Study 3 The Application Process - Application Question

Question 1

Renata is matching a client with an insurer. She completes the application form and sends it to the
chosen underwriter. The client asks Renata how the underwriter will use that information to make a
decision on whether or not to extend coverage to them.

a. What decisions will the underwriter make regarding Renata’s client coverage and what information will inform their choice? (5 marks)
b. If the risk is not acceptable as it is, what are some ways the underwriter may suggest improving or adjusting it? (5 marks)

c. Once the underwriter has determined that a risk is acceptable to insure, how do they rate it
(determine the proper cost to insure)? (5 marks)

Answer 1

Answers:
a. Risk selection
• The underwriter will either
  o Accept the risk
  o Accept the risk subject to certain conditions
  o Reject the risk

• Their decision will be based on
o Personal information about the applicant (used to
determine if there is a moral hazard)
o Details of physical hazards and exposures of the
risk under consideration
o Special factors pertaining to the class of risk or type
of insurance

b. Modifying policy terms and conditions
• Premium surcharge can be added when a client has indicated in some way that the risk will be greater than what can normally be expected

• Additional information may be a way to make a risk more acceptable, along with
o an inspection, and/or
o limiting coverage

• A higher deductible can make a risk more acceptable to insurers
• An applicant who has suffered a number of small losses over a short period of time may be required to self-insure these losses

c. Rating (any five of the following)
• Computer rating: Underwriters enter appropriate data for a given risk and the computer does the calculations and issues the appropriate policy (automobile, homeowners, small commercial packages)

• Manual rating: A pricing method in which an insurer uses rates that are based on its own experience rather than on that of a specific group for which it is calculating a premium
• Loadings: Additional charges for features considered to be more hazardous than the average risk in that class
• Rating with a credit: Credits are allowed for features that make a risk less hazardous than the average risk of that class
• Premium: The final rate multiplied by the amount insured
• Competition: Can result in less stringent underwriting and more rate reductions from the basic established rates. This can lead to detrimental results for insurers—when rates have been cut to a level where they are insufficient to cover the risks, eventually, insurers will have to make adjustments or may even fail.