underwrItIng

Underwriting refers to the process of selecting, classifying, and pricing applicants for insurance.
The underwriter is the person who decides to accept or reject an application.

Statement of Underwriting Policy

Underwriting starts with a clear statement of under- writing policy. An insurer must establish an
under- writing policy that is consistent with company objectives. The objective may be a large
volume of business with a low profit margin or a smaller volume with a larger margin of profit.
Classes of business that are acceptable, borderline, or prohibited must be clearly stated. The
amounts of insurance that can be written on acceptable and borderline business must also be
determined.

The insurer’s underwriting policy is determined by top-level management in charge of

underwriting. The underwriting policy is stated in detail in an under- writing guide that specifies
the lines of insurance to be written; territories to be developed; forms and rating plans to be used;
acceptable, borderline, and prohib- ited business; amounts of insurance to be written; business
that requires approval by a senior under- writer; and other underwriting details.

Introduction
Underwriting can be defined as “assumption of liability”. Underwriting involves the selection of
policyholders after thoroughly evaluating all hazards, establishing prices and then determining
the terms and conditions of the insurance policy.

The term ‘Underwriting’, refers to the formal acceptance of a risk by the insurance company for
a price, which is termed as ‘Premium’. Of the many facets of insurance, underwriting has always
been considered one of the most critical features. During the 1950s, there were specialists who
worked as underwriters and covered almost every type of insurance. The years since then have
seen underwriting emerge as an art in itself.

The importance of underwriting can be well understood by the fact that even though several
activities of an insurance company such as marketing, accounting, claims processing etc. are
sometimes outsourced, underwriting is an area over which the company always retains complete
control.

Once the risk involved is deemed acceptable, underwriting then fixes the rate of premium, and
subsequently, all other terms involved. There are certain guiding objectives and principles that
the underwriter must follow.

‘Underwriting’ in its real sense is being practised after the detariffing last year and the
subsequent removal of control on pricing from 01.01.2008. Each risk shall be assessed on its
own merit. Gone are the days when rates were quoted blindly based on the tariff or the internal
guidelines of the insurer, without actually assessing and evaluating the risk proposed, for fixing
of premium.

Objectives Of Underwriting
The objectives of underwriting are three-fold:
1. Producing a large volume of premium income that is sufficient to maintain and enlarge
the insurance company’s operations and to achieve a better spread of the risk portfolio;
2. Earning a reasonable amount of profit on insurance operations;
3. Maintaining a profitable book of business (by ensuring underwriting profits) – that
contains all the policies that the insurer has in force;
4. More spread – across the profile and geography.

Basic Underwriting Principles

Insurance is a concept of creation of a fund of premiums collected from various persons by
pooling all of their risks, from which the financial losses of those few who suffer from the
insured perils are compensated. The theory of probability, which can predict with a certain
degree of precision, the possibility of a certain event occurring that can give rise to a claim
provided there is sufficient data on past experience, is invariably the basis on which the concept
of underwriting rests.

The principles that guide an underwriter before accepting a risk are:

 1. Selecting insureds who fit the company’s underwriting standards: only those insureds
whose actual loss experience does not exceed the loss experience assumed in the
company’s rating structure will be selected.
This means that the underwriters should select only those insureds whose actual loss experience
is not likely to exceed the loss experience assumed in the rating structure. For example, a
property insurer may wish to insure only high-grade factories, and expects that its actual loss
experience will be well below aver- age. Underwriting standards are established with respect to
eligible factories, and a rate is established based on a relatively low loss ratio.3 Assume that the
expected loss ratio is established at 70 percent, the ratio of losses plus loss adjustment expenses
to earned premiums, and the rate is set accordingly. The underwriters ideally should insure only
those factories that can meet stringent underwriting requirements, so that the actual loss ratio for
the group will not exceed 70 percent

2. There should be proper balance within each rate classification: the underwriter must be
able to group insureds in such a way that the average rate in the group is enough to pay
for all claims and expenses. Units with similar loss- producing features are placed in the
same class and charged the same rate.
The objective is to produce a profitable book of business. The underwriter con- stantly strives to
select certain types of applicants and to reject others so as to obtain a profitable portfolio of
business.

