Study 1: Introduction to Underwriting

Question 1

Insurance

Answer 1

A contract in which one party, the insurer, for monetary consideration agrees to reimburse another, the insured, for loss or liability for a loss on a defined subject caused by specified hazards or perils.

Question 2

Underwriter

Answer 2

An insurance professional employed to accept or reject a risk on behalf of an insurer

Question 3

Risk

Answer 3

The chance of loss. Specifically the possible loss or destruction of property or the possible incurring of a liability. Sometimes referred to as the subject of an insurance contract.

Question 4

Investor of Capital

Answer 4

• An underwriter is responsible for investing shareholder capital
• The risk of loss to an insurer is the risk that its capital may be depleted by a loss for which it must indemnify an insured
• Therefore in accepting or rejecting risk on behalf of an insurer, underwriters are in effect investing the insurer’s capital in those risk they accept and declining to invest capital in those risk they reject

Question 5

Building a Profitable Portfolio (Strategic Plan)

Answer 5

To ensure its profitability, the insurer provides coverage to insureds who are likely to incur less in losses than they pay in premiums. To build a profitable portfolio of such insureds, the insurer needs a strategic plan. That plan will involve identifying:
- The types of risk the insurer wants to pursue
- The line of insurance it wants to underwrite
- The reinsurance it can arrange
- The amounts of insurance it will offer for risks of different types and sizes; and
- The approach it will take to pricing, among other considerations

Question 6

Line Guide

Answer 6

A listing of the maximum amounts of exposure an insurance company is prepared to accept on various classes of risk. Considerations include:
- Licensing
- Types of Business
- Lines of Insurance
- Territory
- Capacity
- Reinsurance
- Pricing

Question 7

Licensing

Answer 7

An important consideration for the underwriter is where the insurer is licensed to accept business

Question 8

Types of Business

Answer 8

Homeowners vs businesses, small risks such as corner grocery stores vs large risks such as schedules of commercial real estate

Question 9

Lines of Insurance

Answer 9

Automobile, property, liability. The lines of insurance an insurer offers are aspects of two criteria of the strategic plan: licensing and types of business.

Question 10

Territory

Answer 10

A consideration for the underwriter as some territories are more prone than others to certain kinds of environmental hazard

Question 11

Capacity

Answer 11

How much capital is available to the underwriter to invest in various kinds of business

Typically the amounts of insurance an underwriter may authorize for risk of varying types are set out in a matrix or table of limits. The amounts are determined by criteria such as:
- The occupancy of the risk - categories of hazard
- The level of public fire protection - FUS grades
- The type of construction - Wood frame structures suffer more frequent and severe losses

Question 12

Reinsurance

Answer 12

Insurance purchased by an insurance company from another insurance company to provide protection against large losses. Essentially insurance for insurance companies.

Two Types:
1. Facultative - Reinsurance of risks on an individual case-by-case basis
2. Treaty - An agreement between an insurance company and a reinsurer where the reinsurer automatically accepts a portion of the ceding company’s liability for a specified class of business

Question 13

Pricing

Answer 13

The underwriter must try to ensure that the premium the insurer receives is proportionate with the risk the underwriter accepts on the insurer’s behalf

Question 14

File Underwriter

Answer 14

An underwriter responsible for underwriting individual risks

Question 15

Portfolio Underwriter

Answer 15

An underwriter responsible for groups of risks

Question 16

Assessing the Risk/Applying the Line Guide

Answer 16

An underwriter might approach a risk with questions around the following:
- Length of time in business
- Type of loss
- Perils
- Physical Hazards
- Moral Hazards
- Required information

Question 17

3 Conditions where an underwriter will reject a risk

Answer 17

1. The risk is of a class not permitted by the line guide or in some other way falls short of minimum requirements specified in the line guide
2. Market conditions or competitive considerations require it
3. The risk is, on its own merits, too flawed to be accepted, and it is not possible to negotiate terms on which the risk could be made acceptable

Question 18

Speculative Risk

Answer 18

A situation where there is both a chance of loss and a chance of profit. Speculative risk is usually not insurable

Question 19

Pure Risk

Answer 19

A situation involving a chance of loss but no chance of gain. This type of risk is insurable

Question 20

Types of Insurable Risks

Answer 20

1. Personal Risks
2. Property Risks
3. Liability Risks

Grouped into 3 classes
1. Personal Lines
2. Commercial Lines
3. Special Risks - marine exposures, aviation, and high-risk industrial operations