Finance 431: Property-Liability Insurance Lecture 3: Underwriting

Underwriting Definition - “the selection of policyholders through hazard recognition and evaluation, pricing, and determination of policy terms and conditions” Purpose - “the development and maintenance of a profitable book of business” Must avoid adverse selection - applicants have greater loss exposure than general population

Which of the following is the best example of adverse selection when someone is applying for insurance? A)The applicant is looking for the lowest price B)The applicant lies to the agent about past claims C)The applicant wants high policy limits D)The applicant is more likely to be someone who has been cancelled by their last insurer E)None of the above

Evolution of Underwriting Pre-1950s - Monoline Policies Underwriter’s career path Map clerk Junior underwriter (apprenticeship) Replaced senior underwriter at retirement Multiple-Line Underwriting Result of McCarran-Ferguson Act More career flexibility Intensive training programs in several lines Continuing education Underwriting Developments Technology

Underwriting Activities Line underwriting Selecting insureds Classifying risks Determining proper coverage Determining appropriate rate or price Providing service to producers and policyholders Staff underwriting Formulating policy Evaluating experience Researching and developing coverages and policy forms Revising rating plans Preparing underwriting guides and bulletins Conducting underwriting audits Participating in industry associations Conducting education and training

One underwriter’s job is to answer policyholders’ coverage questions. Is this person serving as a line or staff underwriter? A)Line underwriter B)Staff underwriter C)Some of both D)Neither line nor staff E)None of the above

Another underwriter’s job is to work with the legal department on policy language. Is this person serving as a line or staff underwriter? A)Line underwriter B)Staff underwriter C)Some of both D)Neither line nor staff E)None of the above

The underwriting manager’s job is to supervise all the employees in the underwriting department. Is this person serving as a line or staff underwriter? A)Line underwriter B)Staff underwriter C)Some of both D)Neither line nor staff E)None of the above

Establishment of Underwriting Policy Principal Dimensions Lines of business Territories Forms, rates and rating plan Constraining Factors Capacity Premium/Surplus ratio Regulation Personnel Reinsurance

Implementation of Underwriting Policy - Underwriting Guides and Bulletins Provide for structured decisions Ensure uniformity and consistency Synthesize insights and experience Distinguish routine from nonroutine decisions Avoid duplication of effort Assist underwriter in policy preparation

Implementation of Underwriting Policy - Measuring Underwriting Results Industry Trends Difficulties Premium volume changes Loss development delay Standards of performance Selection Product mix Pricing Accommodated risks Retention ratio Success ratio (business written/business quoted) Service to producers

To evaluate an underwriting department, what is the best level for the success ratio? A)The higher the better B)The lower the better C)The value should be neither too high nor too low D)The value should be either high or low E)None of the above

Underwriting Process Gathering information Identifying, developing and evaluating alternatives Selecting an alternative Implementing the decision Monitoring the exposures

Gathering Information Sources Producer Application Consumer investigation reports Government records Financial rating services Loss data Inspection reports Field marketing personnel Premium auditors Claim files Production records Hazard Evaluation Physical hazards Moral hazards Weak financial condition Undesirable associates Poor moral character Morale hazards Poor personality traits Poor management

Which of the following types of hazards is most likely to lead to insurance fraud? A)Physical hazards B)Moral hazards C)Morale hazards D)The Dukes of Hazzard E)None of the above

Identifying, Developing and Evaluating Alternatives Basic decision:Accept/Reject/Modify Modifications Loss control program Change rates, rating plans or policy limits Experience rating Schedule rating Retrospective rating Policy limits Amend policy terms and conditions Use facultative reinsurance

Selecting an Alternative and Implementing the Decision Selecting Alternative Underwriting authority required Presence of supporting business Mix of business Producer relationships Regulatory constraints Implementation Communication of decision Execution of appropriate documentation Recording information

Monitoring Changes in loss exposure New driver Notice of loss Monitoring a book of business (by tracking loss ratio) Class of business Territory Producer