Ch 4 Flashcards
What are the additional purposes underwriting serves to achieve profitability?
- Guarding against adverse selection
- Ensuring adequate policyholders’ surplus
- Enforcing underwriting guidelines
What is the main purpose of underwriting?
To develop and maintain a profitable book of business.
How do underwriters minimize the effects of adverse selection?
Underwriters minimize the effects of adverse selection by carefully selecting the applicants whose loss exposures they are willing to insure, charging appro- priate premiums for the applicants that they do accept with premiums that accurately reflect the loss exposures, and monitoring applications and books of business for unusual patterns of policy growth or loss.
Under statutory accounting principles (SAP), an insurer’s total admitted assets minus its total liabilities. Formula: Assets - Liabilities
Policyholders’ Surplus
Capacity
The amount of business an insurer is able to write, usually based on a comparison of the insurer’s written premiums to its policyholders’ surplus. The maximum safe premium volume based on surplus.
Underwriting Authority
The scope of decisions that an underwriter can make without receiving approval from someone at a higher level. Limits the decisions an underwriter may make without approval from a superior. Authority levels vary by GRADE LEVEL.
Line Underwriter
Underwriter who is primarily responsible for implementing the steps in the underwriting process. Makes direct operating decisions.
Staff Underwriter
Underwriter who is usually located in the home office and who assists underwriting management with making and implementing underwriting policy. Advises, supports, and services line underwritings
What limits an insured’s capacity?
Regulatory guidelines and the insurer’s own voluntary constraints.
How do underwriters ensure adequacy of the policyholders’ surplus?
Adhering to underwriting guidelines, making certain that all loss exposures are correctly identified, and charging adequate premium for accepted applications.
What is the main focus of staff underwriters and who do they work with?
Managing the risk selection process. They work with the line underwriters and coordinate decisions with other departments to manage the insurance product, pricing, an guidelines.
What is the main focus of line underwriters and who do they work with?
Evaluating new submissions and renewal underwriting. They work with producers and applicants.
Line underwriter activities.
- Select insured
- Classify and price accounts
- Recommend or provide coverage
- Manage a book of business
- Support producers and insureds
- Coordinate with marketing efforts
Staff underwriter activities.
- Research the market
- Formulate underwriting policy
- Revise underwriting guidelines
- Evaluate loss experience
- Research and develop coverage forms
- Review and revise pricing plans
- Arrange treaty reinsurance
- Assist others with complex accounts
- Conduct underwriting audits
- Participate in industry associations
- Conduct education and training
Which goals does effective account selection attain?
- avoid adverse selection
- charging adequate premiums or accounts with higher than average chance of loss.
- selecting better-than-average accounts for which the premium charged will be more than adequate
- rationing an insured’a available capacity to obtain an optimum spread of loss exposures by location, class, size of risk, and line of business.
The process of grouping accounts with similar attributes so that they can be priced appropriately.
Classification.
What happens if a risk is classified incorrectly?
If too high, insured may leave carrier.
If too low, premium is inadequate.
Why do underwriters sometimes have to determine an applicant’s insurance needs?
Some applicants use alternate risk transfer for some exposures but use insurance for others. Underwriters have to ask questions to make sure there are no gaps. They may have to broaden coverage as a result.
Why do underwriters sometimes have to narrow coverage?
Producers sometimes request broader coverage than the insurer offers. Instead if declining coverage, the insurer may propose higher deductibles or fewer causes of loss.
An insurance policy that is specifically drafted according to terms negotiated between a specific insured (or group of insureds) and an insurer.
Manuscript policy.
What do production underwriters do?
Confer personally with producers and assist them with developing accounts that are acceptable to the insurer.
Staff underwriters’ market research includes an ongoing evaluation of which items?
- effects of adding or deleting entire types of business
- effects of expanding into additional states or retiring from states presently serviced
- optimal product mix in the book of business.
- premium volume goals
A guide to individual and aggregate policy selection that supports an insurer’s mission statement.
Underwriting policy.
Explain the factors to consider in extending underwriting authority to producers
Insurer’s philosophy, the experience and profitability of the producer, and the type of insurance involved