Underwriting & Rating: Setting Insurance Rates
A: The process of revealing all relevant facts.
Q: What is "disclosure"?
When someone applies for insurance, they have a legal duty to be honest and upfront about anything that could affect their coverage -- this is the duty of disclosure. (See page 8-3 in the textbook | LO1).
A: The act of providing false or inaccurate information, intentionally or unintentionally.
Q: What is "misrepresentation"?
If you knowingly give false information, that’s called misrepresentation. (See page 8-4 in the textbook | LO1).
A: A statement or conduct made to influence an insurer to decide on a risk.
Q: What is "representation"?
Applicants are asked to make representations—statements about their situation, like what kind of property they own or how it’s used. (See page 8-4 in the textbook | LO1).
A: The process of establishing rates for each class of insurance, carried out by actuaries.
Q: What is "ratemaking"?
Actuaries look at things like past claims, trends, and risk factors to help set fair prices for each group. (See page in the textbook | LO3).
A: The amount of liability the ceding company (primary insurer) retains for its own account; the part of the risk retained by clients without insuring it.
Q: What is retention?
Retention is the maximum amount that the insurer can insure. Retention depends on concentration of values and reinsurance availability. (See page 8-20 in the textbook | LO4).
A: These types of insurance applications must be signed, per legal requirements.
Q: What are "automobile applications"?
Personal (H/O) applicates are signed sometimes and commercial applications are rarely signed. Even when a signature isn’t technically required, it’s still a smart move to get one. (See page 8-13 in the textbook | LO2).
A: Underwriters require knowledge about these three (3) things.
Q: What are:
1. Insurance product knowledge
2. Insurance industry knowledge
3. Claims knowledge
Underwriters have to figure out which risks an insurance company should take on, which ones to avoid, and under what terms coverage should be offered. To do that well, they need a solid mix of knowledge and skills. (See page 8-19 in the textbook | LO4).
A: Determination of premiums are derived from these three (3) principles.
Q: What are "the law of large numbers, the theory of probability and loss probability"?
LLN: The mathematical premise that states that the degree of uncertainty is reduced as the number of events increases.
TP: How often the event happens and how many chances there are for it to happen.
LP: The likelihood of a risk resulting in a loss, considering all its various hazards and protections.
(See page 8-14 in the textbook | LO3).
A: To properly evaluate a risk, underwriters need to understand these two (2) key concepts.
Q: What are the "frequency and severity"?
These two (2) factors help underwriters by painting a picture of the types of losses and how bad they were; by estimating how much financial risk the insurer is taking on and by guiding decisions on how much to charge and what conditions to include in the policy. (See page 8-20 in the textbook | LO4).
A: Personal information about the applicant, physical hazards and exposures and special factors related to the risk class or insurance type.
Q: What are "considerations for underwriters to accept or reject risks"?
(See page 8-19 in the textbook | LO4).
A: Underwriters review risks and then make one of these three (3) decisions.
Q: What is:
1. Accept the risk
2. Accept the risk subject to certain conditions
3. Reject the risk
(See page 8-19 in the textbook | LO4).
A: In terms of ratemaking, the reliability of predictions depends on these three (3) factors.
Q: What are:
1. The size of the sample
2. The length of time studied
3. Whether past conditions still apply
Insurers rely on data to predict how often losses will happen and these three things affect how trustworthy those predictions are. (See page 8-13 in the textbook | LO3).
A: These are the eight (8) basic pieces of information usually needed in any insurance application, no matter what type of coverage is requested.
Q: What are:
1. Named insured and mailing address
2. Policy term
3. Subject of insurance
4. Loss payees
5. Loss history
6. Prior insurance
7. Agent’s and brokers’ reports
8. Signatures
These application questions aren’t meant to cover every possible situation—since each person’s risk is different—but they give a general idea of what insurers typically ask for. (See page 8-8 in the textbook | LO2).
A: Fewer mistakes, faster service, legal compliance, insurer requirements, clear documentation and privacy protection.
Q: What are the benefits of a written application?
Using a written insurance application helps brokers and agents stay consistent and it also encourages them to explore coverage options that clients might not think to ask about. (See page 8-7 in the textbook | LO1).
A: These are the five (5) steps in the ratemaking process.
Q: What are:
Step 1: Classify risks
Step 2: Gather data on past losses
Step 3: Calculate pure premium
Step 4: Determine total premium
Step 5: Calculate the rate or unit cost
(See page 8-16 in the textbook | LO3).