1.11 Insurer Underwriting Flashcards
Underwriter
Underwriting protects the insurer against adverse selection and risks that are more likely than average to suffer losses. The underwriter’s primary responsibility is the selection of risks to be insured. The underwriter also determines the classification, and premium rate if a risk is accepted by the insurer.
The goal of an underwriter is to select risks that fall into the normal range of expected losses. The producer is the field underwriter; the line and staff underwriters are employed by the insurer.
Underwriting Factors
Nature of the risk
• Hazards that are present
• Claims history
• Other factors that depend upon the type of risk being insured
Rate
The dollar amount charged for a particular unit of insurance, such as $5 per $1,000 of insurance.
Premium
The total cost for the amount of insurance purchased.
For instance, $50,000 of coverage = $5 rate x 50 (per $1,000 of insurance) for a $250 premium.
Class Rating
A rate charged to a group of policyholders who have similar exposures and experience.
Experience Rating
A rate based on the policyholder’s actual loss history when compared to the loss history of similar risks.
Individual Rating
A rate used for a policyholder because a large enough pool of similar risks is not available to any other type of rate. Primarily used for commercial any specialty risks because of the number of unique variables involved.
“A” Rating or Judgment Rating
An individual rate that doesn’t use loss history as a component and that is derived largely from the underwriter’s evaluation and best judgment the risk poses to the insurer.
Loss Cost Rating
A rating organization provides insurers with the portion of a rate that does not include provisions for expenses or profit.
• The expense and profit components to develop the final rate must be added by individual insurers based upon their projections.
• Loss cost rating is used on risks for which the insurer may not have enough data to develop the rate, other than for expenses and profit.
Manual Rating
The use of rates contained in a manual published by the insurer or those of the rating organization of which it is a member.
Merit Rating
The use of rates that rewards a policyholder that takes measures to decrease the probability of loss by the implementation of safety programs, loss control programs, etc.
Retrospective Rating
The use of rates that adjust the policy premium to reflect the current loss experience of the policyholder. Premium adjustments are subject to minimums and maximums.
• Deposit Premium is the required initial premium paid into the policy that is subject to adjustment. A premium audit will be used to determine the actual premium based on the risk exposures
File and Use
Rates must be filed with the state insurance regulatory authority (Department of Insurance) and may be used as soon as they are filed.
Prior Approval
Insurers cannot use rates until approved by the Department of Insurance, or until a specific time period has expired after the filing.
Mandatory Rates
Some states require that mandatory rates be used for certain lines of insurance.
