Chapter 5
Provide two examples of exposure units
auto - each vehicle commercial property - Each $100 of insured value
Standard Market (F policies)
better than average accounts for which the average premium is more than adequate
Referral underwriters
when an application exceeds a line underwriter's authority, a referral underwriter can review and approve the risk
The 6 steps in 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
What are the steps in 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
At what 5 times are policies usually monitored?
1. substantive policy changes - when a new location is added to a property policy or driver is added to an auto policy 2. significant and unique losses - when a claim is reported, it provides the underwriter with an opportunity to see is if the loss is a type they expected 3. preparation for renewal - as the policy expiration date approaches, underwriter checks to see if any changes have occurred 4. Risk control and safety inspections - these inspections may contain recommendations that were requirements of the policy issuance. A follow up investigation could reveal that only some of the requirements were met 5. Premium Audits - report that could disclose larger loss exposures than originally contemplated, unacceptable operations, new products, new operations or financial problems.
Moral Hazard
A condition that increases the likelihood that a person will intentionally cause or exaggerate a loss. - saying there was $5000 in the truck when the vehicle was stolen
Individual rate or specific rate
A type of insurance rate that reflects the unique characteristics of an insured or the insured's property Ie- fire insurance on a large, unique factory building. An underwriter would go through the building using a point system that adds and subtracts things such as fire extinguishers and the number of points determines an insurance rate for that building
Expert system or knowledge-based systems
Computer program that supplement the underwriting decision making process. These systems ask for the information necessary to make an underwriting decision, ensuring that no information is overlooked
Hazard
Condition that increases the frequency or severity of a loss
Provide examples of the kinds of decisions made at an insured's senior management level
Decisions made at an insurance company's senior management level might determine what type of marketing system the insurance company uses, office locations, the emphasis that will be placed on personal and commercial insurance and so forth
Gather Necessary Information: Financial Rating Services
Dun & Bradstreet (D&B), Standard & Poor's and Experian are some of the major financial rating services that provide data on the credit ratings of individual businesses, together with industry averages for comparison.
Interstate Trucking Co (ITC) has 60 employees. among them are 40 truck drivers who sped 95% of their time on the road. The organization also has 7 customer service representatives who handle telephone calls and schedule shipments from the home office. Under ITCs workers comp insurance, which group of employees would the company pay more to insured, why?
ITC would pay more for workers comp insurance covering its truck drivers based on the higher number of loss exposure units for the truck drivers class rating.
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 ranks within the underwriting department
Reinsurance
Insurance for insurance companies - stabilizes the insured's loss experience, providing a large amount of insurance under a single policy, and protects against catastrophic losses.
XYZ Company is applying for building insurance. The rate is .50 per $100 of building insurance. XYZ would like to insure the buiilding for $500,000. Caluculate the premium that XZY would pay
Insured value/unit size = number of exposure units $500,000/$100 = 5000 units rate per unit x number of exposure units = premium .50 x 5000 = $2500
a commercial property has a rate of .50 per $100 of building insurance, and the building is being insured for $600,000
Insured value/unit size = number of exposure units $600,000/$100 = 6,000 units rate per unit x number of exposure units = premium .50 x $6,000 = $3,000
Provide examples of items for which staff underwriters engage in ongoing research to evaluate
Items for which staff underwriters engage in ongoing research to evaluate include, effect of adding or deleting entire lines or business, effect of expanding into additional states or retiring from states presently services, optimal product mix in the book of business, premium volume goals
Gather Necessary Information: Field marketing personnel
Marketing personnel such as marketing representatives and special agents who can provide both specific and general underwriting information
How do you calculate the premium?
