Study 1 - Introduction to Underwriting Flashcards
Define insurance
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
Define underwriter
The insurance company or group that underwrites or insures a particular risk
The individual within an insurance company whose responsibility is to accept or reject business in the particular line in which she specializes and, in this way, choose the risks her principals are prepared to underwrite
Define risk
The chance of loss. Specifically, the possible loss or destruction of property is the possible incurring of a liability. Sometimes referred to as the subject of an insurance contract
What are some lines of insurance underwrites may specialize in?
Property, liability, crime, boiler/machinery, professional liability, automobile and business interruption
Briefly describe the role of an underwriter
To assess and modify or reject a risk on behalf of an insurer
How is an underwriter an investor of capital?
The risk of loss would deplete capital and underwriters attempt to mitigate that risk
What five items are typically in the strategic plan?
- The types of risk the insurer wants to pursue
- The lines of insurance it wants to underwrite
- The reinsurance it can arrange
- The amounts of insurance it will offer for risks of different types/sizes
- The approach it will take to pricing
Define line guide
A listing of the maximum amounts of exposure an insurance company is prepared to accept on various classes of risk
What are the three main elements of underwriting?
- Accepting or rejecting risk
- Investing capital
- Implementing the strategic plan
What are the common considerations in a line guide?
- Licensing
- Types of business
- Lines of insurance
- Territory
- Capacity
- Reinsurance
- Pricing
What three main items determine the amounts in the table of limits under Capacity?
- Occupancy of the risk
- Level of public fire protection
- Type of construction
Define reinsurance
Insurance purchased by an insurance company from another insurance company to provide it protection against large losses it has already insured
What other names might the reinsured go by?
“Original” or “primary” insurer
“Ceding company”
Define facultative reinsurance
Reinsurance of risks on a case-by-case basis
Define treaty reinsurance
Agreement between insurance company and reinsurer, automatically accepting a portion of the insurance company’s business within the terms of the contract
How do underwriters treat facultative and treaty reinsurance?
Facultative; underwrites the risk, however does not have as much info as the insurer’s underwriter
Treaty; underwrites the entire portfolio of an insurance company, discussion & audits
Define book of business
Generally related to joint ventures, the book of business refers to when a smaller brokerage owns its own book of business and enters into a partnership with a larger organization
Larger group will have access to it, small group retains right to repurchase full ownership
Who is responsible for underwriting individual risks?
File underwriter
Who is responsible for underwriting groups of risks?
Portfolio underwriter
What change has effectively turned many underwriters into portfolio managers?
Allowing brokers to write business within certain criteria and within their authority
What are the six main risks that an underwriter may review to assess the risk?
- Length of time in business
- Type of loss
- Perils
- Physical hazards
- Moral hazard
- Required info
What are the three criteria in which an underwriter is generally required to refuse a risk?
- Risk is not a class permitted by line guide or falls short of minimum requirements
- Market conditions or competitive considerations require it (hard market vs soft market)
- The risk is too flawed to be accepted, not possible to negotiate on terms
What are some tools an underwriter can utilize to increase the desirability of a risk?
Deductibles, premium rates, modifications of coverage and implementation of recommendations by the loss control department
Define speculative risk
An insurance term for a situation where the possibility of either a financial loss or gain
Define pure risk
A situation involving a chance of a loss or no loss, but no chance of gain
What two questions are the basic foundation to determine if an item is insurable?
- Is there a chance of loss?
- Is there a chance of profit?
What type of risk is insurable and which is uninsurable?
Pure risk is insurable
Speculative risk is uninsurable
What are the three broad categories of insurable risks?
- Personal risks
- Property risks
- Liability risks
What qualifies as a personal risk?
- Bodily injury
- Loss of life
- Loss of income
Due to:
- Death
- Physical disability (resulting from accident/sickness)
- Old age
- Unemployment
What are the two types of losses for property risks?
- Direct loss
- Indirect loss
What is a direct loss?
The actual damage or destruction of property insured
What is an indirect loss?
A consequence of the direct loss
What five negligent acts are commonly associated with liability risks?
- His or her conduct
- Operation of autos, aircrafts, boats, snowmobiles, trains, trucks, etc
- Ownership or occupancy (or both) of property
- Manufacturing of products
- Rendering of professional services
What are the three classes of insurance?
- Personal lines
- Commercial lines
- Special risks
What are some qualities of a good underwriter?
Experience, knowledge, skills and flexibility
Who or what determines if an underwriter can accept or reject a risk?
The insurer
