Chapter 4 Flashcards
The Underwriting Function
- Profitability really depends on the quality of the underwriting
- Guarding against adverse selection
- Ensuring adequate policyholders’ surplus
- Enforcing underwriting guidelines
examples of adverse selection
- Some property owners in areas prone to coastal storms purchase windstorm coverage or increase their limits only before a hurricane season when they expect severe losses
- A disproportionate percentage of property owners in an earthquake prone zone purchase earthquake insurance as compared to property owners in areas less prone to earthquakes
Policyholders’ surplus:
under statutory accounting principles an insurer’s total admitted assets minus its total liabilities
Capacity:
the amount of business an insurer is able to write, usually basedon a comparison of the insurer’s written premiums to its policyholders’ surplus
Underwriting authority:
the scope of decisions that an underwriter can make without receiving approval from someone at a higher level
Line underwriter
- underwriter who is primarily responsible for implementing the steps in the underwriting process
- Work directly with insurance producers and applicants
Staff underwriter
- underwriter who is usually located in the home office and who assists underwriting management with making and implementing underwriting policy
- Work closely with underwriting management to perform activities essential for profitable risk selection
treaty insurance
A reinsurance agreement that covers an entire class or portfolio of loss exposures and provides that the primary insurers individual loss exposures that fall within the treaty are automatically reinsured
Manuscript policy
an insurance policy that is specifically drafted according to terms negotiated btw a specific insured (or group of insureds) and an insurer
constraints of underwriting policy
- financial capacity
- regulation
- reinsurance
- personnel
Premium-to-surplus ratio:
(capacity ratio) a ratio that indicates an insurer’s financial strength by relating net written premiums to policyholders’ surplus
Statutory accounting principles:
the accounting principles and practices that are prescribed or permitted by an insurer’s domiciliary state and that insurers must follow
Purposes of underwriting audits:
- To check on line underwriters’ adherence to guidelines
- To monitor statistics for books of business
- Provides staff underwriters with info on the effectiveness of the underwriting guidelines
Application
A legal doc that provides info obtained directly from an applicant requesting insurance and that an insurer can use for underwriting and claim handling purposes
Underwriter
an insurer employee who evaluates applicants for insurance, selects those that are acceptable to the insurer, prices coverage, and determines policy terms and conditions
Underwriting submission
underwriting info for an initial app, or a substantive policy midterm or renewal change
info efficiency
the balance that underwriters must maintain btw the hazards presented by the account and the info needed to underwrite it
Premium audit reports
Methodical examination of policyholders’ operations, records, and books of account to determine the actual exposure units and premium for insurance coverages already provided
Underwriting profit
income an insurer earns from premiums paid by policyholders minus incurred losses and underwriting expenses
Counteroffer
a proposal an offeree makes to an offeror that varies in some material way from the original offer, resulting in rejection of the original offer and constituting a new offer
Rating plan
a set of directions that specify criteria of the exposure base, the exposure unit, and rate per exposure unit to determine premiums for a particular line of insurance
Experience rating
a rating plan that adjusts the premium for the current policy period to recognize the loss experience of the insured org 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 inc
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
Mix of business
the distribution of individual policies that compose the book of business of a producer, territory state, or region among the various lines and classifications
teps in the Underwriting Process
- Evaluate the submission
- Develop Underwriting Alternatives
- Select an underwriting alternative
- Determine and appropriate premium
- Implement the Underwriting Decision
- Monitor underwriting decisions
Binder
a temporary written or oral agreement to provide insurance coverage until a formal written policy is issues
Certificate of insurance
a brief description of insurance coverage prepared by an insurer or its agent and commonly used by policyholders to provide evidence of insurance
Combined ratio
a profitability ratio that indicates whether an insurer has made an underwriting loss or gain
distortions can be created by
- changes in premium volume
- major catastrophic losses
- delays in loss reporting and loss development
- underwriting cycle
when combined ratio is 100%
every premium dollar is being used to pay claims and cover operating costs (no insurer profit)
when combined ratio is > 100%
an underwriting loss occurs (more $ paid out than taken in)
when combined ratio is <100%
an underwriting profit occurs because not all premium $ taken in are being used for claims and expenses
Production underwriting
performing underwriting functions in an insurer’s office as well as traveling to visit and maintain rapport with agents and sometimes clients
Selection
Guidelines to ensure that the quality of the underwriter’s book of business does not deteriorate
Product or line of business mix
Evaluates an underwriters contribution to a profitable book of business
Premium to underwriter
Volume of premium an underwriter is able to handle is often used to measure performance
