The Underwriting Process

Individual Rating (Specific Rates)

property insurance rating method based on rates applicable only to individual properties, determined by physical inspection of the property. Used when every insured is unique and could not readily be placed into a class with other similar insureds

*Deposit Premium or Provisional Premium

the premium paid at the beginning of the policy period (The premium deposit required by the insurer on forms of insurance subject to periodic premium adjustment.)

Underwriting Agency

An agency given underwriting and policy writing authority by an insurer. This authority actually allows an agent to price and issue the physical policy to the insured.

Adverse Selection

An imbalance in an exposure group created when persons who perceive a high probability of loss for themselves seek to buy insurance to a much greater degree than those who perceive a low probability of loss.

All the following are common sources of property and casualty insurance underwriting information EXCEPT:

binder

Underwriting Guidelines

A set of rules and requirements an insurer provides for its agents and underwriters. The underwriter uses these guidelines to make decisions regarding the acceptance, modification, or rejection of a prospective insured.

Expenses

include commissions to its producers, employee salaries, office expenses, taxes, and other costs of doing business.

An insurance company's loss ratio is determined by dividing the insurer's:

incurred losses by its earned premiums

Insurance Rate

is the price of insurance for each unit of exposure. Rates vary by insured; those representing a higher risk will be assigned a higher rate than lower-risk insureds.

Underwriters

Any individual in insurance who has the responsibility of making decisions regarding the acceptability of a particular submission and of determining the amount, price, and conditions under which the submission is acceptable.

Incurred Expenses

Expenses paid plus reserves for expenses to be paid.

Profits and Contingencies

If an insurer's actual results are as predicted or better, the insurer will earn a profit.

Certificate of Insurance

A document providing evidence that certain general types of insurance coverages and limits have been purchased by the party required to furnish the certificate.

Application

A form providing the insurer with certain information necessary to underwrite a given risk. The applicant must complete and sign it to apply for insurance.

Binder

A legal agreement issued by either an agent or an insurer to provide temporary evidence of insurance until a policy can be issued.

Loss Report

A listing of reported claims providing such information as the date of occurrence, type of claim, amount paid, and amount reserved for each as of the report's valuation date.

Inspection Report

A report, by an insurer or one of a number of inspection services available, assessing the moral, financial, and physical aspects of a risk.

*Earned Premium

That portion of a policy's premium that applies to the expired portion of the policy. Although insurance premiums are often paid in advance, insurers typically "earn" the premium at an even rate throughout the policy term. The unearned portion of the premium that has been paid is kept in the "unearned premium reserve."

Expense Ratio

The percentage of premium used to pay all the costs of acquiring, writing, and servicing insurance and reinsurance. Is an integral part of retrospective rating basic premiums. (An insurer's expense ratio is calculated by dividing incurred expenses by written premiums.)

Underwriting

The process of determining whether to accept a risk and, if so, what amount of insurance the company will write on the acceptable risk, and at what rate

Incurred Losses

The total amount of paid claims and loss reserves associated with a particular time period, usually a policy year. Incurred losses are customarily computed in accordance with the following formula: losses incurred during the period, plus outstanding losses at the end of the period, less outstanding losses at the beginning of the period. This does not ordinarily include incurred but not reported (IBNR) losses.

Written Premium

This is the premium registered on the books of an insurer or a reinsurer at the time a policy is issued and paid for.

Making the Underwriting Decision The underwriter may:

*accept the application if it clearly meets all underwriting guidelines *reject the application if it clearly fails to qualify *accept the application with stipulations if it is a borderline risk

The Underwriting process involves several steps, including:

*agency underwriting *risk analysis by the home office underwriter *making the underwriting decision *implementing the decision *regularly monitoring the results

Property and Casualty insurance company underwriters analyze risks using the following resources:

*completed application *agency report *loss history data *motor vehicle record (MVR) *inspection report and photos (as required) *loss control report *credit information (if applicable)

Three ratios in evaluating the results of an insurance company's underwriting:

*loss ratio *expense ratio *combined ratio

A written binder should clearly identify:

*the insurer with which the coverage is bound *the type of policy *the amount of insurance *the covered peril(s)

Loss Control Report

A risk management technique that seeks to reduce the possibility that a loss will occur and/or reduce the severity of those that do occur. (Driver training programs are loss control programs that seek to reduce the likelihood of accidents occurring. Sprinkler systems are loss control devices that reduce the severity of loss by fire.)

Loss Ratio

Proportionate relationship of incurred losses to earned premiums expressed as a percentage. If, for example, a firm pays $100,000 of premium for workers compensation insurance in a given year, and its insurer pays and reserves $50,000 in claims, the firm's loss ratio is 50 percent ($50,000 incurred losses/$100,000 earned premiums). (An insurer's loss ratio is calculated by dividing incurred losses by earned premiums.)

Combined Ratio (also known as the combined loss and expense ratio)

is the sum of its loss ratio and expense ratio.

Class Rating

method of determining property insurance premium for properties occupied by businesses that fall into certain "classes," provided that they meet certain eligibility criteria.

Components of a property and casualty insurance rate include:

loss costs expenses a margin for profits and contingencies

The money that a property insurance policyholder pays for insurance covering his building is called a(n):

premium

Loss Cost (pure premium)

reflect past claims (historical loss costs) and estimated future claims (prospective loss costs). Insurers add their expense and profit loadings to these loss costs to develop rates

Loss Reserve

reflects an estimate of the amount that it will eventually pay in settling the claim.

The property and casualty underwriting process generally involves all the following steps EXCEPT:

risk analysis by the producer

Insurance Premium

what the policyholder pays to the insurance company in exchange for receiving insurance coverage. It generally equals the insurance rate times the number of exposure units.