Insurance is used to hedge against the risk of a contingent loss triggered by a physical, human or natural peril. The insured transfers a defined risk of a loss in exchange for a premium, which is an insurance rate used to determine the amount to be charged for a certain amount of insurance coverage. An insured is thus said to be "indemnified" against the loss events covered in the policy.
Insurers underwrite risks within clear constraints. Their available equity or surplus is limited and thus the risk-taking capacity cannot exceed a certain amount. Also, certain regulatory and legal limitations apply, especially in emerging and developing countries. Risks that qualify for underwriting must be diligently assessed, rated and priced.
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.
You know that 'Underwriting' is the most important part of the issue of an insurance policy by the insurer. During the underwriting process, an insurer will critically analyse data and details available related to a proposed risk by the prospects. It access, whether it can accept the risk or not on the basis of details available and the amount of premium to be charged based on future impact of risk if materializes. An insurer through underwriting process accesses the risk volume and decide to share risk with other insurers also.
In the underwriting process, insurers evaluate the risk and exposure of potential clients. They first decide whether to accept the risk or not. If the risk is to be accepted, they decide how much coverage the client should receive and how much they should pay for it. Underwriting involves measuring the risk exposure and determining the premium that needs to be charged to insure that risk. The main functions of underwriters are to acquire or to write business that will bring money to the insurance company and to protect the company business, from risks that the underwrite.
The term 'underwriter' can refer to the underwriting department within an insurance company, or to a company as a whole. The underwriting company on an insurance policy is the one accepting the risk and agreeing to pay any claims that arise. An insurance company having a separate department engaged qualified professionals, whose works are to analyse every proposal brought by sales team to access risk involved, to decide whether to accept the risk or decline the same and in case of acceptance the amount of premium to be charged from the client.
'Underwriting is the process through which an individual or institution takes on financial risk for a fee. This risk most typically involves loans , insurance, or investments. The term underwriter originated from the practice of having each risk-taker write their name under the total amount of risk they were willing to accept for a specified premium. Underwriter access degree of risk of an insurer business. They help insurers to set right premium for a risk.'
'Insurance underwriters evaluate the risk and exposures of potential clients. They decide how much coverage the client should receive, how much they should pay for it, or whether even to accept the risk and insure them. Underwriting involves measuring risk exposure and determining the premium that needs to be charged to insure that risk. The function of the underwriter is to protect the company's book of business from risks that they feel will make a loss and issue insurance policies at a premium that is commensurate with the exposure presented by a risk.
Each insurance company has its own set of underwriting guidelines to help the underwriter determine whether or not the company should accept the risk. The information used to evaluate the risk of an applicant for insurance will depend on the type of coverage involved.
For example, in underwriting automobile coverage, an individual's driving record is critical. However, the type of automobile is actually far more critical. As part of the underwriting process for life or health insurance , medical underwriting may be used to examine the applicant's health status (other factors may be considered as well, such as age & occupation). The factors that insurers use to classify risks are generally objective, clearly related to the likely cost of providing coverage, practical to administer, consistent with applicable law, and designed to protect the long-term viability of the insurance program.'
Each insurance company has its own set of underwriting policy to help the individual underwriters. To determine whether or not the company should accept a certain risk on an offer.
The underwriters may either decline the risk or may provide a quotation in which the premiums have been suitably loaded or in which, various exclusions have been stipulated, which restrict the circumstances under which a claim could become payable. Depending up upon type of insurance product(line of business), insurance insurance companies now using automated underwriting systems to reduce manual works and mistakes while calculating value of risk and fixing of premium rates.
LET'S CONSIDER UNDERWRITING PROCESS IN CASE OF A MOTOR POLICY
Various underwriting factors should be considered by an insurer before concluding a motor vehicle insurance contract. The underwriting factors relate to the particulars of the proposer, as well as the details concerning the motor vehicle.
The main underwriting factors are;
- Drivers of motor vehicles are usually classified into different grouping, where younger drivers are commonly viewed as higher risk. When this underwriting factor is used to determine the acceptability of a proposer, it may represent a form of discrimination, as people do not have direct control over their age . The age of a proposer for motor vehicle insurance may however be perceived as a proxy for maturity, indicating differences in responsible. When used as a guideline rather than a central underwriting variable, the age of a proposer should be of big value to an insurer.
