INS 21 Assignment 5: Underwriting and Ratemaking
Provide 2 examples of exposure units
-auto- each vehicle -commercial property- each $100 of insured value -general liability- each $1,000 of gross sales; each 1,000 of square feet of area; each 1,000 admissions -homeowners- each $1,000 of insured value -workers compensation- each $100 of payroll
Provide examples of items for which staff underwriters engage in ongoing research to evaluate
-effect of adding or deleting entire lines of business -effect of expanding into additional states or retiring from states presently services -optimal product mix in the book of business -premium volume goals
Explain how individual states in the United States regulate underwriting activities through restrictions on unfair discrimination, cancellation, and nonrenewal
-prohibition of unfair discrimination: the ability to discriminate fairly among applicants is one of the most important elements of underwriting -restrictions on cancellation and nonrenewal: most states require that an insurer provide notification to the insured within a specified period of time before a policy is to be cancelled or nonrenewed. this notice is intended to give the insured an opportunity to replace coverage
Describe the purpose of underwriting
The overarching purpose is to develop and maintain a profitable book of business for the insurer. Underwriting is crucial to an insurer's success.
A movie theater is applying for commercial general liability insurance. The rate is $100 per 1,000 admissions. The insurer estimates that the theater will have 50,000 admissions in the new policy period, Calculate the premium
admissions/unit size= # of exposure units 50,000/1,000= 50 exposure units rate per unit X # of exposure units= premium $100 X 50 = $5,000
Explain why line underwriters have an active interest in ensuring that producers' and insureds' needs are met
because customer service activities and underwriting are often interwoven
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/she will seek approval through supervisory and management ranks within the underwriting department
Explain why insurers often adjust data on historical loss costs in the ratemaking process
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 insurer can expect to pay for future claims for each exposure unit
What is the basic premise of an insurance classification and rating system
is that insureds with similar characteristics have similar potential loss frequency and severity. even though wide variation in actual losses may occur from one insured to the next, aggregate losses among all members of the class should be predictably different from the losses of all members of another class who have different characteristics
Describe the line underwriter responsibility of account classification
line underwriters are responsible for account classification, which is the process if grouping accounts with similar attributes so that they can be priced appropriately
Identify the purpose of requiring an insurer to provide notification to the insured of cancellation or nonrenewal within a specified period
most states require that an insurer provide notification to the insured within a specified period, such as 30 days, before a policy is to be canceled or nonrenewed. this notice is intended to give the insured an opportunity to replace the coverage
On what are insurance loss costs typically based?
on an elaborate classification system in which similar loss exposures are combined into the same rating classification
Identify examples of goals for a book of business that a line underwriter works to help achieve
product mix loss ratio written premium
Identify items on which underwriting audits focus
proper documentation, adherence to procedure and classification and rating practices, and conformity of selection decisions to the underwriting guide and bulletins
Describe the use of exposure units in insurance rating
referred to as exposure units. insurers use standardized exposure units for rating most types of insurance
Explain how to calculate a commercial insurance premium using the rate and exposure unit
the # of exposure units X the insurance rate
Explain how staff underwriters are involved in the development of coverage forms
they work cooperatively with actuarial and legal departments to develop new coverage forms and to modify existing coverage forms
Describe the approaches underwriters take to minimize the effects of adverse selection
to minimize the effects od 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 patterns of policy growth or loss
What is the purpose of schedule rating plans?
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
Why might an underwriter vary from the manual rate when determining premium?
to reflect the reality of actual exposures to loss, the specific characteristics of those exposures, and competitive market influences
What is the distinction between treaty reinsurance and facultative reinsurance
treaty reinsurance: automatically reinsures all eligible policies facultative reinsurance: involves a separate transaction for each reinsured policy
Identify the primary factors that influence the authority given to an underwriter
usually reflects the underwriter's experience and responsibilities and the types of insurance handled
How do 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
Identify factors that influence staff underwriters to update rates and rating plans
loss experience competition inflation
Identify examples of items that may be included in underwriting guidelines
some guidelines may identify specific hazards to evaluate, alternatives to consider, criteria to use when making the final decision, ways to implement the decision, and methods to monitor the decision. They also may provide pricing instructions and reinsurance-related information
Describe the goals of effective account selection by line underwriters
-avoiding adverse selection -charging adequate premiums for accounts with a higher-than-average chance of loss -selecting better-than-average accounts for which the premium charged will be more than adequate -rationing an insurer's available capacity to obtain an optimum spread of loss exposures by location, class, size of risk, and line of business
What are the steps in the underwriting process?
