Chapter 4- The Underwriting Function

production underwriter

an insurer employee who works in the insurer's office in an underwriting position but also travels to visit and maintain rapport with agents and sometimes clients

Premium-to-surplus ratio

A capacity ratio that indicates an insurer's financial strength by relating net written premiums to policyholders' surplus. We divide premiums by surplus and if this exceeds 300% it's considered too high and the insurer will be monitored by regulators. Rapid growth could cause an insurer to exceed this limit.

Combined ratio is greater than 100%

An UW loss occurs: more dollars are being paid out than are being taken in as premiums.

Combined ratio is less than 100%

An UW profit occurs because not all premium dollars taken in are being used for claims and expenses.

Market Conduct Examination

An analysis of an insurer's practices in four operational areas: sales and advertising, underwriting, ratemaking, and claim handling. Regulators perform this to ensure that insurers adhere to the classification and rating plans they have filed.

Routine decisions

are those for which the line underwriter clearly has decision-making authority according to the underwriting guidelines.

Line Underwriters

Primarily responsible for implementing the steps in the UW process. - select insureds (new and renewal accounts) - classify and price accounts - recommend or provide coverage - manage a book of business - support producers and insureds - coordinate with marketing efforts

Trending

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

binder

A temporary written or oral agreement to provide insurance coverage until a formal written policy is issued.

When the combined ratio is exactly 100%

every premium dollar is being used to pay claims and cover operating costs, with nothing remaining for insurer profit.

underwriting profit

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

Expense Ratio Formula

incurred underwriting expenses divided by written premiums

Purpose of Underwriting Guidelines

- Provide for structured decisions - Ensure uniformity and consistency - Synthesize insights and experience - Distinguish between routine and non routine decisions - Avoid duplication of effort - Ensure adherence to reinsurance treaties and planned rate levels - Support policy preparation and compliance - Provide a basis for predictive models

Line underwriters activities

- performing market research - formulating underwriting policy - revising underwriting guidelines to reflect changes in underwriting policy - evaluate loss experience - researching and developing coverage forms - Reviewing and revising pricing plans -assisting other with complex accounts -conducting underwriting audits.

Factors before Selecting an Underwriting Alternative

1) underwriting authority- the UW must determine if he/she has authority. 2) supporting business- the applicant should have a desirable business 3) mix of business- the UW must consider whether accepting the submission supports the insurers goals for the mix of business. 4) Producer relationships- 5) Regulatory restrictions

Constraints to Underwriting policy

1. Financial Capacity 2. Regulations 3. Reinsurance 4. Personnel- should have experienced Ups for large accounts

non-financial measures for UW results

1. Selection 2. Product of line-of-business mix 3. Pricing 4. Accommodated Accounts 5. Retention Ratio 6. Hit Ratio 7 Service to producers 8. Premium to Underwriter

Certificate of insurance

A brief description of insurance coverage prepared by an insurer or its agent and commonly used by policyholders to provide evidence of insurance.

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. This can also provide a consistent way to review individual applications that imposes the overall profitability of a book of business.

Return on Equity (ROE)

A profitability ratio expressed as a percentage by dividing a company's net income by its net worth (book value). Depending on the context, net worth is sometimes called shareholders' equity, owners' equity, or policyholders' surplus.

counteroffer

A proposal an offeree makes to an offeror that varies in some material way from the original offer, resulting in rejection of the original offer and constituting a new offer.

retrospective rating

A ratemaking technique that adjusts the insured's premium for the current policy period based on the insured's loss experience during the current period; paid losses or incurred losses may be used to determine loss experience.

Experience rating

A rating plan that adjusts the premium for the current policy period to recognize the loss experience of the insured organization during past policy periods.

Schedule rating

A rating plan that awards debits and credits based 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.

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. (means the primary insurer has agreed to cede insurance to the reinsurer, and the reinsurer has agreed to accept the business)

Underwriting audit

A review of underwriting files to ensure that individual underwriters (line underwriters) are adhering to underwriting guidelines.

rating plan

A set of directions that specify criteria of the exposure base, the exposure unit, and rate per exposure unit to determine premiums for a particular line of insurance.

Hit ratio

The ratio of insurance policies written to those that have been quoted to applicants for insurance

Expense Ratio

An insurer's incurred underwriting expenses for a given period divided by its written premiums for the same period.

success ratio

The ratio of insurance policies written to those that have been quoted to applicants for insurance

Line underwriters

Evaluate new submissions and perform renewal underwriting, usually by working directly with insurance producers and applicants

Constraints in Establishing Underwriting Policy

Financial Capacity (the relationship between premiums written and surplus), regulation reinsurance, and personnel(insurers should have talented employees to market products effectively and to preform good service).

Prospective loss costs

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

Purposes of Underwriting Guidelines

Provide for structured decisions- equipment is what influences premium. Ensure uniformity and consistency Synthesize insights and experience Distinguish between routine and nonroutine decisions Avoid duplication of effort Ensure adherence to reinsurance treaties and planned rate levels Support policy preparation and compliance Provide a basis for predictive models

Facultative Reinsurance

Reinsurance of individual loss exposures in which the primary insurer chooses which loss exposures to submit to the reinsurer, and the reinsurer can accept or reject any loss exposures submitted.

Financial Measures

Such as the combined ratio- which is a profitability ratio that indicates whether an insurer has made an underwriting loss or gain.

Statutory accounting principles (SAP)

The accounting principles and practices that are prescribed or permitted by an insurer's domiciliary state and that insurers must follow. It is designed to determine whether an insurer can meet its obligations to policyholders.

Information Efficiency

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

mix of business

The distribution of individual policies that compose the book of business of a producer, territory, state, or region among the various lines and classifications.

Loss Development

The increase or decrease of incurred losses over time.

loss costs

The portion of the rate that covers projected claim payments and loss adjusting expenses. They are based on a classification system that combines similar loss exposures into the same rating classification. Accurate classification ensures a pool of loss exposures with similar expected loss frequency and severity.

retention ratio

The percentage of insurance policies renewed. Retained earnings/net income

Underwriting Authority

The scope of decision that an underwriter can make without receiving approval from someone at a higher level.

Purpose of Underwriting Audits

These are conducted periodically to monitor line underwriters adherence to the practices and procedures outlines in the underwriting guidelines. They are used to achieve uniformity and consistency in the application of underwriting standards.

Develop Underwriting alternatives/counter offer

This is done after the application has been submitted to accept the application subject to certain modifications: 1) Require risk control measures 2) Change insurance rates, rating pans, or policy limits 3) Amend policy terms and conditions 4)Use facultative reinsurance

Financial Capacity

This is the relationship between premiums written and the size fo the policyholders' surplus, which is the insures net worth. This relationship is crucial in evaluating insurer solvency.

Staff underwriter

Underwriter who is usually located in the home office and who assists underwriting management with making and implementing underwriting policy.

Account underwriting

a method of underwriting in which all of the business from a particular applicant is evaluated as a whole

Distortions

could be created by changes in premium volume, major catastrophic losses, delays in loss reporting and loss development, underwriting cycles are financial measures that can influence underwriting results.

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

Nonroutine decisions

involve submissions that fall outside the underwriter's authority

Combined ratio

loss ratio + expense ratio. This is a profitability ratio that indicates whether an insurer has made an underwriting loss or gain. The lower the ratio, the better.

Underwriting authority

this is granted to underwriter based on their experience and knowledge in risk selection decisions. This typically varies based on position, grade level, experience, having positive results, profitability, and contractual agreements.