Chapter 13 – Underwriting
Introduction
· Underwriting comprises:
o Consideration of the acceptance or rejection of a risk
o If the risk is accepted, the terms of the policy
o The premium for the policy
· Most modern insurers write large volumes of similar risks – their u/w carry out risk screening and rate allocation. U/w therefore takes place at 2 levels
Head office underwriting
Underwriting philosophy
· Management establishes a marketing philosophy that will produce a profit
· Insurers can write broadly, niche, or mass market to selected groups (to certain employers occupations, and associations) or a combination of these
· The insurer’s auto manager creates a u/w manual which may include:
o An acceptance/rejection list
o A ‘senior u/w only’ acceptance list
o A limit table (max liability limits which can be accepted)
o A classification guide
o Other instructional material
· The more comprehensive the u/w manual the greater the description provided for acceptable risks, and the more likely it is that corporate goals will be met
Limits tables and acceptance lists
· The u/w manual includes a limit table for Section A limits, based on the insurer’s reinsurance treaties and to what extent the insurer is willing to expose its own net account
· The limit table may also show the max physical damage limits per vehicle or rate group
· All available extensions and endorsement are dealt w/ in the manual
· Intelligent u/w systems – handle the risk selection process by point allocation or by ‘flagging’ the u/w on the computer screen
Individual underwriting
· U/w has become a function of ensuring new applications and requested changes conform w/ the insurer’s policies for acceptance or referral to a higher authority
· Typical functions include:
o Classification – b/c of rate differentials, correct classification is essential to a profitable auto insurance business
o Rating drivers according to driving records – placing risks in low rate categories when they do not qualify can result in high loss ratios. Tools available to assist u/w:
§ Autoplus or LOE – claims history
§ MVR – convictions history
§ Mid-term flags or abeyance systems which bring policies to the attention of the u/w for reassessment
§ Computer codes from claims which tell things like unlisted driver involved in accident, when charges laid by police or fraudulent claims
o Placing risks in the correct rate groups
o Using correct endorsements – u/w understand and correctly use endorsements of which there are 2 kinds:
§ Extensions – additional coverage like family protection, loss of use, liability for damage to non-owned auto
§ Agreements or restrictions – required by the insurer based on acceptance and rating manuals like limitation of amount or value for antique cars, reduction or deletion of coverage, restriction of a named driver
· U/w have a duty to the insurance buying public and to their employers to avoid mistakes which are embarrassing to the employer and which might result in penalties from insurance regulators
· Areas which are particularly sensitive are:
o Policy cancellation for u/w reasons
o An insurer’s refusal to renew
o Premium surcharges
o Notice to lienholders and to those w/ whom a certificate of insurance has been filed
o Premiums appropriate to the risk – no more, no less
o The use of, or improper use of credit info
· U/w must carry out their duties conscientiously and efficiently and know their u/w and rating manuals thoroughly if they wish to succeed in the industry
Underwriting in Saskatchewan , BC, and Manitoba
· The government in each province is the sole u/w of the legislated basic coverages
· Since there is the responsibility to provide insurance to ‘all persons’ declining risks is illegal for them – they cannot deny anyone the basic coverages
· U/w criteria such as age, sex, marital status and region of the province may also be prohibited on the basis that they are deemed ‘discriminatory’
· As private insurers compete w/ the government for non compulsory coverages, everyone tends to use the same rating criteria
· Some u/w is exercised in issuing ‘special coverage’ policies but this involves mostly such routine things as verifying certain info
· Private companies in the private sector of insurers confine their u/w to requirements regarding accident-free status and driving experience and provide coverages for mostly private passenger vehicles and recreational vehicles such as motor homes and vacation trailers
· The government insurers must and do provide basic coverages as well as certain extended coverages to such vehicles. Some private companies may provide additional coverages subject to certain restrictions
· There is currently no Facility Association or Risk Plan in these provinces nor is this likely to change
Sample Review Questions - Automobile Insurance (Part 1)
1. The 3 different aspects of underwriting are:
a. Consideration of the acceptance or rejection of a risk
b. If the risk is accepted, the terms of the policy
c. The premium for the policy
2. Underwriting takes places at 2 levels. Underwriters carry out risk screening and rate allocation.
3. Limit tables – based on the insurer’s reinsurance treaties and to what extent the insurer is willing to expose its own net account. The max liability limits, which can be accepted. May also show the max physical damage limits per vehicle or rate group.
