AINS 21- Underwriting and Ratemaking Flashcards
Underwriting
process of selecting insureds, pricing coverage, determining insurance policy terms and conditions, and then monitoring the underwriting decisions made
book of business
a group of policies with a common characteristic, such as a territory or type of coverage, or all policies written by a particular insurer or agency
Guarding Against Adverse Selection
Underwriters are an insureds guard against adverse selection, the tendency for people with the greatest probability of loss to be the ones most likely to purchase insurance.
Underwriters minimize the effects of adverse selection by:
- carefully selecting the applicants whose loss exposures they are willing to insure
- charging appropriate premiums for the applicants that they do accept with premiums that accurately reflect the loss exposures
- and monitor applications and books of business for unusual patterns of policy growth or loss
Ensuring Adequate Polyholders’ Surplus
an insurance company must have adequate policyholders’ surplus (total admitted assets minus its total liabilities) if it wishes to increase its written premium volume
an insurer’s capacity is limited by regulatory guidelines and often by its own voluntary constraints, which are frequently more conservative than those imposed by regulators.
underwriters ensure the adequacy of polyholders’ 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
Enforcing Underwriting Guidelines
underwriting guidelines is 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. These guidelines reflect the levels of underwriting authority that are granted to varying levels of underwriters, producers, and managing general agents. Exactly who has what level of underwriting authority varies considerably by insurer and by type of insurance.
Underwriting ensures that applicants accepted adhere to underwriting guidelines. if loss exposures, risks or policy limits on an application exceed an underwriter’s authority, he or she will seek approval through supervisory and management ranks within the underwriting department.
Line Underwriters
the underwriter who is primarily responsible for implementing the steps in the underwriting process
evaluates new submissions and performs renewal underwriting
line underwriters work directly with insurance producers and applicants
Staff Underwriters
the underwriter who is usually located in the home office and who assists underwriting management with making and implementing underwriting policy.
Manages the risk selection process
works with line underwriters and coordinate decisions with other departments to manage the insurance product, pricing, and guidelines
Line Underwriters vs Staff Underwriters
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Line Underwriters: Select Insureds
select new and renewal accounts that meet the criteria established in underwriting guildelines
monitor accounts to ensure that they continue to be acceptable and may cancel or nonrenew an account if risk contro recommendations made at the policy’s inception are not implemented or if the insured fails to take corrective action to control loss frequency
This duty is important in order to maintain the goals of:
- avoiding adverse selection
- charging adequate premiums with high than average chance of loss
- selecting better than average accounts for which the premium charged will be more than accurate
- rationing an insurer’s available capacity to obtain an optimum spread of loss exposures by location, class, size of risk, and line of business
Line Underwriters: Classify and Price Accounts
groups accounts with similar attributes so they can be priced appropriately
for some lines of business, line underwriters may not have an discretionary latitude in policy pricing; in other lines, they can use individual rating plans to apply debits and credits that will adjust the premium to reflect the characteristics of the individual insured; must be sure that the account characteristics justify the adjustments and must document that the account complies with the insurer’s individual rating plan filed with regulatory authorities
Line Underwriters: Recommend or Provide Coverage
supports producers and policyholders by inquiring about the insureds risk management program- may help address gaps in insurance coverage
role in ensuring that applicants obtain the coverage they request; requires collaboration from the producer. Explains the type of losses the coverage forms are designed to cover and the endorsements that must be added to provide the coverage desired.
For most accounts, the line underwriters simply ensures appropriate forms and endorsements provide the requested coverage.
Line Underwriters: Manage a Book of Business
frequently the are expected to manage a book of business
some are made responsible for the profitability of a book of business accepted from a producer, or written in a territory or line of business
works to ensure that each book of business achieves established goals, such as product mix, loss ratio, and written premium
Line Underwriters: Support Producers and Customers
services vary
some may respond to routine inquiries and requests
insurers operating through independent agents often rely on the sales force to perform many policy service functions; line underwriters have an active interest in ensuring that producers’ and insureds’ needs are met
usually directly involved with producers in preparing policy quotations
Line Underwriters: Coordinate with Marketing Efforts
underwriters should not reject applications that meet insurer underwriting guidelines simply because of an underwriter’s bias against a particular class of business.
some insurers rely on special agents or field reps to market the insurer and its products to agents and brokers. some insurers have blended responsibilities of special agents and line underwriters into the position of production underwriter. production underwriters usually confer personally with producers and assists them with developing accounts that are acceptable to the insurer.
