Study 8 – Underwriting Relationships
1. Why is an underwriting decision better and more effective if it is acceptable to the other professionals working for the insurer? (p. 3)
The underwriting decision would likely be both a better decision on its merits and more likely to achieve its purpose if it were acceptable to the professionals working for the insurer’s claims and loss control departments and to the broker. The acceptance would be more likely if the underwriter’s decision was made in collaboration with those other professionals.
In turn, the success of that collaboration would depend in large part on the strength of the relationships between the underwriter and his/her collaborators.
2. What others might an underwriter work with? (p. 4)
Usually, underwriters work in the company of fellow employees in the office of an insurance company such as other underwriters in different sections of their employers’ underwriting departments.
They must also work with people outside of their insurance company: usually brokers, insured’s or applicants, as well as independent loss control inspectors, loss adjusters, lawyers and other professionals.
3. Explain the “shades of grey” that characterize most risks. What do “shades of grey” have to do with the art of underwriting? (p. 4-5)
The art of underwriting is concerned with the “shares of grey” that characterize most risks along the line between the best risk and the worst one and that characterize most underwriting alternatives along the line between simply accepting a risk on the requested terms and rejecting it on any terms. Thus, for any given risk, the underwriter and broker must negotiate to determine which of the underwriting alternatives will apply.
4. What is networking? Why is it beneficial to an underwriter? (p. 5)
Networking is the forming, maintaining and expanding of one’s network of professional relationships to help achieve one’s business objectives.
The more professional relationships an underwriter has, the better he/she will be able to undertake the many small transactions between people that make any business run smoothly and well.
5. Identify some insurance professionals that an underwriter should be sure to nurture good relationships with. (p. 5-6)
· Other underwriters
· Reinsurers
· Brokers/Agents
· Risk managers
· The claims department
· The actuarial department
· The loss control department
· Lawyers
· Industry organizations
· Customers
· Other organizations and people
6. What is the difference between a multi-line and a monoline underwriter? (p. 7)
Multi-Line Underwriters: responsible for all or many lines of insurance for each of the insurer’s accounts.
Monoline Underwriters: responsible for a single line of insurance for each of the insurer’s accounts.
7. When might an underwriter need facultative reinsurance? Give an example. (p. 8)
Underwriters may need facultative reinsurance for unique or especially hazardous exposures. These include:
· Hazardous occupancies such as chemical manufacturing or furniture-making;
· Risks located in areas unprotected by municipal water supplies or fire departments;
· Risks with the potential to suffer catastrophic loss, such as a large schedule of properties in the earthquake-prone lower mainland of British Columbia
· Risks that sell their products in the United States
· Liability risks with the potential for “long-tail” liability losses, such as pharmaceutical production; and
· Risks with high value.
8. Why is it important for an underwriter to establish underwriting credit? (p. 9)
To establish underwriting credit, the underwriter must share a mix of risks with facultative reinsurers, including both more and less attractive risks. That will allow the facultative reinsurer to build a portfolio of business with the underwriter with a good spread of risk and therefore a reasonable chance of making a profit over time.
To establish underwriting credit, the underwriter must also demonstrate to the facultative reinsurer a through knowledge of each risk and the underwriting exposures it represents. That is because the facultative reinsurer is farther removed from the risk than the underwriter and must decide to extend capacity or not on the basis of less information than is available to the underwriter.
11. What difficulties might a newer underwriter have when exchanging information with a broker? (p. 12)
The difficulty for a newer underwriter is that until he/she has had the opportunity to develop relationships with brokers and other professionals, the underwriter will not be told what he/she does not know or directly ask about a risk. Conversely, between a more experienced underwriter and a broker, information will be volunteered on both sides in the interest of good will and the long-term health of the relationship.
12. Explain why and how an underwriter can “improve the source.” (p. 12)
Recognizing the importance of the broker to the underwriter’s efforts to cultivate a book of business, the prudent underwriter will constantly seek to “improve the source.”
The underwriter will take the time to help the broker by leading his/her to expect that certain questions will always need answers and certain information will always need to be included in submissions presented to the underwriter.
13. How is the role of an agent different from that of a broker? (p. 13)
Unlike a broker, an agent does not represent several insurers but only one. The agent may be self-employed and working with that insurer under an exclusive contract, or the agent may be an employee of the insurer.
14. How is commission earned by an agent different from that earned by a broker? (p. 13-14)
Agents and brokers have similar compensation schemes as both work for commissions, a percentage of the premium the insurer receives for a given policy. But while brokers tend to receive variable commissions for new business and renewals, agents tend to receive variable commissions for new business and renewals. Agents often receive commission on renewals according to a sliding scale that sees them receive progressively less commission for each renewal of a policy for a specified number of renewals, after which the agent receives no commission for subsequent renewals. Agents who are employees of the insurer they represent are usually also paid a salary.
