underwriting in insurance

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GROUP NUMBER2UNDERWRITINGMeaningProcedureImportant Principles

INTRODUCTIONThe underwriting process is an essential part of any insurance application. When an individual applies for insurance coverage, he or she is essentially asking the insurance company to take on the potential risk of having to pay a claim in future.

Introduction ContIn some cases, such as with life insurance, such claims can be quite high. Therefore, it is important that the insurance company not to take on too great of risk when considering an applicant for coverage.

Introduction ContTherefore underwriting is critically important function and is performed each time an insurance application is taken. Its purpose is to determine whether or not the insurer will issue a policy to an applicant.

Underwriting MeaningUnderwriting refers to the process of issuing insurance. In this process, an insurance underwriter will evaluate the risk and potential exposure of potential insured.

Meaning ContUnderwriter is a financial professional that evaluates the risks of insuring a particular person or asset and uses that information to set premiums pricing for insurance policies.

Meaning ContInsurance underwriters are employed by insurance companies to help price life insurance, health insurance, property/casualty insurance and homeowners insurance, among others.

Meaning ContThe business model is to collect more in premium and investment income than is paid out in losses, and to also offer a competitive price which consumers will accept.

Meaning ContProfit can be reduced to a simple equation: profit = earned premiums + investment income - incurred loss - underwriting expenses

Meaning ContInsurers make money in two ways;Trough underwriting, the process by which insurers select the risks to insure and decide how much in premiums to charge for accepting those riskBy investing the premiums they collect from insured parties.

PRINCIPLESGenerally underwriting consists of two components, risk assessment and pricing. There are basics principles which are applied in the concept of underwriting;

Principles cont.Attain an underwriting profit.The primary objective of underwriting is to attain an underwriting profit.The underwriter constantly strives to select certain types of applicant and reject others to obtain a profitable portfolio of business.

Principles cont.Select prospective insured according to the companys standards. The underwriter should select only those insured whose actual loss experience is not likely to exceed the loss experienced assumed in the rating structure.

Principles cont.Provide equity among the policy owners.This means that, equitable rates should be charged and each group of policy owners should its own way in terms of losses and expenses.

ExampleIf identical rates were charged to both groups, younger persons would subsidize older persons, which would be in equitable. The impact on that is that, once younger persons become aware that they were being overcharged, they would seek other insures. And this will not be profitable.

Principles cont.Proper balance within each rate classification.This means that, a below-average insured in an underwriting class should be offset by an above-average insured, so that on balance the class or manual rate for the group as a whole will be adequate for paying all claims and expenses.

ContinueTherefore, the above principles are applied by underwriters in the selection of risks.To make an underwriting decision, the following steps are considered;

Underwriting stepsEvaluating loss exposure.In this step information is gathered about an applicants loss exposure. The underwriter must understand the activities, operations and character of applicant. An underwriter can gather information through application containing the insureds statement.

Steps contDetermining underwriting alternatives.There are three underwriting alternatives which are;Accept the submission as is,Reject the submission and,Make a counteroffer to accept the submission subject to certain modifications

Steps contFour major types of modifications are;Loss control measures to reduce hazardsChange insurance rates, rating plans or policy limits. Amend policy terms and conditions.Use facultative reinsurance.

Steps cont.Selecting an underwriting alternative.The underwriter must decide whether to accept the submission as offered, accept it with modifications or reject it. Rejection is sometimes unavoidable, however, rejections produce neither premium nor commission, only expenses.

Steps cont.Determining the appropriate premium.Underwriters must ensure that each loss exposure is properly classified so that it is properly rated. Miss classification can produce adverse result, including insufficient premium to cover losses and expense and inability to sell policies because prices are high than competitors.

Steps cont.Implementing the underwriting decision.Implementing underwriting decision generally involves three steps;-Contact the producer (and other involved) with the decision, good or bad. Put coverage into effect.

Steps cont.Record the policy and applicant information for accounting, statistical and monitoring processes.

Steps cont.Monitoring the loss exposures. After an underwriting decision has been made on a new business submission or a renewal, the underwriter must monitor activity on the individual policies to ensures that satisfactory results are achieved.

CONCLUSIONTherefore underwriting is critically important function and is performed each time an insurance application is taken. Its purpose is to determine whether or not the insurer will issue a policy to an applicant.

THE END

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