Chapter 4: Underwriting

avoid duplication of effort

many underwriting situations recur, solution to one problem should apply to all similar situations that may arise in the future

What do underwriting audits focus on?

proper documentation: adhere to procedure, classification, and rating practices; and conformity of selection decisions to the underwriting guide and bulletins

education and training

staff underwriters are usually responsible for determining the education and training needs of line underwriters

who performs market conduct examinations?

state regulators to ensure that insurers adhere to the classification and rating plans they have filed

key point

states promulgate insurance regulations that take the form of statuses enacted by state legislatures and regulations adopted by the state insurance department

underwriting authority

the levels of underwriting authority granted to underwriters reflect their experience and knowledge in risk selection decisions

What is a consequence of misclassification?

the premium charge is not commensurate with the risk transferred

account underwriting

all of the business from a particular applicant is evaluated as a whole

ways authority is granted for producers

based one experience, profitability, and contractual arrangements

key point

by identifying the principal hazards associated with a particular class of business, underwriting guidelines ensure that underwriters consider the primary hazard traits of the exposures they evaluate

failure to comply with underwriting guidelines result in...

inadequate premiums for loss exposures accepted that are not anticipated in the insurer's planned rate levels

premium to surplus ratio

indicates an insurer's financial strength by relating net written premiums to policyholder's surplus, too high when it exceeds 300%

one approach to controlling underwriting authority

specify in the underwriting guidelines the policy limits at which the accounts must be submitted to a higher authority

underwriting guides

staff underwriters are responsible for revising underwriting guidelines to accurately reflect changes in underwriting policy, these guides identify major elements that line underwriters should evaluate for each type of insurance

What is the purpose of underwriting audits?

staff underwriters conduct periodic audits to monitor line underwriter's adherence to the practices and procedures outlined in the underwriting guidelines

key point

staff underwriters may serve on an advisory organization's committees that study standard policy forms and recommend changes

assisting others with complex accounts

staff underwriters often serve as consultants to other underwriters, they regularly see complex and atypical accounts, also function as "referral underwriters"

key point

staff underwriters work cooperatively with the actuarial and legal departments to develop new coverages and modify existing coverage forms developed by advisory organizations

non-routine decisions

submissions that fall outside the underwriter's authority

triggering events that may indicate change in an account

substantive policy change requests, significant and unique loss occurrences, risk control and safety inspection reports, premium audit results, renewal

underwriting evaluation tools

telematics (GPS), predictive analytics, predictive modeling, CAT modeling

What is the purpose of underwriting?

to develop and maintain a profitable book of business for the insurer

final step of line underwriting process

underwriter needs to monitor both individual policies and books of business to ensure that satisfactory results are achieved, must be alert to changes in insured's loss exposures

staff underwriters

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

ways authority is granted for MGA's

when appointed, assume decentralized underwriting authority, which capitalizes an MGAs familiarity with local conditions

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

underwriting policy

a guide to individual and aggregate policy selection that support an insurer's mission statement

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.

return on equity

a profitability ratio expressed as a percentage by dividing a company's net income by it's net worth (policyholder's equity)

underwriting audits

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

binder

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

market conduct examinations

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

manuscript policy

an insurance policy that is specifically drafted according to terms negotiated between a specific insured and an insurer

distortions in combined ratio are created by:

changes in premium volume, major catastrophic losses, delays in loss report and loss development, and underwriting cycles

staff underwriters responsibility in arranging treaty reinsurance

determine insurer's needs for reinsurance, select reinsurers, negotiate the terms and conditions of reinsurance treaties, and maintaining the insurer's relations with treaty reinsurers

second step in line underwriting process

developing alternatives such as accepting a submission as is, rejecting a submission, or making a counteroffer to accept the submission subject to certain modifications

non financial measures

evaluate individual underwriters and underwriting departments based on their actions rather than their results

line underwriting steps per the book

evaluate the submission, develop underwriting alternatives, select an underwriting alternative, determine an appropriate premium, implement the underwriting decision, monitor the underwriting decision

first step in line underwriting process

evaluating a submission's loss exposures and associated hazards

third step in line underwriting process (selecting an alternative)

factors to be considered: underwriting authority, supporting business, mix of business, producer relationships, regulatory restrictions

