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CIP C120_ Underwriting Essentials.
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CIP C120_ Underwriting Essentials.
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CIP C120: Underwriting EssentialsHow are individually rated automobiles regulated vs. fleets - CORRECT
ANSWER-- individually rated automobiles is regulated the same in commercial
and personal
- fleets are less regulated in commercial that individually rated vehicles
3 elements of underwriting: - CORRECT ANSWER-- Accept/reject risk
- Invest of capital
- Implement strategic plan to build profitable portfolio
Underwriting Function - CORRECT ANSWER-- insurance professional employed
to accept or reject risk on behalf of an insurer
- to ACCEPT, MODIFY or REJECT risk
- most important way to define an u/w is in terms of RISK
- help seek insureds that pose acceptable risks of loss but avoid insureds that
pose unacceptable risks of loss
U/W as investor of capital - CORRECT ANSWER-- u/w INVEST the insurer's
capital in those risks they accept and decline to invest capital in those risks they
reject
- must choose between risks to help allocate the amount of capital the insurer
does have
- tries to invest SCARCE capital in risks that will generate the HIGHEST RATE
OF RETURN
U/W as building profitable portfolio - CORRECT ANSWER-ARLRP- ALEX
REALLY LOVES RISK PORTFOLIOS
Follows insurers strategic plan involving:
- types of RISKS insurer wants to pursue
- LINES of insurance it wants to underwrite
- REINSURANCE it can arrange
- AMOUNTS of insurance it will offer for different sizes and types of risks
- approach to PRICING/other considerations
,Line Guide - CORRECT ANSWER-LCTLTRP - LINE CRITERIA TEACHES
LITTLE TIKES RISK PLANNING
the CRITERIA that an underwriter must consider when accepting or rejecting a
risk
- LICENSING: where insurer is licensed to accept business
- TYPES of business: understand the market (size, hazard level, niche)
- LINES of insurance: lines offered are aspects of licensing and types of business
- TERRITORY: geographical area or territory
- CAPACITY: amounts of insurance an underwriter may authorize for various
types of risks are set out in matrix table, which is determined by occupancy, level
of public fire protection and types of construction
- REINSURANCE: amount of discretion insurers allows its underwriters is
typically reflected in its line guide
1. Facultative (submitted by u/w)
2. Treaty (negotiated by head office. R/I u/w draw upon judgement and conduct
of u/w from discussions and verify through audit. Also draw on their own
knowledge of business, economy and what is trending to reach sound decision)
- PRICING: u/w use rating manuals (fixed rates) or manual rates to ensure that
premiums are proportionate to risk
File underwriter: - CORRECT ANSWER-- underwriter responsible for writing
individual risks
Portfolio underwriter: - CORRECT ANSWER-- responsible for groups of risks
Giving brokers the pen: - CORRECT ANSWER-- vesting underwriting authority in
their brokers within specified limits
- frontline underwriting to anticipate questions that u/w will ask
Questions u/w ask to assess risk: - CORRECT ANSWER-THLOP - THEY HAVE
LOTS OF PERILS
LENGTH OF TIME IN BUSINESS: financial stability, management, high
standards
TYPE OF LOSS: first party or third party
PERILS
PHYSICAL HAZARDS: inspections, efforts to reduce/eliminate hazards
MORAL HAZARD (difficult to identify): financial conditions, poor housekeeping
,OTHER REQUIRED INFO: need inspection, financial reports, past losses?
3 reasons why u/w reject risks? - CORRECT ANSWER-CMS - can't meet
standards
1. CLASS - not permitted in line guide
2. MARKET/COMPETITOR CONDITIONS - high competition driven by premium
rates being below profitable during hard market
3. SUBSTANDARD - risk is too flawed to be accepted
* If none of these considerations oblige underwriters to decline a risk, they must
negotiate terms under which the risk can be made acceptable (ded, rate,
modifications of coverage)
How to decide if a risk is insurable? - CORRECT ANSWER-1. Is there a chance
for loss?
2. Is there a chance for profit?
Types of insurable risks? - CORRECT ANSWER-PURE RISKS - no chance for
profit
1. Personal risks: death, disability, old age, unemployment
2. Property risks: direct, indirect loss
3. Liability risks: conduct, operation, ownership/occupancy of property,
manufacture, services
Classes of insurance - CORRECT ANSWER-1. Personal
2. Commercial
3. Special
Contra Proferentem - CORRECT ANSWER-- principle governing insurance
policies
- recognizes that any ambiguity in a contract must be interpreted against the
person who drew the contract because they had the opportunity to make it clear
Why is it important for U/W to understand general principles and characteristics
of insurance policies? - CORRECT ANSWER-1. Legal Precedents
- how will courts interpret clauses?
, - ex. replacement cost clause gives insurers 180 days to replace personal
property but statutory condition allows one year from the date of loss to take legal
action against the insurer if the insured is dissatisfied with the claim settlement
1. Manuscript Wording
- intentional/inadvertent broadening, typographical errors, contradictions and lack
of continuity/consistency
IBC Policy Wordings - CORRECT ANSWER-- broadly reflect the industry
consensus and practice and matters in coverage
- Insurers adapt IBC wordings to produce their own standard policy wordings or
craft their own altogether
How do policy wordings evolve? - CORRECT ANSWER-- Policy wordings
change over time to reflect changes in society and risks
- Ex. Liability Crisis (mid 1980s) - policy wordings change to respond shortage of
capacity due to occurrence basis claims
- Ex. Abuse exclusions - excludes claims arising from abuse, molestation or
harassment by the insured or the failure of the insured to prevent such events
Dittmann v. Aviva Insurance Company of Canada - CORRECT ANSWER--
Ontario court decision that could eventually change policy wording for the
definition of "accident"
- Dittmann applied for statutory accident benefits for burns suffered by spilling
coffee on herself in the McDonald's drive thru
- Aviva denied coverage because plaintiff was not in an auto accident as she was
not in motion
- Court of Appeal Ontario judge agreed that use of a vehicle with the engine
running and in gear to access the drive-thru along with the seat belt restraint
were direct causes and dominant features of the injuries
Two things manuscript wordings must consider - CORRECT ANSWER-1. Legal
considerations (regulation in property and auto)
2. Insurer's underwriting philosophy
Five elements of a contract (common law) - CORRECT ANSWER-1. Capacity
2. Legality of object
3. Agreement
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