4. Underwriters use limit tables. Limit tables provide a max liability limit that can be accepted as well as a max physical damage limit per vehicle or rate group.
5. The underwriting manual could contain the following info:
a. An acceptance/rejection list
b. A ‘senior underwriter only’ acceptance list
c. A limit table (the max liability limits which can be accepted)
d. A classification guide
e. Other instructional material
6. Some of the different marketing philosophies among insurers include:
a. Seeking a broad range of auto insurance business and rely on underwriting and rating to earn a profit
b. Seeking selected classes (niche) in which they have expertise
c. Mass market to selected groups: certain employers, occupations, and associations
d. Using a combination of the above
7. ‘Intelligent underwriting’ computer programs – handle risk selection process by point allocation or by ‘flagging’ the underwriter on the computer screen. They screen, edit, reject, and rate policies.
8. The functions of an auto underwriter:
a. Classification – b/c of rate differentials, correct classification is essential to a profitable auto insurance business
b. Rating drivers according to driving records – placing risks in low rate categories when they do not qualify can result in high loss ratios. Tools available to assist underwriters:
i. Autoplus or LOE – claims history
ii. MVR – conviction history
iii. mid-term ‘flags’ or abeyance systems which bring policies to the attention of the underwriter for reassessment
iv. computer codes from claims that tell things like unlisted drivers, when charges are laid by the police, fraudulent claims
c. Placing risks in the correct rate groups
d. Using correct endorsement – underwriters must understand and correctly use endorsements of which there are 2 kinds:
i. Extensions – for additional coverage like family protection, loss of use, liability for damage to non-owned auto
ii. Agreements or restrictions – required by the insurer based on acceptance and rating manuals like limitation of amount or value for antique cars, reduction or deletion of coverage, or restriction of a named driver
9. Tools available to assist underwriters:
a. Autoplus or LOE – claims history
b. MVR – conviction history
c. mid-term ‘flags’ or abeyance systems which bring policies to the attention of the underwriter for reassessment
d. computer codes from claims that tell things like unlisted drivers, when charges are laid by the police, fraudulent claims
10. Two general classes of endorsements available:
a. Extensions – for additional coverage like family protection, loss of use, liability for damage to non-owned auto
b. Agreements or restrictions – required by the insurer based on acceptance and rating manuals like limitation of amount or value for antique cars, reduction or deletion of coverage, or restriction of a named driver
11. Underwriters have a duty to the insurance buying public and to their employers to avoid mistakes which are embarrassing to the employer and which might result in penalties from insurance industry regulators.
12. Underwriters can get into trouble with their clients and with industry regulators with regards to:
a. Policy cancellation for underwriting reasons
b. An insurer’s refusal to renew
c. Premium surcharges
d. Notice to lienholders and to those with whom a certificate of insurance has been filed
e. Premiums appropriate to the risk – no more, no less
f. The use of, or improper use of credit info
13. Those provinces having government auto insurance plans, the government is the sole underwriter of the legislated basic coverage and they cannot deny anyone the basic coverage.
14. Underwriting differ b/w the government and the private insurers b/c the private insurers use criteria such as age, sex, marital status and region of the province (territory).
15. The difference b/w private sector insurers in provinces having government auto insurance plans and those in provinces where only the private sector provides the insurance are:
a. Private companies confine their underwriting requirements regarding accident-free status and driving experience and provide coverages for mostly private passenger vehicles and recreational vehicles
b. Government insurers must and do provide basic coverages as well as certain extended coverages to such vehicles. Some private companies may provide additional coverages subject to certain restrictions
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