Rate per unit x number of exposure units = premium IE - .40 per peach x 2 peaches = .80 .98 per pound x 5 pounds = 4.90
Unfair Discrimination - unfair trade practices
Refusing to issue, canceling, or non-renewing coverage for an applicant or an insured solely on the basis of geographic location, gender, martial status, or race
Identify factors that influence staff underwriters to update rates and rating plans
Review and update rates and rating plans continually, subject to regulatory constraints, to respond to changes in loss experience, competition and inflation
Loss Costs
The portion of the rate that covers projected claim payments and loss adjusting expenses
Staff Underwriter
Works in office to assist underwriting management with making and implementing underwriting policy, revises underwriting guidelines so that they accurately reflect changes in the underwriting policy. (handles already established policies)
Certificate of insurance
a brief description of insurance coverage prepared by an insurance company or its agent commonly used by policyholders to provide evidence of insurance (insurance card)
Morale Hazard (attitudinal hazard)
a condition of carelessness or indifference that increases the frequency or severity of loss. -no wirres, careless because they know they have insurance coverage
Legal Hazard
a condition of the legal environment that increases loss frequency or severity. A state where litigation runs rampid, very little litigation
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 insurance company or agency
Rating
a main activity completed by the underwriting department which is prices or determines the policy premium
Law of Large Numbers
a mathematical principal stating that if there are enough similar loss exposures, we can pretty much predict the future. Can predict that 1 out of 100 trees will fall in a windstorm
Actuary
a person who uses mathematical methods to analyze loss data and develop insurance rates
Books of Business: class of business
a poor loss ratio in a particular class of business can indicate inadequate pricing or a disproportionate number of high hazard policyholders relative to the average loss exposure in the classfication
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.
Market Conduct Examinations
a process of evaluation used by state insurance departments to determine that an insurance company's practices and procedures are in compliance with state laws and regulations and to help ensure fair treatment of insureds and claimants
Step 2: Develop Underwriting Alternatives Modifying submissions - Counteroffer
a proposal an oferee 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. Counteroffers can include changing insurance rates, rating plans or policy limits
Contingencies
a provision in an insurance rate for losses that could not be anticipated in the loss data - extra money for unanticipated rates/losses
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. - adjustments to the current policy
Experience Rating
a ratemaking technique that adjusts the insured's premium for the upcoming policy period based on the insured's experience for the current period. - using past to set future premiums
Class rating
a rating approach that uses rates reflecting the average probability of loss for businesses within large groups of similar risks; the predominant method used for rating commercial properties. All memebrs of a class are charges the same rate for insurance, although their premiums will be different if they have different numbers of exposure units. Similar characteristics, similar coverages IE - a homeowner with a $400,000 home will pay more for homeowners insurance than a homeowner with a $200,000 home
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 of loss exposures and provides that the primary insurance company's individual loss exposures that fall within the treaty are automatically reinsured - all or nothing
Rate Manual
a resource for classifying accounts and developing premiums for given types of insurance; includes necessary rules, factors, and guidelines to apply those rates
Underwriting Audit
a review of underwriting files to ensure that individual underwriters are adhering to underwriting guidelines
Trending
a statistical technique for analyzing environmental changes and projecting such changes into the future
Physical Hazard
a tangible characteristic of property, persons, or operations that tends to increase the frequency or severity of loss Ie- houses, boats
Binder
a temporary written or oral agreement to provide insurance coverage until a formal written policy is issued
Catastrophe Model
a type of computer program that estimates losses from future potential catastrophic events -- if hurricane happened in 1938 and today, how much damage would it cause and cost today
Underwriting Guidelines (guide)
a written manual that communicates an insurance company's underwriting policy and that specifies the attributes of an account that an insurance company is willing to insure
Specialty Market (Y policies)
accounts that have unique needs, such as professional liability that are not adequately addressed in the standard market
A movie theater is applying for commerical general liability insurance. The rate is $100 per 1,000 admissions. The insurance company estimates that the theater will have 50,000 admissions in the new policy period. Caluculate the premium
admissions/unit size = number of exposure units 50,000 admissions/1000 admissions = 50 exposure units rate per unit x number of exposure units = premium $100 x 50 = $5000
Treaty Reinsurance
an agreement in which a reinsurance company agrees to automatically reinsure a portion of all eligible insurance of the primary insurance
Insurance Advisory Organization
an independent corporation that works with and on behalf of insurance companies that purchase or subscribe to their services, which include developing prospective loss costs and standard policy forms (ISO) (NCCI)
Advisory Organizations
an independent organization that works with and on behalf of insurance company's that purchase or subscribe to its services - made up of coverage experts who consider the scope of coverage being provided and modify existing coverages
National Council on Compensation Insurance (NCCI)
an insurance advisory organization that manages a database of workers compensation insurance information, analyzes industry trends, prepares workers comp rate recommendations and assists in the developing state specific workers comp forms and endorsements
Underwriting Policy (underwriting philosophy)
an insurance company's mission and goals that are turned into specific strategies that make the company's book of business
Underwriting submissions
applications, renewals, and policy changes to which the underwriting process is applied
Identify the primary functions that influence that authority give to an underwriter
authority given to an underwriter usually reflects the underwriters experience and responsibiltities and the types of insurance handled
Describe the goals of effective account selection by line underwriters
avoid adverse selection, charging adequate premiums for accounts with a higher than average chance or loss, select better than average accounts for which the premium charged will be more than adequate, rotioning an insurance companys available capacity to obtain an optimum spread of loss exposures by location, class, size of risk, and line of business.