Constraints in establishing underwriting policy

financial capacity, regulation, personnel, reinsurance

ensuring adequate policyholder's surplus

if an insurer's underwriting practices generate policy premiums that exceed losses and expenses, then the policyholder's surplus will increase, thereby increasing capacity

enforcing 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 ranks within the underwriting department

key point

insurers recognize the limitations of their capacity and seek to write those lines of business or accounts that maximize return on equity

personnel

insurers require the talent of specialist to market their products effectively, underwrite specific lines of business, service their accounts, and pay claims for losses that occur

key point

line underwriters should not reject applications that meet insurer underwriting guidelines simply because of an underwriter's bias against a particular class of business

low retention rate

might indicate serious deficiencies in the way insurers do business, including poor service to producers, noncompetitive pricing, or unfavorable claim service

low hit ratio

may mean competition is increasing, coverages or forms are too restrictive, service is poor, poor relationship exists between insurer and producer

production underwriting

performing underwriting functions in an insurer's office as well as traveling to visit and maintain rapport with agents and sometimes clients

line underwriters are usually directing involved with producers in preparing ...

policy quotations

line underwriters

primarily responsible for implementing the steps in the underwriting process

a line underwriter may cancel or non renew an account if...

risk control recommendations made at the policy's inception are not implemented or if the insured fails to take corrective action to control loss frequency

underwriting guideline purposes

provide for structured decisions, ensure uniformity and consistency, combine 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, and provide a basis for predictive models

lower combined ratio

reflects a higher level of profitability for an insurer

reinsurance in underwriting

reinsurance treaties may exclude certain types of insurance or classes of business, or the cost of reinsurance may be prohibitive

financial capacity

relationship between premiums written and the size of the policyholder's surplus, crucial in determining insurer solvency

staff underwriting activities

research the market, formulate underwriting policy, revise underwriting guidelines, evaluate loss experience, research and develop coverage forms, review and revise pricing plans, arrange treaty reinsurance, assist others with complex accounts, conduct underwriting audits, participate in industry association, conduct education and training

review and revise rating plans

reviewing and revising rating plans becomes even more crucial to ensure that the loss costs adequately reflect loss development and trending

line underwriting activities

select insureds, classify and price accounts, recommend or provide coverage, manage a book of business, support producers and insureds, coordinate with marketing

underwriting performance standards

selection, product or line of business mix, pricing, accommodated accounts, retention ratio, hit ratio, service to producers, premium to underwriter

information efficiency

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

What happens to insurers who do not implement their classification plan as filed?

they are subject to possible fines

How do line underwriters support the producers and policyholders?

they inquire about an insured's risk management program to ensure that they are using other risk management techniques to address gaps in insurance

How do staff underwriters wok with line underwriters?

they work with line underwriters to coordinate decisions with other departments to manage the insurance product, pricing, and guidelines

Guarding against adverse selection

underwriters minimize the effects of adverse selection by carefully selecting the applicants whose loss exposures they are willing to insure, charging appropriate premiums for the applicants they do accept with premiums that accurately reflect the loss exposures, and monitoring applications and books of business for unusual patterns of policy growth or loss

fourth step in line underwriting process

underwriters must ensure that each loss exposure is accurately classified so that it is properly rated with the appropriate premium charged

key point

underwriting audits are the insurer's quality control check for uniform application of the underwriting guidelines and for continuous improvement

fifth step in line underwriting process (tasks for implementing underwriting decision)

underwriting decision is communicated to the producer, the insurance of any required documents, record data bout the applicant and the policy for policy issuance, accounting, statistical, and monitoring purposes

policy preparation and compliance

underwriting guidelines support compliance with state regulatory requirements, as staff underwriters incorporate applicable regulations in these guidelines

underwriting submission

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

premium to underwriter

underwriting management uses this non financial measure to determine whether individual underwriters are assuming their share of work compared with other underwriters in the same company handling similar accounts

ways authority is granted for underwriters

with experience and positive results