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40 Cards in this Set

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  • Back

Purpose of underwriting

Main purpose of underwriting is to develop and maintain a profitable book of business for the insurer.

Other purposes of underwriting: Guard against adverse selection, Ensure adequate policyholders' surplus, and Enforce underwriting guidelines.

Guarding against adverse selection

Underwriters are an insurer's guard against adverse selection ()tendency for people with the greatest probability of loss to be the ones most likely to purchase insurance).

Underwriters use these methods: Carefully selecting applicants, Charging appropriate premiums (premiums need to reflect loss exposures) and Looking for unusual patterns of growth/loss.

Ensuring adequate surplus

An insurance company must have adequate policyholders' surplus if it wishes to increase its written premium volume. Capacity is limited by regulatory guidelines and often by insurer's own voluntary constraints.

Underwriters ensure the adequacy of policyholders' surplus by making sure loss exposures are correctly identified.

Enforcing underwriting guidelines

Underwriting guidelines reflect the levels of underwriting authority. Authority granted to underwriters, producers and managing general agents.

Underwriting activites

Underwriting responsibilities are delegated by members of senior management to line and staff underwriters. Line underwriters (responsible for implementing steps in underwriting process, have role in ensuring that applicants obtain the coverage they request) Staff underwriters (assist management forming underwriting policy, usually located in home office)

Staff underwriters create the policy, Line underwriters implement the policy.

Line underwriting activites

Select insureds - must meet the criteria established in underwriting guidelines.

Classify and price accounts - grouping accounts with similar attributes so that they can be prices appropriately

Recommend or provide coverage - inquiring about insured's risk management program. For complex accounts, line underwriter may draft manuscript policy or endorsements for insureds.

Line underwriting activities pt.2

Managing a book of business - some insurers make line underwriters responsible for the profitability of a book of business.

Support producers and customers - line underwriters are usually directly involved with producers in preparing policy quotations. Line underwriters can also offer assistance to the insured's risk manager.

Coordinating with marketing efforts - insurer marketing efforts should conform to the insurer's underwriting policy.

Line underwriters are out there working w/ producers to get the insurance to people.

Staff underwriting activites

Research the market - insurers must continually research fundamental issues such as which markets the insurer should target.

Formulating underwriting policy - work with employees from other departments to formulate underwriting policy. Guides individual and aggregate decision making. Communicated through underwriting guidelines.

Staff underwriters are mainly behind the scenes.

Staff underwriting activities pt.2

Revising underwriting guidelines - must reflect changes in underwriting policy. Some underwriting guides include systematic instructions for handling particular classes of commercial accounts. As time goes on the guidelines need to be changed, this is what staff underwriters do.

Evaluating loss experience - determining if changes should be made in guidelines.

Staff underwriting activities pt.3

Research and developing coverage forms - working with actuarial and legal depts to develop new coverages and modify existing forms developed by advisory organizations. Review and update rates and rating plans continually.

Reviewing and revising pricing plans - updated continually to respond to changes in loss experience, competition and inflation.

Staff underwriting activities pt.4

Arrange traty reinsurance - determining the insurer's needs for reinsurance and negotiating the terms and conditions.

Assessing others with complex accounts - serving as consultants to other underwriters. Staff underwriters have seen unusual circumstances so they may be able to help line underwriters.

Conducting underwriting audits - a way of monitoring line underwriter activities and adherence to underwriting authority. Need to make sure line underwriters are following guidelines.

Staff underwriting activities pt.5

Participating in industry associations - representing the insurer as a member of national and state insurance associations.

Conducting education and training - determining education and training needs of line underwriters. Staff underwriters often develop courses and serve as instructors.

Levels of authority

Before accepting an applicant, a line underwriter must determine whether they have necessary underwriting authority to make the decision. Requirements are usually communicated through the insurer's underwriting guidelines.

E.x. a notation next to a specific classification in the underwriting guide might indicate that senior underwriter must review and approve an application from that classification.

Granting authority

Insurers generally grant authority in these ways: Underwriters gain underwriting authority with experience and positive results (e.x. a good loss ratio). Managing general agents assume decentralized underwriting authority, capitalizes on their familiarity with local conditions. Insurer with conservative philosophy may not grant authority to entities beyond their own internal underwriters.

