Finance 431:Property-Liability Insurance

Lecture 3:Underwriting

UnderwritingDefinition - “the selection of policyholders through hazard recognition and evaluation, pricing, and determination of policy terms and conditions”

Purpose - “the development and maintenance of a profitable book of business”

Must avoid adverse selection - applicants have greater loss exposure than general population

Which of the following is the best example of adverse selection when someone is applying for insurance?A) The applicant is looking for the lowest price B) The applicant lies to the agent about past

claimsC) The applicant wants high policy limitsD) The applicant is more likely to be someone

who has been cancelled by their last insurerE) None of the above

Evolution of UnderwritingPre-1950s - Monoline Policies

Underwriter’s career path

Map clerkJunior underwriter (apprenticeship)Replaced senior underwriter at retirement

Multiple-Line UnderwritingResult of McCarran-Ferguson Act - 1945More career flexibilityIntensive training programs in several linesContinuing education

Underwriting DevelopmentsTechnology

Underwriting ActivitiesLine underwriting

Selecting insureds

Classifying risks

Determining proper coverage

Determining appropriate rate or price

Providing service to producers and policyholders

Staff underwriting

Formulating policy

Evaluating experience

Researching and developing coverages and policy forms

Revising rating plans

Preparing underwriting guides and bulletins

Conducting underwriting audits

Participating in industry associations

Conducting education and training

One underwriter’s job is to answer policyholders’ coverage questions. Is this person serving as a line or staff underwriter?A) Line underwriter

B) Staff underwriter

C) Some of both

D) Neither line nor staff

E) None of the above

Another underwriter’s job is to work with the legal department on policy language. Is this person serving as a line or staff underwriter?A) Line underwriter

B) Staff underwriter

C) Some of both

D) Neither line nor staff

E) None of the above

The underwriting manager’s job is to supervise all the employees in the underwriting department. Is this person serving as a line or staff underwriter?

A) Line underwriter

B) Staff underwriter

C) Some of both

D) Neither line nor staff

E) None of the above

Establishment of Underwriting Policy

Principal Dimensions

Lines of business

Territories

Forms, rates and rating plan

Constraining Factors

Capacity

Premium/Surplus ratio

Regulation

Personnel

Reinsurance

Implementation of Underwriting Policy -Underwriting Guides and Bulletins

Provide for structured decisions

Ensure uniformity and consistency

Synthesize insights and experience

Distinguish routine from nonroutine decisions

Avoid duplication of effort

Assist underwriter in policy preparation

Implementation of Underwriting Policy -Measuring Underwriting Results

Industry TrendsDifficulties

Premium volume changesLoss development delay

Standards of performanceSelection Product mixPricingAccommodated risks Retention ratioSuccess ratio (business written/business quoted)Service to producers

To evaluate an underwriting department, what is the best level for the success ratio?

A) The higher the betterB) The lower the betterC) The value should be neither too high

nor too lowD) The value should be either high or lowE) None of the above

Underwriting Process

Gathering information

Identifying, developing and evaluating alternatives

Selecting an alternative

Implementing the decision

Monitoring the exposures

Gathering InformationSources

Producer

Application

Consumer investigation reports

Government records

Financial rating services

Loss data

Inspection reports

Field marketing personnel

Premium auditors

Claim files

Production records

Hazard Evaluation

Physical hazards

Moral hazards

Weak financial condition

Undesirable associates

Poor moral character

Morale hazards

Poor personality traits

Poor management

Which of the following types of hazards is most likely to lead to insurance fraud?

A) Physical hazardsB) Moral hazardsC) Morale hazardsD) The Dukes of HazzardE) None of the above

Identifying, Developing and Evaluating Alternatives

Basic decision: Accept/Reject/Modify Modifications

Loss control programChange rates, rating plans or policy limits

Experience ratingSchedule ratingRetrospective ratingPolicy limits

Amend policy terms and conditionsUse facultative reinsurance

Selecting an Alternative and Implementing the Decision

Selecting Alternative

Underwriting authority required

Presence of supporting business

Mix of business

Producer relationships

Regulatory constraints

Implementation

Communication of decision

Execution of appropriate documentation

Recording information

MonitoringChanges in loss exposure

New driver

Notice of loss

Monitoring a book of business (by tracking loss ratio)

Class of business

Territory

Producer