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Insurance Underwriting - Learn how to underwrite insurance proposals

Updated on April 19, 2016

Insurance Underwriting

Insurance underwriters evaluate the risk and exposures of potential clients. They decide how much coverage the client should receive, how much they should pay for it, or whether even to accept the risk and insure them. Underwriting involves measuring risk exposure and determining the premium that needs to be charged to insure that risk. The function of the underwriter is to protect the company's book of business from risks that they feel will make a loss and issue insurance policies at a premium that is commensurate with the exposure presented by a risk.

Each insurance company has its own set of underwriting guidelines to help the underwriter determine whether or not the company should accept the risk. The information used to evaluate the risk of an applicant for insurance will depend on the type of coverage involved. For example, in underwriting automobile coverage, an individual's driving record is critical.[1] As part of the underwriting process for life or health insurance, medical underwriting may be used to examine the applicant's health status (other factors may be considered as well, such as age & occupation).

Underwriting Experience:- The underwriting experience of non-life insurance industry in Malaysia may be indicated by the incomes and expenditures. In terms of income, data on earned premiums are available whereas in terms of expenditures, the available data may be broken down into three main components; net claims incurred, commissions paid and management expenses.

Figure 2 shows the trend of earned premiums for Malaysian non-life insurance industry in 1974-2004 (Lee 1997; Persatuan Insurans Am Malaysia 2001; Persatuan Insurans Am Malaysia 2004). The earned premiums were represented by the net premiums plus changes in provision for unearned premium reserves during the year. Based on Figure 2, the earned premiums had expanded spectacularly throughout the years.

When the three components of expenditures, namely net claims incurred, commissions paid and management expenses, are summed up and deducted from earned premiums, the underwriting profit is obtained.

The rating agency however, said that the recent hike in the third-party (TP) motor insurance premiums by the insurance regulator IRDA would improve the underwriting performance in 2011-12.

Third-party motor insurance premiums have increased by 10 per cent for private cars and two-wheelers and 68 per cent for goods and passenger vehicles.

A high combined ratio indicates weak underwriting performance. A combined ratio of more than 100 per cent indicates underwriting losses.

Third-party motor insurance is the only segment in the general insurance category whose tariffs are regulated.

The TP motor insurance segment is marked by unlimited liability and numerous instances of inflated and fraudulent claims, Crisil said.

"This rate hike is inadequate to cover the substantial losses incurred in this segment; premium rates need to more than double from the 2010-11 levels for the industry to make underwriting profits in this segment,"

What is underwriting?

Knowledge of individual risk peculiarities.

Assessing how the risk & a peril produce potential losses.

Estimating magnitude of losses—peril-wise.

Estimating insured’s systems & capabilities for prevention & minimization of losses.

Prescribing rates, terms & conditions.

Deciding on retention & risk transfer.

Technical aspects of U/W.

Risk assessment-- characteristics of risk, nature of perils covered, interaction between the two.

Frequency and severity of loss occurrences & MPL.

Fire prevention and minimization capabilities.

Burning cost vs. prospective risk analysis.

Accuracy of claims estimates—triangulation.

Value addition- quality of claims handling--not priced. Claims experience is everything in rating.

Underwriting performance improved in many countries in 2010, with declines in the underwriting ratio (claims ratio + acquisition ratio + operational ratio) showing that a smaller percentage of premium revenues was spent in claims and expenses in 2010 than in 2009.

A decline in the claims ratio (total claims and benefits disbursed/GWP) was the primary driver of better underwriting performance in Italy, Spain, and the U.K., as well as in Australia and Brazil, where the acquisition ratio (total commission and fees paid/GWP) also declined tangibly.

The underwriting ratio rose, however, in Belgium, Canada, Germany, and the U.S., due to higher claims and/or operational ratios (total operating expenses/GWP).

The underwriting ratio in India remained the highest across all the countries analyzed, as the industry there experienced both a high claims ratio and a high operational ratio.

Insurance Underwriting


Insurance Underwriting



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      Sneha Shinde 2 years ago

      Guide on Insurance Underwriting & Risk Management