Study 2: Underwriting the Risk: An Overview - Summary

Question 1

Principles of policy analysis

Answer 1

• Insurance policies are contracts of adhesion (non-negotiable because one party drafts the policy wording)
• Contra proferentem: any ambiguity over the policy’s wording will be decided against the insurer
• When analyzing policy wordings, underwriters should be aware of legal precedents that indicate how clauses in the contract have been interpreted

Question 2

Manuscript policies

Answer 2

• Important for underwriters to understand general principles and characteristics of insurance policies since they may have to deal with manuscript policies which are not standard
• Underwriters must be able to understand what the manuscript policy offers in order to decide if they should participate
• The underwriter should also look for typographical errors, contradictions between parts of the manuscript wording, and any lack of continuity or consistency in the manuscript.

Question 3

The evolution of policy wordings

Answer 3

• Individual insurers adapt IBC wordings to produce their own standard policy wordings
• Insurers will also craft their own unique wordings for distinctive risks
• Policy wordings change over time to reflect changes in society and risks. Ex. the development of claims-made coverage, exclusions for abuse added

Question 4

The insurance policy and the law

Answer 4

• Policy wordings are shaped by legal considerations beyond the insurer’s control
• Ex. automobile insurance is heavily regulated, so auto insurance policies are too

Question 5

Under common law, a contract has five elements

Answer 5

• Agreement (offer and acceptance)
• Capacities of the parties to contract
• Consideration
• Genuine intention (meeting of the minds)
• Legality of the object

Question 6

Agreement (Offer and acceptance)

(Element of a contract)

Answer 6

An offer and acceptance which are definite and communicated. The parties are in agreement.

Question 7

Capacity of parties to contract

(Element of a contract)

Answer 7

The parties are adults of sound mind who are under no influence of drink or drugs. They are legally capable of entering into a contract.

Question 8

Genuine Intention (Meeting of the minds)

(Element of a contract)

Answer 8

The circumstances of the meeting and dealings with one another make it clear that the parties intend to strike a binding agreement to undertake a transaction.

Question 9

Legality of object

(Element of a contract)

Answer 9

The object of a contract must be a thing or an act that is legal.

Question 10

Four requisites to a binding contract in Quebec

Answer 10

1. Consent
2. Capacity to contract
3. Cause of contract
4. Object of contract

Question 11

Three unique features of an insurance contract

Answer 11

• Insurable interest
• Indemnity
• Utmost good faith

Question 12

Insurable interest

(Unique feature of an insurance contract)

Answer 12

• Refers to an interest that the insured must have in the subject of insurance, so that if a loss occurs, the insured will suffer an economic loss
• Ex. while someone owns a house they can insure it, but as soon as they sell it, they no longer have insurable interest

Question 13

Indemnity

(Unique feature of an insurance contract)

Answer 13

• Repaying in the event of a loss so that the insured neither gains nor loses
• Insureds recover according to the terms of their policy

Question 14

Utmost good faith

(Unique feature of an insurance contract)

Answer 14

• The highest standard of integrity on the part of the insured and the insurer
• Reflects the unequal access to information between the insured and the insurer. Only the insured has direct knowledge of the material facts of a risk, and therefore is expected to disclose everything honestly.

Question 15

Tools available to an underwriter to determine the material facts of a risk

Answer 15

• loss control reports
• property valuation mechanisms
• credit reports
• financial statements

Question 16

Policies are basically made up of five main sections

Answer 16

1. Coverage summary
2. Insuring agreements
3. Statutory conditions/Quebec general conditions
4. Policy conditions
5. Signature clause

Question 17

Coverage summary

(Policy main sections)

Answer 17

Usually consists of a separate page and sometimes called the declarations. Contains:

• The parties to the contract (the insurer and the insured)
• The effective (start) date, term, and expiry (end) date of the coverage
• The premium and rate
• The amounts insured

Question 18

Insuring agreements

(Policy main sections)

Answer 18

The insuring agreements section states the following:

• The subject matter of the insurance—description of the property covered
• The perils insured against
• The exclusions
• The circumstances under which the insured may receive the proceeds of the insurance

Question 19

Statutory conditions / Quebec general conditions

(Policy main sections)

Answer 19

• Applicable to auto, accident and sickness (A&S), and fire insurance policies
• Policies may contain both statutory conditions and policy conditions
• Policies in Quebec contain only general conditions. The Civil Code of Quebec specifies the points that must be addressed in the general conditions.