Staff Underwriters: Research the Market
share the research responsibilities with actuarial and marketing dept. research includes an ongoing eval of:
- effect of adding or deleting entire lines of business
- effect of expanding into additional states or retiring from states presently serviced
- optimal product mix in the book of business
- premium volume goals
Staff Underwriters: Formulate Underwriting Policy
works with employees from other dept to formulate underwriting policy; no single underwriting policy is appropriate for all insurers. insurers often develop their underwriting policy within the context of the market(s) in which they serve:
Standard Market
Nonstandard Market
Specialty Market
Staff Underwriters: Revise Underwriting Guidelines
usually responsible for revising underwriting guidelines so that they can accurately reflect changes in underwriting policy.
some guidelines include systematic instructions for handling particular classes of commercial accounts; may identify specific hazards to evaluate, alternatives to consider, criteria to use when making final decisions, ways to implement the decision, methods to monitor the decision. may also provide pricing instruction and reinsurance-related info
Staff Underwriters: Evaluate Loss Experience
evaluate an insurer’s loss experience to determine whether changes should be made in underwriting guidelines
insurance products that have losses greater than those anticipated are usually target for analysis
may reveal trends affected the insurer’s products
Staff Underwriters: Research and Develop Coverage Forms
coverage forms are developed both by advisory organizations and individual insurers. advisory developed coverage forms are usually constructed by coverage experts who consider the scope of coverage being provided, coverage provided by other policies, and legal restrictions that apply to coverage form development. When an insurer develops its own forms, staff underwriters collaborate with the insurers actuarial and legal dept. Insurers may create their own to meet changing consumer needs and competitive pressures.
Staff Underwriters: Review and Revise Pricing Plans
reviews and updates rates and rating plans continually, subject to regulatory constraints, to respond to changes in loss experience, competition, and inflation.
Uses history loss data to develop prospective loss costs.
Staff Underwriters combine prospective loss costs with an insurer-developed profit and expense loading to create a final rate used in policy pricing.
for any overages for which advisory organizations do not develop loss costs, the insurer must develop its own rates. in such situations, reviewing and revising rating plans become even more crucial to ensure that the loss costs adequately reflect loss development (increase or decrease of incurred losses over time) and trending (a statistical technique for analyzing environmental changes and projecting such changes into the future).
Staff Underwriters: Arrange Treaty Reinsurance
responsible for securing and maintaining treaty 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)
when facultative reinsurance (reinsurance of individual loss exposures 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) is required for a particular account, the reinsurance transaction may be handled by either a staff underwriter or a line underwriter
Staff Underwriter: Assist Others with Complex Accounts
often serve as consultants to other underwriters
generally have significant first-hand line underwriting experience
regularly see complex and atypical accounts, unlike most line underwriters
also function as referral underwriters- when an application exceeds a line underwriter’s authority, a referral underwriter can review and approve the risk
Staff Underwriter: Conduct Underwriting Audits
often responsible for monitory line underwriter activities and adherence to underwriting authority by conducting underwriting audits
focus on proper documentation, adherence to procedure and classification and rating practices, and conformity of selection decision to the underwriting guide and bulletins
Staff Underwriter: Participate in Industry Associations
many insurers are members of national and state associations that address insurance industry concerns, insurers often share in the operation of residual market mechanisms, such as auto joint underwriting association and windstorm pools.
Staff underwriters typically represent the insurer as a member of these organization. May also serve on an advisory organizations committees that study standard policy forms and recommend changes.
Staff Underwriter: Conduct Education and Training
usually responsible for determining the education and training needs of line underwriters
some training needs are met through programs provided by the insurer’s HR dept
often develop courses and serve as instructors in technical insurance subjects
Hazards: Four Types
Physical: tangible characteristic of property, persons, or operations that tends to increase the frequency or severity of loss
Moral: condition that increase the likelihood that a person will intentionally cause or exaggerate a loss
Morale: condition of carelessness or indifference that increases the frequency or severity of loss
Legal: condition of the legal environment that increases loss frequency or severity.
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. allows insurers to reflect on factors not reflected in the class rates
Retrospective Rating
A ratemaking technique that adjusts the insured’s premium for the current policy period based on the insured’s loss experience during the current period; paid losses or incurred losses may be used to determine loss experience.
Facultative Reinsurance
Reinsurance of individual loss exposures 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.
UW Process: Develop Alternatives
the UW may accept a submission as is, reject the submission, or accept the submission subject to certain modifications.
Four major ways an UW can modify a submission:
1) Require risk control measures
2) Change insurance rates, rating plans, or policy limits
3) Amend policy terms and conditions (counteroffer)
4) Use facultaive reinsurance (if treaty reinsurance is not available, treaty reinsurance is an agreement that cover 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.)
UW Process: Select an UW Alternative
must decide whether to accept a submission as offered, reject it, or accept it subject to mods
Rejection is sometimes unavoidable; however, rejections produce neither premium nor commission, only expense. And remember that the UW goal is to produce profitable business.
Rating
a main activity performed by the Underwriting Department, determines the policy premium which is known as rating
according to irmi, it is to match the hazard or exposure of an insured with the appropriate premium for that insured.
