Chapter 6 - Underwriting Flashcards
Once all the relevant material information needed to assess a risk has been gathered, the underwriter needs to calculate what?
An appropriate premium and consider any terms, limitations, conditions and/or exclusions to apply
What allows underwriters to assess accurately the level of premium to charge for most packaged commercial risks
Law of large numbers
Each member of the ‘common pool’ of policyholders is required to contribute what?
An equitable premium
What is an equitable premium?
A fair premium based on the size and degree of risk that they introduce to the pool.
What does a homogenous risk mean?
A risk of a similar kind
The underwriting guidelines which have been developed by insurers for packaged policies reflect what three key points?
Type of business
Comparing the proposer to the average member of its group
Claims
When identifying the main risk factor for a care home, what might pose a higher risk than to an office?
They have to lift patients therefore the risk of injury to the employees is likely to be more frequent.
When comparing a salon to other salons what does the underwriter need to consider?
What treatments the salon does and rate accordingly.
When looking at claims statistics - what does the underwriter need to consider?
Patterns
Any large claim throwing off the pattern
Causes of claim
Geographical locations
Upcoming changes - ie global warming with floods
What does the underwriter need to consider in terms of the premium?
That is is attractive to policyholder
That is will cover certain other costs
Insurers/Underwriters need to ensure that they collect enough premiums to cover what?
Adequate claims settling provision
Reserve
Reinsurance costs
The insurer’s operating expenses
What basis are packaged policies usually calculated on?
All-Inclusive
What is the main rating factor applicable to?
Contents sum insured
The main rating factor is a rate applicable to the contents sum insured, which includes the rate structure for cover automatically included in the packaged policy for what?
things like, theft money, glass liabilities that are automatically included in the policy
Is BI rated with liabs and contents?
Not usually, it often has a separate rate
How does the rating work when an option to increase a standard sum insured or to included an option section of cover is added?
The rating structure will detail the additional charge to be included for these extras.
Office policies have very little variation in risk, what is the only variation to the contents rate?
The postcode
Office policies are very uniform in there rating, what are other packaged policies?
Whilst there are similarities, there is not the same degree of uniformity of risk.
What factors of a shop policy would change the rate?
The location - crime rates
The type of shop - off-licence/green grocer
What is a main tool underwriters use to simplify the underwriting process for packaged commercial policies?
The use of standard policy terms.
When looking at standard terms, what is typically done by the underwriters?
They define the risk they want
Automatically exclude elements of cover they don’t - eg heat work
They impose standard of loss control - eg minimum security
What are the two types of policy exclusions?
Absolute exclusion, specific exclusion
What is an absolute exclusion?
Events that will never form part of the cover provided by a packaged commercial policy.
eg. a PI exclusion as this would need to be picked up on a separate PI policy
What is a specific exclusion?
Things which are excluded unless specified and the insurer chooses to included.
eg. heat work, height work over 5m ect
What is different between a condition and an exclusion?
An exclusion is not cover
A condition ensures that all risks meet minimum underwriting standards. eg. - security condition
What happens if an insured does not meet a condition?
Cover is not effective unless conditions are met.
What is a premium from the insurers perspective?
The amount they charge to take on the risk agreed by them.
What factor normally is used to set the premium base?
Contents sum insured
When setting premium rates for shops and offices, the cost of legal advice helplines, is based on what?
A fixed charge by the service provider which is included in the premium.
What formula is normally used to calculate premium?
premium base x premium rate = premium
What is the premium base?
A suitable measure of risk.
Often the contents sum insured but could be things like turnover, wages, number of employees.
What is the premium rate?
A figure that reflects the hazard associated with the risk.
More risky = higher premium rate.
Office is low risk
Climbing trees is high risk
Who decides the premium base?
The proposer - eg - contents sum insured required
Who decides the premium rate?
The insurer based on what should be charged to that risk.
What are the two types of rates?
Rate per cent and rate per mille
What is the rate per cent?
The price in £ for each £100 of sum insured. EG1.5% means £1.50 per £100 contents
What is the rate per mille?
The price in £ for each £1000 of sum insured. EG1.5% means £1.50 per £1000 contents
What is rate per mille usually used?
Where the premium base is for example the turnover
What is adjustable and flat premiums?
An alternate method to setting a premium.
What is an adjustable premium?
The insured submits estimates of wages/turnover - the policy premium is based on this.
At the end of the year the accurate figures are given and an AP or RP is charged/returned.
Is adjustable premiums common on packaged policies?
No
What is a flat premium?
Where there is no obvious exposure measures a flat rate is applied. For example adding PA.
What is IPT applicable to?
General Insurance Premiums
What are the two IPT rates?
12% standard
20% for travel, some vehicle and electrical appliances
What insurances are typically except from IPT?
Long term insurance
Reinsurance
Ships/aircraft/goods in transit internationally
Risks located outside the UK
How often must insurance account to HM Revenue and Customs for the tax that is due?
Quarterly
What schemes allow intermediaries to underwrite risks within certain parameters?
Delegated authority schemes
What is the advantage of DA underwriting schemes for the managing agent?
Reach more policyholder
Increase expertise in that sector and reputation
What is the advantage of DA underwriting schemes for the policy holder?
Increased choice
Drives competition and therefore innovation
What is the disadvantage of DA underwriting schemes for the managing agent?
If they are not managing it effectively it might not comply with contractual or regulatory reequipments.
This out create poor u/w results.
Less u/w control for insurer.
Insurer could take on more than it intended.
It could create conflicts of interests.
A Lloyds broker may use a “lineslip” arrangement - what is that?
Allows the managing agent to delegate its authority to another managing agent or authorized insurance company.
What are the two types of laneslips?
Bulking lineslip
Non-bulking lineslip
What is a bulking lineslip?
When the premiums for many risks are combined for presentation and settlement to underwriters.
What is a non-bulking lineslip?
When each individual risk has to be presented separately.