On what are insurance loss costs typically based
based on elaborate classification system in which similar loss exposures are combined into the same rating classficiation
How is insurance premium calculated?
by multiplying the insurance rate (unit price) by the number of exposure units.
What is the purpose of constant monitoring of underwriting results
constant monitoring of underwriting results enables underwriting management to adjust underwriting guidelines to accommodate changing conditions, goals and results
Step 1: Evaluate the submission
evaluating a submission's loss exposures and associated hazards which fall into 4 categories
What is the difference between fair discrimination and unfair discrimination in insurance underwriting
fair discrimination is applying the same standard or method of treatment to insureds. Unfair discrimination involved applying different standards or methods of treatment to insureds who have the same basic characteristics and loss potential
Identify items on which underwriting audits focus
focus on proper documentation, adherence to procedure and classification and rating practices, and conformity of selection decisions to the underwriting guide and bulletins
Identify the elements listed in underwriting guidelines
guidelines list the factors that should be considered by the underwrter for each type of insurance, the desirable and undesirable characteristcs of applicants relative to those factors, and the insurance companys overall attitude toward applicants that exhibit those characteristics
Gather Necessary Information: Producers
has personal contact with an applicant, and first hand knowledge of the applicant's business operations, knows the applicants reputation in the community and has determined the applicant's coverage needs Ie - talks one on one, gets a feel what for a person is like
Describe the role of insurance advisory organizations in ratemaking
helps develop insurance rating systems by collecting reliable loss data that insurance companies use in establishing their rates and premiums. The organizations analyze the loss data collected to determin the average loss costs per exposure unit used in class rating
Nonstandard Market (E policies)
higher risk applicants who are charged a higher than average premium
Prospective loss costs
historical loss data gathered by the insurance companies that are modified by loss development, trending and credibility processes to create a final rate used in policy pricing
Gather Necessary Information: Government Records
include motor vehicle reports; criminal court records; and civil court records, including records of suits filed, mortgages and liens, business licenses, property tax records, US Securities and Exchnage Commission (SEC) filings and bankruptcy filings
Gather Necessary Information: Inspection Reports
independent inspections or risk control reports control reports provide underwriting information about the property's physical condition, the business operations' safety record and the policyholder's management - physical inspections
Explain why insurance companies often adjust data on a historical loss costs in the ratemaking process
insurance companies often adjust data on a historical loss costs in anticipation of losses that can be expected in the future as a result of inflation or other measurable trends. The resulting prospective loss costs indicate the amount of money an insurance company can expect to pay for future claims for each exposure unit
Agency Reinsurance
insurance company that dividies the insurance among several insurance companies Ie - 1 carrier may take comp collision for auto, another carrier may take homeowners. NJM takes home and auto, Geico takes motor cycle
Describe the line underwriters responsibility of account classification
line underwriters are responsible for account classification, which is the process of grouping accounts with similar atributes so that they can be priced appropriately
Explain why line underwriters have an active interest in ensuring that producers' and insureds' needs are met
line underwriters have an active interest in ensuring that producers' and insureds' needs are met because customer service activities and underwriting are often interwoven.