15. What is the difference between speculative risk and pure risk? (p. 14)
Speculative risk is a chance of a gain or loss whereas pure risk is the chance of only a loss.
16. What is risk management? What are risk managers responsible for? (p. 14)
Risk management is both an academic discipline and a profession. It is also a process that allows insurance and risk management professionals to systematically identify and deal with risk exposures. In the broadest sense, risk managers are those responsible for managing pure risk exposures within an organization.
17. Why is a good relationship with a risk manager important to an underwriter? (p. 15)
The risk manager is a critical source of information to the underwriter. The risk manager has the knowledge the underwriter needs of the workings of the risk’s operation, its insurance needs, its claim management, and its exposure to loss.
18. Explain the difference between hard and soft markets. (p. 16)
Soft market: exists when supply exceeds demand and competition between insurers is keen as prices for insurance are driven down and terms are less restrictive.
A soft market favours brokers because they have more choices in obtaining coverage for their insured and can expect lower premiums and less restrictive terms.
Hard market: exists when demand exceeds supply and competition between insurers is less intense, prices for insurance are driven up and terms are more restrictive.
A hard market favours underwriters because they can charge higher premiums and require more restrictive terms for the insurance they provide through brokers.
19. How might good relations with the claims department help the underwriter’s relationship with the insured? (p. 17-18)
In a difficult negotiation over renewal terms, a positive experience for the insured with the insurer’s claims department in the adjustment of a claim might be a consideration in persuading the insured to stay with the insurer.
A good working relationship with the claims department can greatly help the underwriter in estimating the likely future development of incurred losses that are still being adjusted. That estimate allows the underwriter a more accurate picture of the risk’s loss experience and a more informed assessment of the risk as a whole.
20. Why is it helpful for an underwriter to discuss the interpretation of policy language with professionals in the claims department? (p. 19)
Claims people are often the most expert in the interpretation of policy language because that is integral to their work in determining the insurer’s entitlements.
The underwriter will often find it helpful to discuss the interpretation of policy language with his/her counterparts in the claims department to better understand the coverage that would be extended to a risk that the underwriter agreed to insure.
21. What is the role of an actuary? (p. 19)
Actuaries do the remaking that produces the rates that underwriters then modify according to the insurer’s underwriting philosophy, the competition in the marketplace, and the characteristics of each risk.
22. What is the role of the loss control department? (p. 20)
The loss control department is often thought of as the “eyes and ears” of the underwriting department and is one of the most important sources of information about a risk and the exposures it poses for an insurer is the report from the loss control inspector.
23. Why is a good relationship with the people in the loss control department important for an underwriter? (p. 20)
It allows the underwriter to direct the loss control inspector’s attention to any aspects of the risk of special concern. In turn, it encourages the inspector to be more forthcoming with observations about the risk and more readily allows the underwriter to clarify any points in the report that might be unclear or to ask questions to enhances his/her understanding of the exposures described in the report.
One of the critical aspects of an underwriter’s decision is which if any of the loss control recommendations must be acted on to make the risk acceptable.
24. In what ways can a lawyer provide useful legal information to an underwriter? (p. 22)
A lawyer can help an underwriter to “take the temperature of the court” to understand how policy language has been and would be interpreted by the courts in the event of a dispute with the insured.
Lawyers can also point the underwriter to developments in case law and new and revised legislation that will add to the underwriter’s general understanding and knowledge.
25. Explain how identifying an underwriter’s customers depend on context. (p. 23)
In different contexts, an underwriter’s “customer” might be the adjuster from the claims department who is handling a large loss for one of the underwriter’s accounts. Or the customer could be the broker with whom the underwriter is negotiating for business; or the risk manager of the large commercial risk that the underwriter hopes to insure; or the loss control inspector who can supply a clear picture of the hazards that a particular risk poses.
26. What is the function of IBC’s Agreement of Guiding Principles? (p. 24)
This agreement guides insurance practice concerning multiple insurance policies where they depart from statutory specifications; where the law is unclear; where gas exists in the law; or in unusual or disputed circumstances.
27. What is the importance of good will between competing companies? (p. 25)
The success of the Agreement of Guiding Principles depends on relations between the organizations that might find themselves in conflict over circumstances covered by the Agreement.
Where there is good will between the organizations, there is the prospect of a swift and mutually satisfactory settlement of disputes. Where there is tension between the organizations, perhaps arising out of past disputes or differences in culture or because competitive pressures have overcome cooperative impulses, it may be much more difficult to resolve disputes.
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