Rating & underwriting

Question 1

what is underwriting

Answer 1

the selection of risks, determination of the appropriate premium charged for those risks, determination of the policy terms and conditions, and the monitoring of decisions to ensure a profitable and growing book of business is maintained.

Question 2

Spread of risk

Answer 2

Refers to the selling of insurance in multiple geographic areas to multiple policyholders to minimize the danger that all policyholders will have a similar type of loss at the same time

Question 3

loss ratio

Answer 3

loss ratio calculation takes incurred losses and divides that number by earned premiums

relationship between losses incurred and premiums earned over a specific period time expressed as a ratio or percent

Question 4

Ratesetting

Answer 4

insurers employ actuaries to analyze factors

actuaries attempt through statistical analysis to determine the appropriate rating charge for the various factors in order for the insurer to have adequate revenue to pay claims associated with the class of insurance, essentially matching premiums with all expenses

premiums based on the principles derived from the law of averages

large loss data bases used by actuaries to establish rates for coverage

Question 5

The Law of Large Numbers (law of averages)

Answer 5

states that the larger the sample of past observations used to predict whether an event will occur in the future, the more accurate the predictions will be

Question 6

How far back to underwriters look when determining rates?

Answer 6

5 year past experience

• assess for a chargeable accidents (was motorist at fault partially or fully)
• non-chargeable event does not affect rating and includes payments for bodily injury and property damage under license insurance

Question 7

Underwriter rights

Answer 7

Right to surcharge the premium, reduce coverage, restrict coverage or cancel coverage if exposure or risk is not considered average

(principal operators that drive vehicle 50% or more at a time considered in rating risk,)

underage operators considered in ratings of risks (snowmobiles)

Question 8

Autos covered through Commercial Auto policies and NOT personal

Answer 8

Vehicles used for carrying passengers for compensation
transporting goods for compensation
vehicles carrying explosives or radioactive material

Question 9

Black box underwriting (individualized rating methodology)

Answer 9

client and broker enter data into a complex rating system and a rate is determined based on a number of relativities associated with the risk