CPCU 520 3rd Edition - Chapter 4 - The Underwriting Function

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.

Account underwriting

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

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.

Premium-to-surplus ratio, or capacity ratio

A capacity ratio that indicates an insurer's financial strength by relating net written premium to policyholders' surplus.

Market conduct examination

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

Underwriter

An insurer employee who evaluates applicants for insurance, selects those that are acceptable to the insurer, prices coverage, and determines policy terms and conditions.

Underwriting profit

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

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.

Understanding Guidelines (underwriting guide)

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.

Hazard

A condition that increases the frequency or severity of a loss.

Underwriting policy (underwriting philosophy)

A guide to individual and aggregate policy selection that supports 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 (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.

Combined ratio

A profitability ratio that indicates whether an insurer has made an underwriting loss or gain. (loss ratio+expense ratio)

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 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.

Underwriting audit

A review of underwriting files to ensure that individual 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 business.

Policyholders' surplus

An insurer's assets minus its liabilities, which represents its net worth.

Loss Exposure

Any condition or situation that presents a possibility of loss, whether or not an actual loss occurs.

Hit ratio

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

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.

Production underwriting

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

Facultative reinsurance

Reinsurance of individual loss exposure 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.

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.

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.

Underwriting authority

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

Policyholders' surplus

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

Staff Underwriter

Underwriter who assists underwriting management with making and implementing underwriter policy.

Line Underwriter

Underwriter who is primarily responsible for implementing the steps in the underwriting process.

Underwriter submission

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