Chap 8 -_underwriting

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

UNDERWRITING1

P5125/underwriting/Haniza

What is underwriting?

A process of assessing and selecting risks, and determining the premium, terms and conditions

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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

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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

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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

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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

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Warranties

Is imposed to control hazard

To ensure no additional hazards introduced during the policy period; and

Insurer’s recommendations are carried out

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Exclusions

Inserting a clause to exclude the insurer’s liability from certain losses

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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

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Excess

The insured is required to bear a specified amount of every losses

Eg. losses of less than RM400, cannot be claimed

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Franchise

Insured is entitled to make a claim if loss exceeds a specified amount

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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

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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

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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

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Gross premium rate


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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


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Minimunpremium

• 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

Refund of premium


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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

Short Period Premium Rates


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Is charged when insurance is effected for less than 12 months

Chap 8 -_underwriting

Real Estate

Transcript of Chap 8 -_underwriting