CIP 120: Underwriting Essentials

When Assessing a Risk an underwriter may approach with questions such as: 1. who is the applicant 2. what kind of loss may the applicant occur 3. First party or third party 4. What perils does the risk face 5. What physical Hazards 6. does the risk posses a moral hazard 7. How much information is needed to make a decision (past losses, financial statements)

Generally an underwriter will reject the risk if forced to by one or more considerations: 1. The risk is of a class not permitted by the guideline or falls sort of minimum requirements by the line guide. 2. Market conditions or competitive considerations. If it is a hard market, the underwriter may be forced to reject. 3. The risk is, on its own merits, to flawed to be accepted, and it is not possible to negotiate terms.

Definition: 1. Pure premium is the premium required to pay for insured losses - that is to just pay the claim. 2. Development factors - are the adjustments to current reserves for claims that have yet to be settled to reflect the estimated final costs of those claims. 3. Trend Factors - Adjustments applied to all losses to reflect what they would probably cost if they were to occur next year rather than having occurred at some time in the past.

4. Acquisition cost - incurred by the insurer to conclude a contract of insurance with a policy holder. This typically include commission, advertising, promotional expense, inspection or appraisal fees. 5. Administration expenses - general expense the insurer incurs to operate the business. These may include cost of providing and maintaining premises, buying equipment and supplies, salaries and benefits for staff, interest on debt. 6. Profit - is the amount of money left to insurer after all of the expenses

A Typical Application: The Applicants name, The broker or agent The applicants contact info The desired effective and expiry dates The applicants occupation The applicants loss experience Whether the applicant has been canceled by any previous insurers Whether the applicant qualifies for any premium discounts Who signed the application and how has it been signed.

Additional Insured is any party not automatically included as an insured but is entitled to a certain degree of protection under the policy. An Additional Named Insured is any party other than the original Named Insured identified as an Insured under the policy. An Additional Named Insured has more rights under the policy than does the an Additional Insured but also more responsibilities.

COPE 1. Construction - types of materials used in the walls, roof, size of building, age, number of stories, type of heating system and fuel. 2. Occupancy - Use of the property by occupants including number of occupants, operations, hazards, measures to reduce hazards. 3. Protection - includes public and private. Public is town grade, private is sprinkler extinguishing system, fire brigades, alarm systems.

COPE cont'd 4. Exposure - refers to chance that the applicant will suffer a loss as a result of proximity to one or more other risks or potential causes. Separate buildings near the applicants. Nature hazards (body of water/forests) nearby, fellow occupants.

Principles of Policy Analysis: Contra Proferentem, Legal precedents, underwriter must understand intent, Manuscript policy, Policy wordings. Insurance policy and law, policy as contract.

Contract is an agreement between legally capable parties for a consideration demonstrating intent to do something that is legal.

Definitions: 1. Exposure base - denomination in which the unit of exposure is expressed 2. Exposure unit - expressed as a specified amount of the exposure base such as units of $1,000 receipts. 3. Three mandatory plans administered by the GISA: - The Automobile Statistical plan (Green Book) - The Ontario Statutory Accident Benefits Statistical Plan - The Ontario Commercial Liability Statistical Plan 4. Law of large numbers 5. Theory of Probability

Criteria for Usefulness of Statistic: 1. Size of the Sample 2. Time period of when the sample was taken 3. Conditions of past and future of the sample. Ratemaking is done by actuaries. Rating is done by underwriters.

Definitions: 1. Reciprocals - Issue policies, charge premiums and pay claims. Examples of alternative risk transfer. Reduce the market for Traditional insurance. 2. Captives - Created to write the parent company's own insurance. Reduce the market for traditional insurance. Help influence the market cycle and the demands it places on underwriters

Enron Method and Scandal - Buying and selling in future contracts between buyers and sellers of natural gas. - Guaranteed stable prices for buyers and sellers while affording a commission to Enron - Enron owed much of its success to inflated statements of profit, dubious accounting practices and fraud. - Method became apparent, the companies share price began to fall.

The knowledge an underwriter needs: 1. the environment 2. the legal system 3. the business 4. the product 5. the risk

Hard Skills: Tangible, measurable skills, uniquely associated with a particular job. Technical Skills Analytical Skills Soft Skills: Intangible, unmeasurable, generally useful in any job. Communication Skills Organizational Skills Other Requirements: Cooperation with other professionals, conflicting considerations, personal characteristics, the power of why.

Unique Features of Insurance Contracts 1. Insurable interest 2. Indemnity 3. Utmost Good Faith (Uberrima Fides) A higher standard of honesty. Only the Insured has all the material facts. The essence of utmost good faith. Elements overlap. Underwriter depends on honesty of the Insured.

Insurance Policy: is a document that provides evidence of a contract of insurance. It states and details the terms of the contract that is the terms of the agreement between the Insured and Insurer.

What is an Underwriter 1. An underwriter is an insurance professional employed to accept or reject risk on behalf of an insurer. 2. An underwriter is an investor of shareholder capital 3. Underwriter is an insurance professional employed to implement an insurer's strategic plan.

Insurance: Insurance is the undertaking by one person to indemnity another person against loss or liability for loss in respect of a certain risk or peril to which object of insurance may be exposed, or to pay a sum of money or other thing of value upon the happening of a certain event.

Parts of an Insurance Policy: 1. Declarations (Parties, Effective Dates, Effective Premium, Amounts Insured, Other Interested Parties, Description of Object of Insurance - sometimes) 2. Insuring Agreements - The object of insurance, the perils insured against, exclusions, how the Insured may receive any proceeds of the insurance. 3. Statutory or General Conditions - Rights and responsibilities that law assign to both Insured and Insurer under the policy.