How to line underwriters respond to requests from producers and applicants who want to know how coverage will respond to a particular type of loss
line underwriters respond to requests from producers and applicants who want to know how coverage will respond to a particular type of loss by explaining the types of losses the coverage forms are designed to cover and the endorsements that must be added to provide the coverage desired
Front-line underwriters
make the initial underwriting decision about applications and then forward those applications that meet underwriting guidelines to the insurance company's underwriter
Centralized Underwriting Authority
many or all final underwriting decisions are made in the home office
Books of Business: territories or geographic areas
monitoring territorial underwriting results can help the insurance to target areas for future agency appointments in profitable regions. Poor results could indicate areas from which the insurance company might withdraw or in which the insurance company might raise rates, if permitted by regulators
Identify the responsibilities underwriting management entails
participating in the insured's overall management, arranging reinsurance, delegating underwriting authority, developing and enforcing underwriting guidelines, monitoring underwriting results
Insurance Premium
periodic payment by the insured to the insurance company in exchange for insurance coverage Ie - in the grocery store, if an 18oz jar of peanut butter costs $2.34, the unit price is .13 per ounce
List 5 prinicipal sources of underwriting information (any of these 5)
procedures, insurance applications, inspection reports, government reports, financial rating services, loss data, field marketing personnel, premium auditors and claim files.
Identify the purpose of a market conduct evalutation
process of evaluation used by state insurance departments to determine that an insurance company's practives and procedures are in compliance with state laws and regulations and to help ensure equitable treatment of insureds and claimants
Insurance Services Offices, Inc. (ISO)
provides analytical and decision-support products and services to the property-casualty industry
Gather Necessary Information: Applications
provides general information required to process, rate, and underwrite loss exposures of the applicant - how the application is completed, half ass or in full
Judgement rating
rating used by underwriters to rate one of a kind risks
Redlining
refusing to issue coverage solely based on geographic location
List three examples of unfair discriminations
refusing to issue, cancel or nonrenew coverage for an applicant or an insured soley on the basis of the applicant's or insured's geographic location, gender, or marital status or race
Facultative reinsurance
reinsurance of individual loss exposures in which the primary insurance company chooses which loss exposures to submit to the insurance company, and the reinsurance can accept or reject any loss exposures submitted - can cherry pick the policies they want to reinsure
what are the 4 major ways an underwriter can modify a submission
require rick control measures, change insurance rates, rating plans, or policy limits, amend policy terms and conditions, use facultative reinsurance.
Line Underwriter
responsible for evaluating new submissions and performing renewals - ensures that the policy is being issued with the appropriate forms and endorsements and works to achieve goals for each book of business (handles new policies)
Identify examples of items that mat be included in underwriting guidelines
some underwriting guidelines include systematic instructions for handling particular classes of commercial accounts. Such guidelines may identify specific hazards to evaluate, alternatives to consider, criteria to use when making the finical decision, ways to implement the decisions, and methods to monitor the decision. The guidelines may also provide pricing instructions and reinsurance-related information
When evaluating an insurance companys loss experience, what products do staff underwriters usually target to analysis
staff underwriters usually target for analysis insurance products that have losses greater than those anticipated
Predictive Analytics
statistical and analytical techniques used to develop models that predict future events or behaviors. - prediction of hurricanes - where the storm is going to go
Identify examples of events that trigger the monitoring of existing policies
substantive policy changes, significant and unique losses, preparation for renewal, risk control and safety inspections, premium audits
What is the basic premise of an insurance classification and rating system
that insureds wth similar characteristics have similar potential loss frequenct and severity. Even though wide variation in actual losses may occur from one insured to the next, aggregate losses among all memebers of the class should be predictable different from the losses of all memebers of another class who have different characteristics
An insured has experienced excessive theft, vandalism and suspicious fire losses in one territory. Upon investigation, the underwriters discovered that the major employer in the territory had closed. The resulting unemployment has created financial pressures on many former workers. It is suspected that the losses are a result of these pressures. The insured has implemented a significant rate increase for all property in this territory as a result of the losses. Judge whether the rate increase implemented by the insurance company is an example of fair or unfair discrimination
the action by the insurance company is an example of fair discrimination because the premium increase being charged is commensurate with the increased loss exposure experienced by the property owners in the territory
Capacity
the amount of business an insurance company is able to write, usually based on a comparison of the insurance company's written premiums to its policy holder surplus.
