exposure. Controls the property limits accepted based on treaty reinsurance.

Book of Business

A group of policies with a common characteristic, such as territory or type of coverage, or all policies written by a particular insurer or agency.

Underwriting Policy

A guide to individual and aggregate policy selection that supports an insurer's mission statement.

Application

A legal document that provides information obtained directly from an applicant requesting insurance and that an insurer can use for underwriting and claim handling purposes.

Predictive Modeling

A process in which historical data based on behaviors and events are blended with multiple variables and used to construct models of anticipated future outcomes.

Treaty Reinsurance

A reinsurance agreement that covers an entire class or portfolio of loss exposures and provides that the primary insurer's individual loss exposures that fall within the treaty are automatically reinsured.

How do underwriters ensure adequate policyholder surplus?

Adhere to underwriting guidelines- only accepting certain loss exposures and charging adequate premiums.

What must occur before line underwriters can underwrite?

Determine whether he/she has the necessary authority to make the decision. Communicated in the underwriting guidelines.

What is the main goal of underwriting?

Develop and maintain a profitable book of business for the insurer

Evaluate the Submission

Evaluate loss exposures and hazards. Seek to achieve information efficiency.

Producers as a source of UW info

Field-underwrite applicants and have first hand knowledge of the insured's business.

UW Guidelines: Avoid Duplication of Effort

If problems inherent in a situation have been identified and solved, the solution can be applied to all similar situations that may arise in the future.

Prospective Loss Costs

Loss data that are modified by loss development, trending, and credibility processes, but without considerations for profit and expenses.

Premium Audit

Methodical examination of a policyholder's operations, records, and books of account to determine the actual exposure units and premium for insurance coverages already provided.

GAAP Return on Equity

Net Income/Average Owners' Equity. Used by stock insurers.

SAP Return on Equity

Net Income/Average Policyholders' Surplus. Used by both stock and mutual insurers.

National Association of Insurance Commissioners Annual Statement

P&C has 33 lines of business. Fire, workers comp, etc. Must report premiums, losses and expenses by these lines of business, but insurers combine them to create products.

Financial Rating Services as a source of UW info

S&P, Exerpian- overall picture of financial status

What happens if an insurer has too high of a premium to surplus ratio?

The NAIC flags it for additional solvency surveillance from regulators.

Statutory Accounting Principles

The accounting principles and practices that are prescribed or permitted by an insurer's domiciliary state and that insurers must follow. Limit insurer capacity.

Capacity

The amount of business an insurer is able to write, usually based on a comparison of the insurer's written premiums to its policyholders' surplus.

Information Efficiency

The balance that underwriters must maintain between the hazards presented by the account and the information needed to underwrite it.

Underwriting

The process of selecting insureds, pricing coverage, determining insurance policy terms and conditions, and then monitoring the underwriting decisions made.

Policyholder's Surplus

Under statutory accounting principles (SAP), an insurer's total admitted assets minus its total liabilities.

Underwriting Submissions

Underwriting information for an initial application, or a substantive policy midterm or renewal change.

Return on Equity

a profitability ratio: net income/net worth. Net worth is also called shareholders' equity or policyholders' surplus.

Underwriting Audits

a review of underwriting files to ensure that individual line underwriters are adhering to UW guidelines.

Specialty Market

accounts that have unique needs, such as professional liability, that are not adequately addressed in the standard market

UW Guidelines: Ensure Adherence to Reinsurance Treaties and Planned Rate Levels

affects the profitability of a book of business and the eligibility for reinsurance. Ex: if the value of a home is understated, the home will be underinsured, and premiums will be inadequate to cover planned losses.

National Association of Insurance Commissioners (NAIC)

an assc of insurance commissioners from the US and its territories who coordinate insurance regulation among states. Determine whether an insurer can meet its obligations to policyholders

Manuscript Policy

an insurance policy that is specifically drafted according to terms negotiated between a specific insured (or group of insureds) and an insurer. Written by a line underwriter to cover complex/unique accounts.

Importance of Information Systems in Underwriting Authority

can be automatically coded and exceptions can be documented. Personal auto/homeowners may have automated underwriting.

Underwriting Authority Cutoffs

can be types of business or policy limits.

Claim files as a source of UW info

claims representatives document lotsa info in their investigations

Applications as a source of UW info

general info, specific info about loss exposures, can have supplemental questionnaires

Job of Line Underwriters

evaluate individual accounts for acceptability and execute underwriting policy by following procedures outlined by staff underwriters.

Nonstandard Market

higher-risk applicants who are charged a higher-than-average premium

UW Guidelines: Provide a Basis for Predictive Models

identify applicants with lower underwriting risk (rank/score all variables associated with an account and its loss exposures)

UW Guidelines: Provide for Structured Decisions

identify major considerations underwriters should evaluate for each type of insurance. Identify principal hazards to ensure underwriters consider this.