-evaluate the submission -develop underwriting alternatives -select an underwriting alternative -determine an appropriate premium - implement the underwriting decision -monitor the underwriting decision
Identify the responsibilities underwriting management entails
-participating in the insurer's overall management -arranging reinsurance -delegating underwriting authority -developing and enforcing underwriting guidelines -monitoring underwriting results
List 5 principal sources of underwriting information
-producers -insurance applications -inspection reports -government records -financial rating services -loss data -field marketing personnel -premium auditors -claim files
List 3 examples of unfair discrimination
-refusing to issue, cancel, or nonrenew coverage for an applicant or an insured solely on the basis of the applicant's or insured's geographic location, gender or marital status, or race
What are the 4 major ways an underwriter can modify a submission
-require risk control measures -change insurance rates, rating plans, or policy limits -amend policy terms and conditions -use facultative reinsurance
Describe the underwriting activities typically performed by line underwriters
-select insureds -classify and price accounts -recommend or provide coverage -manage a book of business -support producers and insureds -coordinate with marketing efforts
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 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
Interstate Trucking Company (ITC) has 60 employees, Among them are 40 truck drivers who spend 95% of their time on the road. The organization also has 7 customer service reps who handle telephone calls and schedule shipments from the home office. Under ITC's workers compensation insurance, which group of employees would the company pay more for insurance? Explain.
ITC would pay more for workers compensation insurance covering its truckers, based on the higher number of loss exposure units for the truck drivers' class rating. long hours spent driving expose truck drivers to more traffic accidents than customer service reps. As a class, truck drivers suffer more frequent and more severe injuries and disabilities. The rating class for truck drivers reflects this significantly higher loss exposure. The employer pays a higher rate for the higher loss exposure.
Describe the underwriting activities typically performed by staff underwriters
Staff Underwriters: -research the market -formulate underwriting policy -revise underwriting guidelines -evaluate loss experience -research & develop coverage forms -review/revise pricing plans -arrange treaty reinsurance -assist others with complex accounts -conduct underwriting audits -participate in industry associations -conduct education and training
An insurer 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 insurer 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 insurer is an example of fair or unfair discrimination
although not all of the insurer's property policyholders in the territory would view it as fair, the action by the insurer is an example of FAIR discrimination. The premium increase being charged is commensurate with the increased loss exposures experienced by the property owners in the territory
Identify the purpose of a market conduct evaluation
are a process of evaluation used by state insurance departments to determining that an insurer's practices and procedures are in compliance with state laws and regulations and to help ensure equitable treatment of insureds and claimants
Provide examples of the kinds of decisions made at the insurer's senior- management level
determine what type of marketing system the insurer uses, office locations, the emphasis that will be placed on personal and commercial insurance, etc.
What is the purpose of constant monitoring of underwriting results
enables underwriting management to adjust underwriting guidelines to accommodate changing conditions, goals, and results
When evaluating an insurer's loss experience, what products do staff underwriters usually target for analysis
insurance products that have losses greater than those anticipated
Explain how insurance rates are developed
insurance rates are developed through insurance rating systems established by insurers and independent insurance advisory organizations. typically, insurance rating systems are primarily based on insurers' loss costs,
What is the difference between fair discrimination and unfair discrimination in insurance underwriting
insurance underwriting strives for fair discrimination by applying the same standard or method of treatment to insureds- distinguishing among properties, businesses, and people; grouping them into categories; and charging premium commensurate with their loss exposures. unfair discrimination involves applying different standards or methods of treatment to insured who have the same basic characteristics and loss potential
XYZ company is applying for building insurance. the rate is $.50 per $100 of building insurance. XYZ would like to insure the building for $500,00 Calculate the premium that XYZ would pay
insured value/unit size= # of exposure units $500,000/$100= 5,000 units rate per unit X # of exposure units- premium $0.50 X 5,000= $2,500
ABC company is a new business that provides internet marketing services to commercial clients. ABC is applying for workers compensation insurance for its sseven employees, who are classified as clerical employees. The manual rate is $0.30 per $100 of payroll. ABC's annual payroll is $500,000. Calculate the basic premium that would be charged for ABC's seven employees, ignoring any additional rating factors that might apply.
rate X exposure units= premium $0.30 X ($500,00/$100)= $1,500
Describe how underwriters use the Insurance Services Office, Inc (ISO) Commercial Lines Manual (CLM) to determine premiums
the ISO CLM provides classification tables that contain hundreds of classifications of commercial business operations. When calculating the premium for commercial accounts,, underwriters typically determine the insured's business operation and then find the appropriate rating classification in the applicable classification table.
Describe the role of insurance advisory organizations in ratemaking
they help develop insurance rating systems by collecting reliable loss data that insurers use in establishing their rates and premiums. The organizations analyze the loss data collected to determine the average loss costs per exposure unit used in class rating
Describe the approaches underwriters take to ensure the adequacy of policyholders' 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.
Identify the elements listed in underwriting guidelines
underwriting guidelines list the factors that should be considered by the underwriter for each type of insurance, the desirable and undesirable characteristics of applicants relative to those factors, and the insurer's overall attitude toward applicants that exhibit those characteristics