3. Charging equitable rates: the rates that apply to one group should not be charged to
another group as well. For example, in the case of Health insurance, charging the same
premium rate for people in the age group of 20-25 years and those in the age group of 50-
55 years will result in the younger lot subsidizing the older people.
This means that equitable rates should be charged, and that each group of policy- holders should
pay its own way in terms of losses and expenses. Stated differently, one group of policyhold- ers
should not unduly subsidize another group. For example, a group of 20-year-old persons and a
group of 80-year-old persons should not pay the same pre- mium rate for individual life
insurance. If identical rates were charged to both groups, younger persons would be subsidizing
older persons, which would be inequitable. When the younger persons became aware that they
were being overcharged, they would seek other insurers whose classification systems are more
equitable. The first insurer would then end up with a disproportionate number of older persons,
and the underwriting results would be unprofitable. Thus, because of competition, there must be
rate equity among the policyholders.

4. Each portfolio (fire, marine, health, etc.) to be self sustaining without assuming any
cross-subsidy.

Needs of U’ting or purpose

● To check adverse selection
The purpose of the underwriting standards is to reduce adverse selection against the insurer.
There is an old saying in underwriting: “Select or be selected against.” Adverse selection is the
tendency of people with a higher-than-average chance of loss to seek insurance at standard
(average) rates, which if not controlled by underwriting, will result in higher-than- expected loss
levels.
● Competition
● To ensure fair pricing and subsidizing
● Regulatory compliance
● Risk assessment

Categories of clients risks

The underwriting process often involves more than acceptance or rejection. In some instances, an
exposure that is unacceptable at one rate may be written at a different rate. In the life insurance
field, for example, applicants may be classified as
● standard,
● preferred,
● substandard, and
● Declined/uninsurable.
Standard risks are persons who, according to the company’s underwriting standards, are entitled
to insurance without a rating surcharge or policy re- strictions.

The preferred risk classification includes those whose mortality experience, as a group, is ex-
pected to be above average and to whom the in- surer offers a lower-than-standard rate. The most
common preferred class today consists of non- smokers, for whom many insurers offer a
preferred risk rate.

Substandard risks are persons who, because of a physical condition, occupation, or other factors,
cannot be expected, on average, to live as long as people who are not subject to these hazards.
Sub- standard applicants are insurable but not at stan- dard rates. Policies issued to substandard
applicants are referred to as rated policies (or extra risk poli- cies) and require a higher-than-
standard premium rate to cover the extra risk when, for example, the insured has impaired health
or a hazardous occupation. Usually, substandard risks will pay a percent- age surcharge, a flat
additional premium, or in some cases, they will receive a policy subject to restric- tions not
included in the policies for standard risks. Most life insurers use a numerical rating system un-
der which a point value is assigned for each type of physical disability or negative influence. The
total of all points represents the expected mortality in- crease over that which is expected for
standard or normal risks. The surcharge may apply only for a pe- riod of time and then disappear,
or it may continue throughout the policy. In some situations, the poli- cies issued to substandard
risks may limit the death benefit during the first few years to the premiums paid.

Finally, some applicants are uninsurable. The ap- plicants may be uninsurable because of high
phys- ical or moral hazard, or if they suffer from a rare disease or have a situation unique for
which the insurer does not have the experience to derive a proper premium.

