Finance- Introduction to Insurance

Topics: Insurance, Actuarial science, Underwriting Pages: 8 (1284 words) Published: April 2, 2013

Chapter 6 - Agenda
•  Rating and Ratemaking •  Underwriting •  Production •  Claim settlement •  Reinsurance •  Investments

Copyright © 2011 Pearson Prentice Hall. All rights reserved.


Rating and Ratemaking
•  Ratemaking refers to the pricing of insurance and the calculation of insurance premiums –  A rate is the price per unit of insurance –  An exposure unit is the unit of measurement used in insurance pricing

premium = rate * exposure units
–  Total premiums charged must be adequate for paying all claims and expenses during the policy period –  Rates and premiums are determined by an actuary, using the company’s past loss experience and industry statistics

Copyright © 2011 Pearson Prentice Hall. All rights reserved.


•  Underwriting refers to the process of selecting, classifying, and pricing applicants for insurance •  A statement of underwriting policy establishes policies that are consistent with the company’s objectives, such as –  Acceptable classes of business –  Amounts of insurance that can be written

•  A line underwriter makes daily decisions concerning the acceptance or rejection of business

Copyright © 2011 Pearson Prentice Hall. All rights reserved.




•  Important principles of underwriting:
–  The primary objective of underwriting is to attain an underwriting profit –  The second principle is to select prospective insureds according to the company’s underwriting standards –  The purpose of underwriting standards is to reduce adverse selection against the insurer •  Adverse selection is the tendency of people with a higherthan-average chance of loss to seek insurance at standard rates. If not controlled by underwriting, this will result in higher-than-expected loss levels.

–  Underwriting should also maintain equity among the policyholders •  One group of policyholders should not unduly subsidize another group Copyright © 2011 Pearson Prentice Hall. All rights reserved.


•  Underwriting starts with the agent in the field •  Information for underwriting comes from: –  –  –  –  –  – 

•  After reviewing the information, the underwriter can:

The application The agent’s report An inspection report Physical inspection A physical examination and attending physician’s report MIB report

–  Accept the application –  Accept the application subject to restrictions or modifications –  Reject the application

Copyright © 2011 Pearson Prentice Hall. All rights reserved.


•  Production refers to the sales and marketing activities of insurers –  Agents are often referred to as producers –  Life insurers have an agency or sales department –  Property and liability insurers have marketing departments

•  An agent should be a competent professional with a high degree of technical knowledge in a particular area of insurance and who also places the needs of his or her clients first

Copyright © 2011 Pearson Prentice Hall. All rights reserved.




Claim Settlement
•  The objectives of claims settlement include:
–  Verification of a covered loss –  Fair and prompt payment of claims –  Personal assistance to the insured

•  Some laws prohibit unfair claims practices, such as:

–  Refusing to pay claims without conducting a reasonable investigation –  Not attempting to provide prompt, fair, and equitable settlements –  Offering lower settlements to compel insureds to institute lawsuits to recover amounts due 6-7

Copyright © 2011 Pearson Prentice Hall. All rights reserved.

Claim Settlement
•  The claim process begins with a notice of loss •  Next, the claim is investigated –  A claims adjustor determines if a covered loss has occurred and the amount of the loss

•  The adjustor may require a proof of loss before the claim is paid •  The adjustor decides if the claim should be paid or denied –  Policy provisions...
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