Study 2: Underwriting the Risk: An Overview

Question 1

What are the main principles of a policy that an underwriter should be aware of? (2)

Answer 1

• Should be aware of the legal principle of contra preferentem (against the offeror). Which basically means that any ambiguity in a insurance contract will go against the party who drew it up
• Should be aware of legal precedents that indicate the interpretation that the courts have given to various clauses in the contract. (Actual Cash Value and Replacement cost clause)

Question 2

Manuscript policies - how does an underwriter assess manuscript wordings?

Answer 2

• Underwriters must be able to read and understand the manuscript policy and be able to assess the coverage it offers to determine whether to participate in the risk
• Underwriter should understand that some features of the manuscript wording may be standard, while others may not
• Should also look for typographical errors, contradictions, any lack of continuity or consistency in the manuscript. When developing own manuscript wordings should be cautious of wording they use.

Question 3

The evolution of policy wordings

Answer 3

• Underwriter should understand the general way in which polices evolve.
• Policy wordings change over time to reflect changes in society and risks (Ex: liability crises pg 2-5)
• An example of policies changing to reflect society is the increasing tendency of insurers to insert exclusions in liability policies for liability arising from allegations of abuse or molestation against the insured (Ex on page 2-5)
• Also see example on page 2-6 (Dittmann V. Aviva)

Question 4

Insurance policy and the Law

Answer 4

Policy wordings are also shaped by legal considerations over which the insured has no control. They are heavily regulated.

Question 5

What is a contract? What are the 5 elements of a contract?

Answer 5

• A contract is an agreement or promise between two or more persons that is intended to be legally enforceable. The 5 elements include:
  1) Agreement (offer and acceptance)
  2) Capacities of the parties to contract
  3) Consideration
  4) Genuine intention (meeting of the minds)
  5) Legality of the object

Question 6

An example of how the 5 elements of a contract apply (the sale of a house)

Answer 6

Agreement - Bob listed is house for sale, Romila offered Bob a sum of money for the house and he accepts. There has been both an offer and acceptance which means parties are in agreement

Capacity of parties to contract - both are of sound mind which means they are legally capable of entering contract

Consideration - to create a contract, a promise must be given in exchange for something in return, that something is called consideration. Bob has accepted Romila’s offer and promised to sell her his house and Romila promises to give Bob something of value - in this case $300,000

Genuine intention - Both parties intent to strike a binding agreement

Legality of object - The object of a contract must be a thing or act that is legal. In this case Bob selling his house is a legal contract

Question 7

What are the 4 elements of a contract in Quebec?

Answer 7

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

*There are differences in the way that contracts are described in Quebec under the Civil code of Quebec, but also many similarities with the Common Law

Question 8

What 3 features are unique to an insurance contract?

Answer 8

• Insurable Interest - An interest that the insured must have in the subject matter of insurance. Its required to prevent antisocial behaviour and preventing someone from profiting off of another persons loss
• Indemnity - Putting people back in the same financial position they were in before a loss. The principle states that an insured person should not profit from their own loss
• Utmost good faith - all parties to insurance contract are required to act in utmost good faith (calls for highest standard of integrity between insured and insurer). The insured must have highest standard of honesty when discussing risks with insurers as insurers rely on the info provided by insured. The law imposes a duty to disclose any info that is basic to acceptance of a risk.

Question 9

What are the 5 main sections of an insurance policy?

Answer 9

• Coverage Summary
• Insuring agreements
• Statutory conditions/ Quebec general conditions
• Policy conditions
• Signature clause

Question 10

Coverage summary/Declerations - what info does this section contain? (4)

Answer 10

Usually contains the following info:

• The parties to the contract (Insurer and insured and address of insured)
• The commencement date, term, and expiry date
• The premium and rate
• The amounts insured

Question 11

What does the insuring agreements section state?

Answer 11

States the following:

• The subject matter of insurance
• Perils insured against
• Exclusions
• Circumstances under which the insured may receive proceeds of the insurance

Question 12

Describe the Statutory Conditions/ Quebec General conditions section and the Policy Conditions section.

Answer 12

Statutory conditions/ General Conditions - Applicable to auto, accident and sickness and fire insurance policies. Must be printed on every one of those policies

Policy conditions - Provisions that state the rights and duties of the insured or insurer

Question 13

Who signs under the signature clause section? How does this section work when it comes to subscription policies?