Parts of an Insurance Policy: 4. Policy conditions - A condition clause states if the Insured does or does not do a certain thing, the insurer will not pay a claim or the insurance policy be declared void. 5. Signature Clause

Five elements of a Contract: 1. Offer and Acceptance (Agreement) 2. Capacity of Parties to Contract 3. Consideration (Promise) 4. Genuine Intention (meeting the Minds) 5. Legality of Object

Quebec: Elements of Contract 1. Consent 2. Capacity to Contract 3. Cause of Contract 4. Object of Contract

Soft Market - When Supply exceeds demand, competition between insurers is keen, prices for insurance are driven down and terms are less restrictive. Hard Market - When demand exceeds supply, competition between insurers is less intense, prices for insurance are driven up, terms are more restrictive. Supply of demand for insurance capacity rise and fall against each other in cycles of hard and soft markets.

Risk management Is both an academic discipline and a profession. It is a process that allows insurance and risk management professionals to systematically identify and deal with risk exposures. Risk managers are those responsible for managing pure risk exposures within an organization.

Negligence is omission to do something which a reasonable person, guide by those considerations which ordinarily regulate the contact of human affairs, would do, or doing something that a prudent and reasonable person would not do.

The ABC Rule 1. A duty of care exists 2 The duty was Breached 3. There is a casual relationship shown between the breach and the damage.

The Underwriting Process The Line Guide: License, Types of Business Lines of Insurance, Territory Capacity, Reinsurance Pricing, Applying the Line Guide Assessing the Risk, Making a Decision

The Amounts of Insurance an Underwriter may authorize for risk are determined by criteria such as the following: 1. The Occupancy of the risk 2. The level of fire protection 3. The type of construction

The CLEAR System The Canadian Loss Experience Automobile Rating System. IBC obtains insurance experience loss from the statistical companies of Canada: The GAA, ICBC, MPIC, and SGI The Clear system bases the premium for physical damage insurance on the likelihood of vehicles being involved in claim and whist will typically cost to settle each claim.

The MSRP - Manufacturers Suggested Retail Price MSRP is often unfair because ignores: 1. Most collision claims result in repair rather than replacement of the vehicle. 2. Vehicle price is not the only predictor repair costs 3. Some features that add to the price of the vehicle may lower the likelihood for a claim, claim costs. 4. Vehicle price is not always the best predictor if claims frequency or severity. 5. Not all vehicles depreciate at the same rate. 6. Vehicles may exhibit different track records for different types of claims.

Personal Umbrella Policy Offers three main benefits in addition those available under ordinary liability insurance (Primary Policy): 1. Limits of insurance of those in the primary policy 2. Drop down coverage (broader coverage) to cover certain exposures that primary policy does not. 3. Territorial Limits are wider than those in the primary policy.

The broader coverage might include: 1. broader premises liability coverage 2. excess auto liability coverage 3. coverage for liability arising out of the use of watercraft and non owned aircraft. 4. Coverage of the policy holder's employer's liability

7. Rate - is the price of unit of insurance for the policy period. 8. Premium - is the total cost of the insurance. Major components of any rate are: 1. The anticipated cost of settling a claim (loss ratio) 2. The acquisition costs of obtaining the business such as commission. (sales expenses) 3. The cost of the administrating the process including taxes levied on the premium. A Rate will be adequate if actuarial forecast of future losses based on the past losses are accurate for the population. The sample represented by the book of business must be representative of the population.

The process that actuaries use to arrive at an adequate rate are: 1. Classifying the risk based on the types of objects of insurance, the hazards of exposure or both. 2. Determining the number and nature of the rating classes. 3. Selecting the proper measure of exposure. 4. Gathering loss statistics (General Insurance Statistical Agency - GISA) and IBC. 5. Predicting future losses from the data regarding past losses. 6. Calculating the pure premium from the predicted losses. 7. Calculating The Total Premium 8. Calculating the premium rate or unit cost.

The potential involvement of the courts make liability insurance more difficult to underwrite than other types of insurance because: 1. An applicant can be sued for any part for which another person or organization to recover damages from the applicant. There is no way of knowing ahead of time what will happen. 2. Once a lawsuit has gone to trial it is not possible to be certain whether the applicant will be found legally liable. 3. If the applicant is found liable in court there is no way to predict the amounts the court will require the applicant to pay.

Two systems of Civil Law: Quebec and Common Law Common law is mixture of case law and statue law. Three Ways that civil law may impose liability 1. Negligence: A wrongful act is an intentional act or negligent act or failure to act 2. Nuisance - Private and Public Nuisance 3. Breach of Contract

Compulsory Insurance and Residual Markets Common law provinces require insurers to be members of a residual market called the facility association In Quebec insurers are required to be members of the Groupement Des Assuruers automobiles (GAA) which administers a residual market called the Risk Sharing Plan (RSP)

Underwriting Process for Automobile Risk: Review the application, Learn about the applicant, Identify the lessors of any leased vehicles, Examine the applicants relationship with the broker, ask about the use of the vehicle, type or class of the vehicle, any after market modifications, any repairs, identify and distinguish between the registered and actual owner, establish the drivers age and Canadian driving experience, maintenance, make underwriting decision.

Underwriting the Commercial Risk 1. Premises Liability - is rooted in the duty of care Occupier, Trespasser, Licensee, Invitee, Contractual entrant Hold harmless clause and indemnity agreements are used together to transfer liability from where it normally lies to someone else and direct who will pay for the defence cost in a legal action or for expenses to satisfy a judgement. Steps to analyze premises liability - chapter 5 - 15 2. Products Liability Bakery Example: Chapter 5 page 15 to 18. Summary Chapter 5 - Page 25 to 26.

Underwriting the Personal Risk Ask questions about the owners lifestyle, occupation and hobbies. Chapter 5 - 18 to 21.