Question 20

Policy conditions

(Policy main sections)

Answer 20

Provisions that state the rights and duties of the insured and the insurer

Question 21

Signature clause

(Policy main sections)

Answer 21

• Found immediately after the insuring agreements or conditions
• Policy is signed by the insurers only; the insured’s signature is not required
• Policies must also be countersigned by an underwriter or the agent / broker
• Subscription policies must be signed by a member of each company participating in the risk

Question 22

Purpose of the underwriter’s toolkit

Answer 22

• To make effective decisions, underwriters must have a wide range of knowledge, skills, and use different tools when assessing a risk
• The underwriter’s toolkit helps to understand a risk and place it in contexts with other risks like it in the industry

Question 23

The five categories of the underwriter’s toolkit

Answer 23

1. The environment
2. The legal system
3. The business
4. The product
5. The risk

Question 24

The environment

(The underwriter’s toolkit)

Answer 24

• Understanding a risk means placing it in the appropriate context
• Political, social, and economic environments must be considered
• Ex. an oil pipeline would have a variety of factors affecting its development - it may be cancelled by the government for instance

Question 25

The legal system

(The underwriter’s toolkit)

Answer 25

Underwriters must have a sound understanding of the legal system that governs the parties to a contract. This understanding should encompass:

• the three sources of law in Canada: common law, statute law, and the Civil Code of Québec;
• the division of jurisdiction between the federal level of government and the provincial and territorial levels of government;
• the structure of the federal, provincial, and territorial court systems;
• the distinction between civil law and criminal law;
• aspects of civil law including the law of tort and especially the law of contract; and
• the insurance contract itself.

Question 26

The business

(The underwriter’s toolkit)

Answer 26

• Refers to the insurance industry and other industries that produce risk for the underwriter to accept or reject
• Underwriters must understand the industry to make sense of underwriting policies, recognize regulatory pressures that determine the state of the insurance market, and determine other courses of action

Question 27

The product

(The underwriter’s toolkit)

Answer 27

• Must understand why a product (i.e. the insurance policy) is needed
• Different risks require different kinds of policies (i.e. property, liability, automobile)
• Underwriters should keep up to date with current and emerging types of coverage

Question 28

The risk

(The underwriter’s toolkit)

Answer 28

• The underwriter needs to understand as much as possible about the applicant and about the hazards and perils the risk faces
• Ex. if the risk is a manufacturer, the underwriter should understand the type of product being made, the ingredients or components used to make it, where it’s being manufactured, who the end user is etc.

Question 29

Other skills the underwriter should have

Answer 29

• Technical skills
• Analytical skills
• Communication skills
• Organization skills

Question 30

Technical skills for the underwriter

Answer 30

• Technology, research, rating, and ratemaking
• Computer skills are critical to analyze loss information and prepare rating schemes
• Reinsurance skills: ability to determine what capacity the insurer will make available, judge how much capacity to commit to a risk, and structure the limit of liability

Question 31

Analytical skills for the underwriter

Answer 31

• Allows them to deal with the resources available
• Must analyze information about a risk in the context of alternative policy wordings that might be used to provide or modify coverage
• Must be skilled with words (how the policy is structured to convey its intent) and numbers (financial statements and summaries of loss experience)

Question 32

Communication skills for the underwriter

Answer 32

• Cooperating with other professionals inside and outside the insurance company
• Comfort with words assists with communication and evaluating complex wordings
• Listening skills are also critical, as are negotiating skills

Question 33

Organization skills for the underwriter

Answer 33

• Documentation skill is critical - files must be documented whenever something significant is done for the risk
• Most important skill is time management. Underwriters must set priorities and reconcile a necessary concern for detail with the need to manage a large volume of work