Granting authority pt.2

Producers may gain underwriting authority based on experience, profitability and contractual arrangements. Producers can perform account selection (and reject certain applicants) before submitting account to insurer. Saves insurer from having to evaluate accounts the insurer's underwriters will ultimately reject.

Underwriting policy

An insurance company's underwriting policy determines: Composition of the insurer's book of business, Amount of business the insurer is willing to write, Rating philosophy and forms the insurer will apply, and Territories to be developed.


Underwriting policy is formed by senior management of the insured. Guides underwriting decisions. Determines insurer's book of business. Underwriting policy translates insurer's goal and mission into a specific strategy tat determines the insurer's book of business.

When underwriting policy changes, major constraining factors must be considered, Financial capacity, Regulation, Personnel and Reinsurance.

Financial capacity

The relationship between premiums written and surplus. Surplus is an insurer's net worth. Surplus is the insurer's ability to write new insurance.

NAIC has developed financial ratios used to identify insurers that should receive additional solvency surveillance from regulators. Premium -to-surplus ratio (premium / surplus) is a capacity ratio, considered too high when > 300%. Return on equity is another key ratio.


Ways regulation affects underwriting policy: Insurers must be licensed in each state in which they write insurance. Rates/forms must be files with state regulators. Some states specifically require underwriting guidelines to be filed (some insurers consider underwriting guidelines to be trade secrets). Regulators perform market conduct exams (look at sales and advertising, rate making and claim handling). Focus on insurance availability can lead to requirements to extend coverage (may require certain insurers to offer certain coverages if there isn't enough coverage available in that state).

Regulation is not applied uniformly across states.

Personnel and reinsurance

Insurers must have a sufficient number of trained underwriters to implement its policy. Underwriting specialists are especially needed for technical lines of insurance such as aviation insurance.

The availability and cost of adequate reinsurance can influence underwriting policy. Reinsurance treaties may exclude certain types of insurance of classes of business, or the cost of reinsurance may be prohibitive.

Underwriting policy

Underwriting policy is communicated to underwriters through underwriting guidelines. So the underwriting policy is developed by senior management and passed off the staff underwriters who develop underwriting guidelines which are used to communicate the underwriting policy. Continually updated to reflect policy changes.

Underwriting guidelines identify major elements that underwriters should evaluate. Insurers consider guidelines trade secrets because they specify attributes of accounts that insurers are willing to insure.

Purposes of guidelines

Provide for structural decisions (identify major considerations underwriters should evaluate for each type of insurance). Ensure uniformity and consistency (include acceptable approaches to evaluating applicants and desirability of a type of risk). Synthesize insights and experience (serve as repository for an insurer's expertise).

Purposes of guidelines pt.2

Distinguish between routine and nonroutine decisions (nonroutine decisions involve submissions outside underwriter's authority). Avoid duplication of efforts (past solutions should apply to all similar situations that might arise in the future). Ensure adherence to reinsurance treaties and planned rate levels (staff underwriters reflect treaty limitations in the guidelines).

Purposes of guidelines pt.3

Support policy preparation and compliance (staff underwriters incorporate applicable regulations in the guidelines). Provide a basis for predictive models (predictive modeling identifies applications that present lower underwriting risk).

Purpose of underwriting audit

Staff underwriters conduct audits for the following reasons: Achieve consistency in the application of underwriting standards set forth in the underwriting guidelines. Provide line underwriters with strategies to improve future underwriting decisions. Monitor statistics for books of business. Provide staff underwriters with information on effectiveness of underwriting guidelines.

Audits are usually conducted on site at the branch or regional office being audited.

Principle sources of underwriting information

Producers, Applications, Inspection reports, Gov't records, Financial rating services (provide data on the credit ratings of individuals and businesses (rating agencies that provide data on credit of businesses are Standard and Poor's, Dun and Bradstreet and Experian) as well as industry averages), Loss data, Field marketing personnel, Premium auditors, Claim files, Productions records, Consultants' reports.

Independent agents and brokers may perform field underwriting to screen applicants.

Steps in underwriting process

Evaluate the submission, Develop underwriting alternatives. Select an underwriting alternative. Determine appropriate premium, Implement the decision. Monitor the decision.

