Insurance Underwriting

Insurance underwriting

Underwriting refers to the process that a large financial service provider (bank, insurer, investment house) uses to assess the process of providing access to their product like providing equity capital, insurance or credit to a customer.

Continue

Any insurance company relies on an underwriting philosophy, and is confronted with specific market conditions. The market conditions are defined by the insurance cycle. The degree of understanding of the insurance cycle will influence the risk appetite of the insurer and insured.

Insurance Cycle

Non-life insurance business is characterized by the insurance cycle. The insurance cycle refers to the periodic oscillation of the market between soft and hard phases. The soft market is characterized by decreasing premiums, less capital and less competition. The hard market exhibits growing premiums, new capital influx and more stringent underwriting guidelines. A hard market can be triggered by a large loss event such as natural catastrophes. A soft market follows the hard market once the insurance market is saturated, that competition has taken off and premiums has started to decline.

Functions of the underwriter

Insurance underwriters evaluate the risk and exposures of the prospective clients. Scrutinize Proposals Examine Actuarial calculations Decide coverage Decide Premium Decide whether to accept the risk or decline Decide loading or discount

Functions of the underwriter

The function of the underwriter is to acquire or to "write" business that will make the insurance company money, and to protect the company's book of business from risks that they feel will make a loss. The underwriters can either decline the risk, or may decide to provide a quotation in which the premiums have been loaded , or in which various exclusions have been stipulated, which restrict the circumstances under which a claim would be paid. Automated underwriting systems

Life & General Insurance underwriting

Subject Matter Underwriting capacity and retention on own account and solvency concern Reinsurance arrangement and cost associated with that Availability of technical expertise for underwriting big and complex risk in the company. The authority to accept such risks and the underwriting policy of the company.

Sources of Underwriting

Financial Advisors The Applicants Medical Sources Company Officers

Life insurance underwriting factors

Age Sex Build (Height-Weight relationship) Personal medical history of disease Family history of disease Occupation Habits

Continued..

Financial status (Income Vs. Cover

(Sum Assured) Sources of income - whether earned or unearned

Insurable interest
Others like hazardous hobbies, travel, aviation activities etc (Avocation). Moral Hazards

Females and Children

We normally divide the proposals for insurance from female lives into three categories: Women with earned income Women with unearned income Women without any independent income

General Insurance

History of subject matter Location Safety measures Political risks Environmental risks Industrial risks Risk Matrix

Challenges & Opportunities

Moral hazard aspects Pricing of the proposal Uncertainty about frequency and severity of claims Reinsurance support Training of underwriting Emerging risks & Business opportunities

New avenues

Terrorism cover Environmental and pollution issues High tech/ high value project Coverages for intellectual property right Cyber security / liability Insurance as a comprehensive solution under one umbrella. Credit risk Performance guarantee Contingent business interruption

Classifications of "Lives"

Standard Lives

Standard Lives are those Lives for whom insurance can be given without any rating surcharge or policy restrictions. Their Insurance is accepted at what is termed as "Ordinary Rates'.

Sub-standard Lives

Sub-standard risks are those persons who, because of physical conditions, occupation, or other factors cannot be expected, on average, to live as long as standard lives. Their insurance is accepted either with an extra premium or with policy restrictions. Policies issued to these applicant, are termed as rated policies.

Declined

They are simply uninsurable risks. This may be due to high physical or moral hazard, or he may suffer from a disease so rare or a situation so unique that the insurer does not have the experience to derive a proper premium.

Rating Systems

Numerical Rating System-This is the most widely followed system. This is a method by which the variation of a given applicant's expected mortality from standard mortality is quantified. Standard mortality is represented by the index number 100.

Continued

The principle of this system assumes that the average risk is 100 percent and each factor influencing mortality is expressed numerically in terms of percentage mortality greater or less than 100 percent, debits or credits allotted to each in multiples of five according to whether it has an unfavourable or favourable influence.

Continued

The total sum is then computed and the result is expressed with reference to standard 100 percent, the figure being equivalent to the percentage expected mortality of the group in which that particular applicant will be placed.

Continued

Judgment Rating- Each individual risk is determined on a judgment basis. Here the process of underwriting and rate making merge. This system is used when credible statistics are lacking or when the exposure units are so varied that it is impossible to construct a class.

Advantages and disadvantages of the both systems

Loading

Flat Temporary Extra Premium: Where the extra premium can be removed after a temporary period due to the temporary nature of the risk. E.g. Gestation Periods after certain operations like Ulcer operation. Flat Permanent extra premiums: Where the risk is relatively constant and is expected to remain the same through out the currency of the policy. E.g. Certain Physical impairments like loss of sight in one eye.

Continued

Extra-percentage premiums: This is appropriate if the extra risk is assumed to increase with age throughout life. For example, overweight, adverse family history etc.

The lien

In this method extra premium is not imposed for extra mortality but the amount of coverage provided is reduced. The reduction in insured amount is known as Lien. The lien usually decreases in amount as the policy duration increases. In other words if claim arises due to death o the policyholder, the reduction in insured amount will be higher at the early stages of the policy, then in the later years. In fact if claim arises after a particular period it is possible that the Life Assured will get the same amount as any standard life would get.

Continued

This method does not impose any financial burden on the policyholder by way of additional premium. For example Lien can be imposed on policyholders who are underweight at younger ages. Usually flat extra and extrapercentage premiums are used for providing for extra mortality.