Chap 8 -_underwriting
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This document discusses the principles and process of underwriting in insurance. It defines underwriting as assessing and selecting risks to determine premiums, terms, and conditions. The key purposes of underwriting are to guard against applicants with high probability of loss and to charge premiums commensurate with risk. Common underwriting features include identifying hazards, selecting risks, and setting premiums, terms, and conditions accordingly. Risks with abnormal hazards may be accepted with risk improvements, warranties, exclusions, restricted coverage, excesses, or franchises. Premiums are set using individual, class, or merit rates and cover expected claims costs plus expenses.
Chap 8 -_underwriting
- 1. L E A R N I N G O U T C O M E S : 1 . D I S T I N G U I S H C L E A R L Y T H E V A R I O U S P R I N C I P L E S I N I N S U R A N C E R E L A T E D A R E A UNDERWRITING 1 P5125/underwriting/Haniza
- 2. What is underwriting? A process of assessing and selecting risks, and determining the premium, terms and conditions 2 P5125/underwriting/Haniza
- 3. What is the purpose of underwriting? To guard against anti-selection - an applicant who has a very high probability of loss, submits a proposal for insurance To charge a premium that is commensurate with the risk transferred - higher premium charged to those with higher probability of loss 3 P5125/underwriting/Haniza
- 4. Common features of underwriting Identify & evaluate risk • Physical & moral hazards • Physical hazards associated with the subject matter of insurance • Eg. Motor insurance – type of vehicle; fire insurance – type of construction • Moral hazards – carelessness, unreasonableness, fraud Select risk • Accept or reject a risk • Proposal of risk is not rejected unless it posses a considerably bad physical or moral hazards associated with it Determine premium, terms & conditions • Premium is the price for insurance • The rate charged must reflect the degree of hazard and total units of coverage required reflect the value of risk transferred • Risk with normal hazard be charged normal rates • Terms & conditions imposed dependants on the hazrads 4 P5125/underwriting/Haniza
- 5. Risk with abnormal hazards These risks are acceptable subject to the following underwriting measures : i. Risk improvement ii. Warranties iii. Exclusions iv. Restricted cover v. Excess vi. Franchise 5 P5125/underwriting/Haniza
- 6. Risk improvement It requires the proposer to undertake certain improvements on the risk before risk is acceptable to the underwriter Install fire alarm, automatic sprinkler water 6 P5125/underwriting/Haniza
- 7. Warranties Is imposed to control hazard To ensure no additional hazards introduced during the policy period; and Insurer’s recommendations are carried out 7 P5125/underwriting/Haniza
- 8. Exclusions Inserting a clause to exclude the insurer’s liability from certain losses 8 P5125/underwriting/Haniza
- 9. Restricted cover Offer a narrower insurance coverage than originally proposed by the insured Eg proposer proposed for a comprehensive motor policy, instead offered for third party policy 9 P5125/underwriting/Haniza
- 10. Excess The insured is required to bear a specified amount of every losses Eg. losses of less than RM400, cannot be claimed 10 P5125/underwriting/Haniza
- 11. Franchise Insured is entitled to make a claim if loss exceeds a specified amount 11 P5125/underwriting/Haniza
- 12. Confirmation of acceptance Terms and conditions accepted by the proposer, the insurer will confirm acceptance of risk proposed Cover note will be issued as a temporary evidence until the policy is issued 12 P5125/underwriting/Haniza
- 13. Re-insurance & Co-insurance Re-insurance - The insurer reinsures (cedes) the part of the risk which is in excess of his retention, to the reinsurer Co-insurance - Two or more insurers share the original risk and each of them is directly responsible for that proportion of risk 13 P5125/underwriting/Haniza
- 14. Premium rating Individual Rates • Rate charged on each risk separately without referring to a manual or formula Class rates • A large number of risks to be insured under a class of insurance is classified into various classes • To establish a premium rate known as class rate Merit rates • A combination of class and individual rates • Underwriter determines the class rate and adjust depending on the merits • Merits is determined through the evaluation of physical factors 14 P5125/underwriting/Haniza
- 15. Gross premium rate P5125/underwriting/Haniza 15 Is made up of : i. Pure premium rate - Premium rate calculated based on the expected claims cost i. Expenses and commissions margins ii. Contingency margins iii. Profit margins
- 16. P5125/underwriting/Haniza 16 Minimun premium • To cover administrative expenses incurred in issuing a general insurance policy Minimum sum insured • To cover administrative expenses incurred in issuing a life insurance policy
- 17. Refund of premium P5125/underwriting/Haniza 17 Premium is refundable for failure of consideration or through a provision in the policy Failure of consideration arises when the liability which the insurer assumed has not attached or commenced Total failure of consideration exists under the following situations : i. A vessel is insured for 12 months from a date and becomes a total loss before that date ii. A cargo policy has been issued but the contract of sale is cancelled and no shipment takes place
- 18. Short Period Premium Rates P5125/underwriting/Haniza 18 Is charged when insurance is effected for less than 12 months