Exposure Units
unit of measure used to determine an insurance policy premium.
area, gross receipts, payroll, for example
UW Management: Participating in Insurer Management
Typically responsibility for marketing, product development, claims, finance, actuarial services, and others.
might determine what type of marketing system the insurer uses
office locations
emphasis that will be placed on personal and commercial insurance
etc.
must decide how UW activities can contribute to the insurer’s broad goals
UW Management: Arranging Reinsurance
one responsibilities is purchasing reinsurance (aka insurance for insurers)
stabilizes the insurer’s loss experiences
provides protection against catastrophic losses
allows an insurer to provide a large amount of insurance under a single policy
provide insurer with additional UW info and expertise
Two types of reinsurance: Treaty and Facultative
Treaty 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. An arrangement in which a reinsurer agrees to automatically reinsure a portion of all eligible insurance of the primary insurer. Policies not selected individually
Facultative Reinsurance
not automatic
reinsurance of individual loss exposures in which the primary insurer chooses which loss exposures to submit to he reinsurer, and the reinsurer can accept or reject any loss exposures submitted
pricing, term, and conditions of each policy are individually negotiated
UW Management: Delegating UW Authority
an insurer’s UW management focuses on the entire group of insureds.
UW management must determine how much UW authority to grant to those UW.
UW Authority is the scope of decisions that an UW can make without receiving approval from someone at a higher level.
authority given reflects the UW experience and responsibilities and the types of insurance handled.
UW authority is highly decentralized- field office personnel-
UW authority can also be centralized- home office, field office personnel serves as point of contact where insurer personnel gather info, accept apps, provides policyholder services
many insurers are neither completely centralized or decentralized- strive to maintain balance between the UW authority given to UW in field offices and the UW authority reserved for home office UW
also grant some UW authority to the agents who represents them, known as front-line UW
UW Management: Developing and Enforcing UW Guidelines
UW guidelines and bulletins explain how UW should approach each app, evaluate the app they receive, decide how to handle, and act on those deciions
UW Management: Monitoring UW Results
to see whether UW guidelines have produced the desired effect and to ensure that UW are following UW guidelines and the UW goals are being met.
sometimes sends UW audit teams to visit field offices to perform an UW audit
Discrimination: Fair vs Unfair
discrimination itself is a neutral act, an insurer’s ability to discriminate fairly is essential if insureds are to be charged a premium commensurate with their loss exposures.
Unfair discrimination is prohibited as an unfair trade practice.
Examples of unfair discrimination: refusing to issue, canceling, or nonrenewing coverage for an applicant/insured solely on the basis of geographic location (redlining), gender, marital status, or race - notice how age is not listed here.
Cancellation/Nonrenewal
Restrictions on cancellation and nonrenewal help insurance serve its purpose of providing protection for policyholders.
Most states require that insurers provide notification of cancellation or nonrenewal to the insured within a specified period. this gives the insured an opportunity to replace the coverage.
Restrictions on cancellation and nonrenewal limit the speed with which underwriters can stop providing coverage for insureds who become undesirable.
Ratemaking
a complex process that requires analysis of both external and internal data. uses this to calculate insurance rates, which are a premium component.
relies on statistical analysis of past losses
Actuaries
a person who uses mathematical methods to analyze insurance data for various purposes, such as to develop insurance rates or set claim reserves
Loss Costs
insurance rating system is based on the insurers’ loss cost- the portion of the rate that covers projected claim payments and loss adjusting expenses.
an insurer adds an allowance for expenses and profits to the basic rate that has been developed from loss costs to determine the final rate for a particular loss exposure.
loss data reflects historical loss costs
Insurance Advisory Organizations
independent corporation that works with and on behalf of the insurers that purchase or subscribe to their services, which include developing prospective loss costs and standard policy forms.
The largest one is Insurance Services Offices, Inc (ISO)- provides analytical and decision-support products and services to the property-casualty industry.
Law of Large Numbers
a mathematical principle stating that as the number of similar but independent exposure units increases, the relative accuracy of predictions about future outcomes (losses) also increases.
assists insurers in that it allows a reliable estimate of future loss amounts
Prospective Loss Costs
loss data that are modified by loss development, trending, and credibility processes, but without considerations for profit and expenses. indicates the amount of money an insurer can expect to pay for future claims for each exposure unit.
Contingencies
a provision in an insurance rate for losses that could not be anticipated in the loss data.
Class Rating
a rating approach that uses rates reflecting the average probability of loss for business within large groups of similar risks; the predominant method used for rating commercial properties.
the basic premise of class rating system is that insureds with similar characteristics have similar potential loss frequency and severity. 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. for example and employer will pay more for workers compensation insurance for a construction worker than for a clerical worker because construction workers as a class are more likely to become injured or disabled on the job than clerical workers as a class
Personal auto insurance is most likely rated using class rates.
Individual rating
when insureds cannot be readily assigned to the same class, the insured loss exposure is rated individually. reflects the unique characteristics of an insured or the insured’s property.
fire insurance on a large, unique building is one ex that may use individual rating. the rate applied is “per $100 of insurance” to determine the premium for fire insurance.
Judgment Rating
when there is no established premium-determining system then the UW has to rely heavily on their judgment- type of individual rating
Final Rate
price per exposure unit determined by adjusting the prospective loss costs for expenses, profits, and contingencies.
to conduct business, insurers pay not only loss costs but also other expenses, such as UW and loss adjustment expenses, and plan for profits and contingencies. to set the final rates, they charge insureds for particular loss exposures. Individual insurers, therefore, add an allowance for factors such as expenses, profits, and contingencies to the basic insurance rates developed through insurance rating systems.
