Ch 31: Underwriting

Question 1

Underwriting definition

Answer 1

• The process of consideration of an insurance risk.
• Includes assessing whether the risk is acceptable and, if so, setting the appropriate premium, together with the terms and conditions of cover.
• May also include assessing the risk in the context of the other risks in the portfolio.

Question 2

Two underwriting risks

Answer 2

• Premium rates are not appropriate for the lives concerned.
• Premium rates permit selection against the company

Question 3

Outline of underwriting process

Answer 3

• To ensure that premium rates are approppriate for the lives concerned, the company will break down the lives into homogenous groups with respect to mortality (or whatever contingency is relevant) and price accordingly. - done at product development stage
• Rating factors are used for splitting applicants into homogenous groups.
• The more rating factors are used and subsequently the more groups are categorised, the more selection against the company is prevented.
• However, too strong underwriting procedures may discourage business or cost more than what it saves.

Question 4

How underwriting is used to manage risk (6)

Answer 4

• It can protect the company from anti-selection. Being slightly different from the market standards may lead to an accumulation of anti-selection (if no rating factor is used for smoking, but the market does use it -> increased anti-selection)
• The process will enable a life insurer to identify lives with a substandard health risk for whom special terms would need to be offered.
• For these substanard risks, the underwriting process will identify the most suitable approach and level for the special terms to be offered.
• Adequate risk classification within the underwriting process will help ensure that all risks are rated fairly.
• Underwriting will help to ensure that actual mortality experience does not depart too far from that assumed in the pricing of the contracts being sold. Process should allign the risks written by company with the pricing performed by the actuary. Critical that the pricing actuary understands how the business is being underwritten and how this compares with competitors’ underwriting standards and pricing. Should continously monitor whether the average experience of the lives accepted have the same average experience as assumed in the standard premium rates.
• Financial underwriting will help reduce the risk of over-insurance