Experiences underwriters do not always follow each of the steps in strict order.

Evaluate submission

The first step is evaluating a submission's loss exposures and associated hazards. Underwriters must understand the activities, operations and character of every applicant. Insurers often employ field marketing personnel who can provide both specific and general underwriting information.

Underwriters perform two tasks: Weigh the need for information against the cost of obtaining it. Gather the necessary information from various sources, paying close attention to a submission's hazards.

Evaluate submission pt.2

Types of hazards: Physical (tangible characteristic of property, persons or operations, fire protection, property attributes) Moral hazard (increases the likelihood person will intentionally cause or exaggerate a loss). Morale hazard (carelessness or indifference). Legal hazard (condition of legal environment).

Develop underwriting alternatives

The second step in the process is developing underwriting alternatives. Underwriter may accept a submission as is, reject submission or accept the submission subject to certain modifications.

Modifications: require risk control measures. Change insurance rates, limits or rating plans. Amend policy terms and conditions. Use facultative reinsurance.

Select an underwriting alternative

The third step in the process is selecting an underwriting alternative.

Factors to be considered before selecting an underwriting alternative: Underwriting authority, Supporting business (underwriter may consider the applicant if they have other insurance through the insurer already), Mix of business (underwriter looks at insurer book of business to see if applicant fits in), Producer relationships and Regulatory restrictions.

Determine appropriate permium

The fourth step in the process is determining an appropriate premium. Underwriters must ensure that each loss exposure is properly classified so it is properly rated. Accurate classification ensures a pooling of loss exposures whose expected loss frequency and loss severity are similar.

Implement the decision

The fifth step in the process is implementing the decision, which generally involves three tasks: Communicating decision (communicate to the producer). Issue documents (underwriter might need to issue a binder and possibly a certificate of insurance) Record information (information about the policy and the applicant are recorded).

Monitor underwriting decision

The sixth step in the process is monitoring the underwriting decision.

Underwriter must monitor individual policies and monitor books of business. Individual policies must be monitored for substantial changes and unique losses. Books of business must be monitored to evaluate quality and profitability. A poor loss ratio in a particular class of business can indicate inadequate pricing.

Measuring underwriting results

Insurers use financial and nonfinacial measures to track their results. Financial measures are not always reliable in the short term (measure profitability). Nonfinancial measures can be used to evaluate actions of underwriters and underwriting depts.

Financial measures

The combined ratio is the most common financial measure of underwriting results. Sum of loss ratio and expense ratio. When the combined ratio is less than 100% an underwriting profit occurs.

Changes in premium volume, major catastrophic losses and delays in loss reporting can distort the combined ratio.

Proper underwriting should produce an underwriting profit or a small underwriting loss that can be offset by investment gains.

Nonfinancial measures

Nonfinancial measures (measure of underwriters performance, not results) link an organizations's strategy and its outputs to its performance. Selection (insurers often establish selection goals for underwriters to ensure the quality of the book of business does not deteriorate). Product or line of business mix (building a proper mix requires underwriters have a knowledge of in insurer's business goals). Pricing (Pricing standards enable insurers to determine levels of premium adequacy).

Nonfinancial measures pt.2

Accommodated accounts (accepting substandard exposures in return for more profitable accounts). Retention ratio (nonfinancial ratio) (percentage of expiring policies an insurer renews, measured by policy count, premium volume or both, low retention rate might indicate poor service to producers, non competitive pricing or unfavorable claim service).

Nonfinancial measures pt.3

Hit ratio (ratio of policies written to those that have been quoted to applicants)

A high hit ratio might indicate: Competition is easing, Rates are inadequate or lower than other insurer's rates, Coverage is broader than other insurers, The underwriter has the skill set for production underwriting, and Selection criteria are deteriorating or An extremely good relationship exists between the insurer and the producer.

Low hit ratio may mean selection criteria are too stringent or poor relationship exists between the insurer and the producer.

Nonfinancial measures pt.4

Service to producers (requires establishing a set of minimum acceptable standards for certain types of service to producers). Premium to underwriter (management uses this measure to determine if underwriters are assuming their share of work).