Underwriting Fuctions

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INS 321 Risk Management II

Course Tutor: AdesolaOgunlade

Module Aims:

1)Function aspect of insurance

Introduction to the significant functional areas of insurance; examine each function in order to provide a precise understanding of each of these functions.

2)principles of insurance buying

3)history of insurance legislation in Nigeria

Lecture 1:

Underwriting function

Rate making theory and application

The marketing function

Recommended Texts

Diacon, S.R and Carter, R.L. (1992).Success in Insurance 3rd ed. Athenaeum Press Ltd, Gateshead, Tyne & Wear.

Isimoya, O.A. (2000). Risks Management and Insurance Application.Malthouse Press Ltd. Ikeja, Lagos

McOliver, Franklin (1993). Principles of Risk Management and Insurance.IdodoUmeh Publishers Ltd, Nigeria.

Underwriting

What is underwriting?

Insurance is unlike almost any other industry, because product prices are fixed long before insurers know what the claims costs will be.

It is the probability of a risk occurring which may result in a loss that is being insured against.

Underwriting is the procedure by which an insurer evaluates the risk of a proposal and decides whether or not to enter into a contract and if so on what terms i.e. it is the evaluation of risk.

(Diacon& Carter, 1992 p.193)

As this is done way before the claims costs are established, selecting and pricing risks have to be effectively done in order to ensure that the insurance company can maintain a profitable account of customers in a constantly changing business environment.

What risks to insure?

a)Pure Risk: can result only in loss e.g. damage by fire

b) Speculative Risk: can result in loss or gain e.g. a business venture

c) Particular Risk: localised to an individual or a
business i.e. risks we can partially control e.g. the decision to own and drive a car

d) Fundamental Risk: affects large numbers of
individuals or businesses – or whole societies e.g. unemployment, riot

(a)and (c) tend to be more insurable

Assessment: - An understanding of the risk in order to determine whether to accept or not and if accepted on what conditions. This is broadly categorised into;

Moral Hazards – attitude and conduct of proposer – don’t worry its insured Physical Hazards –tangible factors that arise out of the nature of the risk itself

Other factors considered in risk assessment are;

An evaluation of the major underwriting factors affecting claims experience for the particular type of insurance, e.g. age, sex, health and type of contract An assessment of the average claims experience of the group An assessment of the effect of the different underwriting factors on claims experience A comparison of the proposer’s characteristics

A comparison of the premium to be charged with the amount to be paid in the event of a claim

Generally assessments may vary based on the type of insurance.

Further reading: classes of insurance and the kind of assessments done in the underwriting function.

Other sources of information in the underwriting function are;

Application Form - UberimmaeFidei
The Brokers
Survey
Centralised information sources for example mortality tables used in life insurance

Rate Making Theory and Application

Rate making is the process of establishing premium rates for an insurance company’s service products. (Isimoya, 2000 p.246)

Pricing insurance refers to the setting of the insurance ‘rate’ for a particular unit of exposure. For example, a premium of N50,000 to provide coverage against fire damage, to a total value of N10M, suggests a rate of N0.50 for every N100 of fire insurance. The premium is the total price paid at a particular insurance rate.

Insurance market is divided into life and non-life insurance, effective rate making is based on these two categories.

Factors to consider when fixing the...
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