Answer 13

• This clause is found immediately following the insuring agreements or the conditions. The policy is signed by the insurers only. The insureds signature is not required. Is usually signed by CEO
• Its signed either under hand or under-sealed, and it must be countersigned by an employee or someone else from company
• A Subscription policy is a single policy that cover a risk that is divided among a number of insurers, where one is considered the lead company. They must be signed by a member of each company participating in the risk

Question 14

What are the categories of knowledge that are in an underwriters toolkit? (5)

Answer 14

• The environment
• The legal system
• The business
• The product
• The risk

BLEPR*

Question 15

The environment

Answer 15

To understand a risk, an underwriter must be able to place it in its appropriate contexts. The largest context in which to understand a risk is its political, social, and economic environment

Question 16

The legal system - What knowledge should the underwriter have about the legal system in Canada? (6)

Answer 16

Their understanding and knowledge should encompass the following:

• The 3 sources of law in Canada (Common law, Civil code of Quebec, Statute law)
• Division of jurisdiction between federal, provincial and territorial levels of government
• The structure of federal and provincial court systems
• Distinction between civil law and criminal law
• Aspects of civil law including the law of tort and law of contract
• The insurance contract itself

Question 17

Business- Why does the underwriter need to understand both the insurance industry as well as the industry of the risk they are trying to assess?

Answer 17

• Need to understand the insurance industry to make sense of their employers underwriting policies, and to understand the regulatory and competitive pressures that determine the state of the insurance market
• They need to understand the industry in which the risk competes so they can properly assess the risks and determine the dynamics of the risk to determine whether the risk will survive and earn profits, which in turn will help determine whether the risk will generate profits or loss for insurer

Question 18

The product - Why do underwriters need to have knowledge and understanding of the product?

Answer 18

• In broad terms, the insurers product is insurance and in specific terms, the insurers product is the insurance policy
• Different kinds of risks require different types of policies, therefore, underwriters should know as much as possible about different types of property, liability, auto, or other insurance policies
• A risk represents a need for insurance, and an insurer meets that need by providing insurance. Underwriters should be aware of the needs of others to provide best policy and understand the potential obligation they are undertaking for the insured (Ex on pg 2-15)

Question 19

What other skills do underwriters require? (2)

Answer 19

• They need both technical skills and people skills
• Technical skills are tangible, measurable skills associated with a particular job
• People skills are intangible skills that are hard to measure and are useful for any job. These skills include leadership, negotiation, motivation, and being able to work with different personalities

Question 20

What technical skills should an underwriter possess? (4)

Answer 20

An underwriters technical skills include:

• Technology
• Research
• Rating
• Ratemaking
• Loss development skills are important in rating and ratemaking
• Computer skills are critical to the well organized underwriter. (analysis of loss info, writing of reports, research for further info on a risk, etc)
• Should also develop reinsurance skills (the ability to determine from the line guide what capacity the insurer will make available to insure a given risk, and structure the limit of liability to accommodate any reinsurance)

Question 21

What two fundamental skills must an underwriter have when it comes to analytical skills?(2)

Answer 21

• Must be comfortable and skilled with words. Must be familiar with words that appear in policy language and they must be able to make sense of long, complex sentences that describe or limit coverage
• Must be comfortable and skilled with numbers (understanding financial statements, reports, etc.) They don’t need to be a mathematician, but basic Math skills are important.

Question 22

What communication skills does an underwriter require? (4)

Answer 22

• Must be comfy with words- must choose words with care to avoid being misunderstood and must be sensitive to the ways in which others use words.
• Must listen well
• Should be alert to others body language
• Must be able to empathize (most important skill) - to imagine themselves in the others circumstances. The better an underwriter can empathize with another, the better they will be able to anticipate that persons needs and objections

Question 23

What organizational skills does an underwriter require? (2)

Answer 23

• Documentation skill - must be good at documenting and filing. Must document the file for a risk whenever they do anything significant in respect to the risk
• Time management - must learn to set priorities and to manage time correct. They should understand which tasks are the most important and which ones will require more time

Question 24

What other requirements should an underwriter possess? (2)

Answer 24

• Among the many valuable characteristics in an underwriter, the most important is curiosity. A good underwriter will always seek to understand a risk and its context as thoroughly as time and resources permit
• Underwriting is more attractive to and better performed by people who are happy with this line of work and enjoy being busy and productive