Expert Systems

knowledge or rules based systems. Help insurers improve efficiency and make consistent UW decisions by asking for all necessary info. Used in personal insurance.

Loss data as a source of UW info

loss frequency/severity, types of losses, trends in loss experience/reporting. Helps predict future losses and price policies.

Personnel in Underwriting Policy

must have a sufficient number of properly trained underwriters to effectively implement underwriting policy. Must have sufficient volume of premium/IT to be efficient in a territory.

Line Underwriters

primarily responsible for implementing the steps in the underwriting process. Evaluate new submissions and renewal underwriting

Field Underwrite

producers often know type of accounts insurer wants and submits those of quality. Aka front-line underwriters that save time/$

Financial Capacity

relationship between premiums written and the size of policyholders' surplus.

Adjusting underwriting policy based on jurisdiction

response to limited capacity. Ex: restrict acceptance to workers comp if benefit levels in a state are rising.

Redirecting focus on target business classes

response to limited capacity. Stop pursuing a class of business with higher than expected losses and develop a marketing campaign for accounts with better returns.

Support Producers and Insureds

role of line underwriter. Help producers prepare policy quotations that will "win" accounts.

Coordinate with Marketing Efforts

role of line underwriter. Producers should not submit accounts outside UW guidelines, and underwriters should not reject accounts based on bias.

Manage a Book of Business

role of line underwriters. Can be from a producer, written in a territory or LOB, and works to meet overall goals on product mix, loss ratio, and written premium.

Recommend/Provide Coverage

role of line underwriters. Ensure there are risk mgmt techniques in place to address gaps in insurance coverage. May narrow or broaden requested coverage to meet specific needs. Make sure forms are in place to provide required coverage.

Select Insureds

role of line underwriters. Select new and renewal accounts that meet the criteria in the underwriting guidelines. Avoid adverse selection, charge adequate premiums, select preferable accounts, spread business by location, class, size, and LOB. Ongoing monitoring.

Classify and Price Accounts

role of line underwriters. group accounts with similar attributes so they can be priced appropriately (both profitable and competitive). These classifications are filed with state DOI.

Research the Market

role of staff underwriter, actuaries, and marketing. Effect of adding/deleting business, expanding/retiring states, optimal product mix, and premium volume goals.

Assist with Complex Accounts

role of staff underwriter. Consultants to other underwriters. Can review/approve risks with limits too high for a line underwriter.

Conduct Underwriting Audits

role of staff underwriter. Monitor line underwriter adherence to authority/guidelines. Focus on documentation, procedure, selections. Also look at stats by type of insurance, class of business, size of exposure, territory. Show if UW goals are met, but not if they are a product of the guidelines.

Revise Underwriting Guidelines

role of staff underwriter. Must accurately reflect changes in UW policy. Often include systematic instructions for handling classes of accounts, but can be more general.

Evaluate Loss Experience

role of staff underwriter. Should changes be made to underwriting guidelines? Often occurs when losses are greater than anticipated. Includes market analysis for trend.

Research and Develop Coverage Forms

role of staff underwriter. Work with actuaries/legal to develop new coverages/modify existing coverage forms.

Formulate Underwriting Policy

role of staff underwriter. translate insurer's mission/goals into specific strategies that determine the composition of an insurer's book of business.

Participate in Industry Associations

role of staff underwriters. Address industry concerns, residual market, policy forms.

Arrange Treaty Reinsurance

role of staff underwriters. Determine need, select reinsurer, negotiate, and maintain relations. Affects the types of coverage and limits that can be offered.

Review and Revise Pricing Plans

role of staff underwriters. Respond to changes in loss experience, competition, and inflation. Prospective Loss Cost + Expenses + Profit = Rate

Conduct Education and Training

role of staff underwriters. Train line underwriters through formal program or specific classes.

UW Guidelines: Distinguish Between Routine and Non-Routine Decisions

routine: line underwriter has decision making authority, non-routine: does not.

UW Guidelines: Support Policy Preparation and Compliance

rules and eligibility for various rating plans (retrospective, experience). Regulations are incorporated in the guidelines.

Loss Development

the increase or decrease in incurred losses over time.

Underwriting Authority

the scope of decisions that an underwriter can make without receiving approval from someone at a higher level

Evaluation Tools: Telematics

use of GPS tacking to collect and analyze data regarding driver behavior/vehicle use.

Acceptable Return on Equity

used by insurance regulators to survey solvency. An acceptable value is 5-15%

Premium audit reports as a source of UW info

useful info about operations that may have underwriting implications