- To use sex as an underwriting factor may be regarded as discriminatory, because people cannot choose their sex. Men are sometimes viewed as a higher risk and therefore have to pay a higher premium to counter the higher risk. This rationale may be seen as unacceptable in the current society where everybody, irrespective of their sex, is perceived to be equal. To be reasonable, sex may only be employed as an underwriting factor when it can be proved that men cover more mileage than women, and are therefore expose to more risk.
- Marital status of the proposer-the use of marital status as a rating variable in motor vehicle insurance may also lead to the conclusion that single persons are more irresponsible compared to married people. Marital status is sometimes regarded as a measure of maturity as married people are seen to be more settled down and responsible. These views discriminate against homosexual and single people, as marriage is a personal choice or belief. Insurers should be very careful to use marital status as an underwriting factor because that may be perceived by the civil society as being discriminatory.
- Driving history of the proposer- the driving history of a proposer may help an insurer to determine the level of associated risk. The rationale of considering the previous driving history is that driving habits may be indicated by past traffic offences and convictions.
- On the other hand, Butler and Butler have recognized in their study that there are no safe drivers, because accidents and traffic violations occur randomly due to the possibility that particular detrimental conditions may exist at that point in time . It should also be considered that the information is not always reliable or complete, and that external forces which are out of the driver's control, may cause the accident. Conclusions about a proposer's driving history may be problematic and should therefore be carefully evaluated by an insurer whenever it is considered as an underwriting factor in motor vehicle insurance.
- The address of the proposer indicates the territory in which the motor vehicle will mainly be used. As each territory has its own characteristics relating to different traffic conditions and density, as well as different population concentrations, studies showed that territory is often a very valuable rating factor when underwriting motor vehicle insurance.
- A proposer's attitude towards risk and insurance in general is an important underwriting factor in motor vehicle insurance. An insurer is however at an informational disadvantage as proposers may tend to underreport their history involving insurance in general. Although the basic principle of utmost good faith stipulates that all material information must be forwarded by the insured to enable the insurer to make an informed decision, policyholders switching to another insurer may not be the best proposers and perhaps not disclosing all relevant facts about their insurance history.
- An prerequisite for all first party proposers of motor vehicle insurance is that they should have an insurable interest in the subject matter. An insurable interest exists when a legal or financial relationship is found between the proposer and the subject matter of the insurance, and when the proposer will experience a financial loss if the subject matter is damaged. No claim will be paid by an insurer if an insurable interest is not present.
Underwriting guidelines include the following elements
- Underwriting Data Requirements for Risk Assessment / Risk Rating.
- Interests Insured and Insurance Options.
- Coverage (Limits, Deductibles), Terms & Conditions, Exclusions.
- Capacity, Pricing, Processes and Acceptance
- Accumulation Controls, Natural Catastrophe (Nat Cat) Exposure.
THE UNDERWRITER'S MAXIM
1. Maintain a regular review of the existing portfolio rates and terms to ensure that the insurer;
- Achieves maximum profitability;
- Does not lose quality business;
- Dear appropriately with poor quality business.
2. Obtain quality new business at terms which are designed to contribute to profit of the company;
3. Obtain information/feedback from customers, intermediaries and. The market in general, to ensure that products, terms, development and profitability are maintained at optimum level;
4. Develop new products/product extensions, which can be successfully sol to existing customers, strengthening existing relationships and achieving maximum premium growth from organic growth;
5. Identify target segments of the market which will contribute to building of a profitable, quality portfolios;
6. Maintain robust inspection/survey programmes for existing portfolios;
- Ensuring that portfolio quality is maintained and policy terms are related to the quality of the risk.
- Providing risk improvement advice to customers, where applicable.
7. Develop streamlined system at minimum expense,, to achieve the maximum degree of account and service to customers.
Underwriting is the most important activity of an insurer. Through underwriting process an insurer access the risk involved into a project and impact of risk on its business. An insurer while considering a proposal from prospects first collect all required data and information and access risk involved and amount to be paid at the time of happening of risk. If risk is more than the benefit involved then insurer try to transfer some risk by re-insurance . On the basis of assessment of risk insurer determine the amount of premium to be charged for accepting risk involved. Thus process of underwriting a risk is the most important activity of a company.
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