Information Efficiency
the balance that underwriters must obtain between the hazards presented by the account and the information needed to underwrite it IE - buying a $300 weather report to settle a $700 claim
Mix of business
the distribution of individual policies that compose the book of business of a producer, territory, state, or region among various lines and classificiation Ie - keeping everything balanced
Loss Development
the increase or decrease of incurred losses over time
Identify examples of goals for a book of business that a line underwriter works to help achieve
the lint underwriter works to ensure that each book of business achieves established goals, such as product mix, loss ratio, and written premium
Gather Necessary Information: Loss data
the loss experience of a commercial policyholder might be extensive enough to statistically significant on its own. - Used to predict future losses
Explain how to calculate a commerical insurance premium using the rate and exposure unit
the number of exposure units is multiplied by the insurance rate
Final rate
the price per exposure unit determined by adjusting the prospective loss costs for expenses, profits and contingencies
Insurance Rating System
the price per exposure unit determined by adjusting the prospective loss costs for expenses, profits and contingencies
Rate
the price per exposure unit for insurance coverage
Ratemaking
the process insurance companies use to calculate insurance rates, which are a premium component
Account Classification
the process of grouping accounts with similar attributes so they can be priced appropriately
Books of Business: Producers
the producer's premium volume, policy retention, and loss ratio are evaluated both on an overall basis and by type and class of business. That evaluation should include the balance or mix of business designer between personal and commercial insurance and the projected growth factor.
Facultative Reinsurance
the reinsurance company evaluated each policy it it asked to reinsure and the underwriters decide which they want to reinsure. Pricing, terms and conditions of each policy are individually negotited
Underwriting Authority
the scope of decisions that an underwriter can make without receiving approval from someone at a higher level
Adverse Selection
the tendency for people with the greatest probability of loss to be the ones most likely to purchase insurance Ie - people prone to coastal storms purchase windstorm coverage or increase their limits only before a hurricane season, when they expect severe losses.
Exposure Units
the unit of measurement (Ie- area, gross, receipts, payroll) used to determine an insurance policy premium Ie - in homeowners insurance, exposure units are normally expressed as $1,000 of insured value. In the case of a home being insured for $400,000, the number of exposure units is 400
Describe how underwriters use ISO and commerical lines Manual (CLM) to determine premiums
they provide classification tables that contain hundreds of classification of commercial business operations. When calculating the premium for commerical accounts, underwriters typically determine the insured's business operation and then find the appropriate rating classification in the applicable classification table
What is the purpose of schedule rating plans?
they use them to reflect the differences between the applicant and the average risk. Underwriters apply scheduled rating credits to "better than average" risks and scheduled debits to "worse than average" risks
Explain how staff underwriters are involved in the development of coverage forms
they work cooperatively with the actual and legal departments to develop new coverage forms and to modify existing coverage forms
Identify the purpose of requiring an insurance company to provide notification to the insured of cancellation or non-renewal within a specified period
this notice is intended to give the insured an opportunity to replace the coverage
What is the purpose of underwriting?
to develop and maintain a profitable book of business
Desribe the approaches underwriters take to minimize the effects of advserse selection
to minimize the effects of adverse selection, underwriters carefully select the applicants whose loss exposures they are willing to insure, charge premiums that accurately reflect the loss exposures for those applicants they select, and monitor applications and books of business for unusual patters of policy growth or loss
What is the distinction between treaty reinsurance and facultative reinsurance?
treaty reinusrance automatically reinsures all eligible policies, while facutative reinsurance involved a separate transaction for each reinsured policy.
Describe the approaches underwriters take to ensure the adequacy of policy holder's surplus
underwriters ensure the adequacy of policyholders' surplus by adhering to underwriting guidelines, making certain that all loss exposures are correctly identified, and charging adequate premiums for the applications that are accepted
Why might an underwriter vary from the manual rate when determining premium
underwriters vary from the manual rate to relfect the reality of actual exposures to loss, the specific characteristics of those exposures and competitive market influence
what factors, beyond the content of a submission itself, must an underwriter consider before selecting an underwriting alternative?
underwriting authority, supporting business, mix of business, producer relationships, regulatory restrictions
Decentralized Underwriting Authority
underwriting management delegates extensive underwriting authority to field office personnel
Gather Necessary Information: Claim files
when renewing existing policies an underwriter can obtain insights into the policyholder's character by reviewing the policyholder's claim files. A lot of information can be accumulated this way.