The Underwriting Process

The underwriting process follows a series of stages, at the end of which the status of a risk is
decided. It is only after the risk has been weighed and all possible alternatives evaluated that the
final underwriting is done. When a proposal for insurance is received, the underwriter has four
possible courses of action:
 ● Accept the risk at standard rates
● Charge extra premium depending on the risk factor
● Impose special conditions
● Reject the risk.
●
The underwriter follows specific steps when evaluating a potential risk. These are as follows:
1. Assimilating information about the applicant (The information who are material
facts)
Again to assist with understanding the applications we shall meet, it is good to remember basic
definitions:
(a) Proposal Forms may also be called Applications, a term more commonly used in life
insurance. These are documents in the form of a questionnaire that the proposer completes when
making an application for insurance cover.
(b) A Material Fact is legally defined as “every circumstance which would influence the
judgment of a prudent insurer in fixing the premium, or determining whether he will accept the
risk”. In practice, underwriters are generally interested in any fact that makes a difference with
the insurability of or terms to be applied to a risk. It will be remembered that at law, a proposer
is under a duty of Utmost Good Faith, a duty to reveal all material facts, whether the insurer
asks specific questions or not.

Material Facts We looked at a definition of these above. An alternative description for the term
could be “facts which must be disclosed” (by law, and in order to enable the underwriter to make
a professional assessment of the risk).
These include facts which: (what exactly should be disclosed)
1. render a risk greater than would otherwise be supposed, e.g. highly flammable materials
stored on the insured premises (fire insurance), when the insured’s business would not
lead a prudent underwriter to assume this;
2. render a potential loss greater than would otherwise be supposed, e.g. stock items of gold
and other precious materials in a general store where a prudent underwriter would not
expect such things (theft insurance);
3. relate to previous losses or claims’ experience;
 4. relate to previous adverse insurance experience, e.g. being refused cover or having
special terms applied by another insurer;
5. describe and assist in understanding the nature of the subject matter of the proposed
insurance;
6. may affect the legal rights of the insurer, e.g. special terms of trade which waive all
future subrogation rights.
“Non-material” Facts Obviously, any facts that do not constitute material facts need not be
revealed (e.g. one’s exact age when seeking fire insurance). There are certain facts, however,
which might fall under the definition given in. but which do not have to be revealed, because that
is what the law provides for.
These include facts which: (what exactly should not be disclosed)
1. improve or decrease the risk, e.g. having an automatic sprinkler system (fire insurance);
2. are matters of common knowledge, e.g. Hong Kong is subject to the risk of typhoons
(extra perils insurance);
3. an insurer may be deemed to know, e.g. the normal processes and dangers involved with
various occupations (EC insurance);
4. the proposer cannot reasonably be expected to know, e.g. he is suffering from an
undiscovered brain tumour (medical insurance);
5. were open to discovery but were not discovered in a risk survey carried out by or on
behalf of the insurer, e.g. with public liability insurance;
6. should have been the subject of further enquiry by the insurer, e.g. some questions on a
proposal form have been left blank or answered in uncertain terms.

Note:
1. It is the proposer’s legal responsibility to reveal material facts, but the courts are very reluctant
to allow this to be too strong a weapon for insurers. Judges will want very good evidence that
information is indeed material, if there is no specific question from the insurer concerning it.
Also, they will expect the most scrupulous care to be given to any information supplied, so that
any suggestion that the insurer should have been put on enquiry or should reasonably have been
aware of materiality will very much count against the insurer in any formal dispute.
2. The normal situation is that with any uncertainties it will be the responsibility of the insurer to
prove that a fact was indeed material and that information supplied was inadequate. This is not
an easy responsibility to discharge.
Facts which need not to be disclosed
● Those which lessen the risk
● Of public knowledge
● Of the law
● Those which an insurer is deemed to know
● Those which the proposer does not know
● Those which the insurer has put on inquiry
The Insurer is not expected to:
● Make false statements during negotiations
● Issue policies that are not authorised under the Insurance Act
● Issue ambiguous policies
● Take advantage of the insured’s ignorance by offering inadequate claim settlements and
limited scope of cover.
Remedies for breach of utmost good faith
If the insured is found to be in breach of this principle, the insurer has a right to any of the
following remedies:
● Avoid contract from inception
● Avoid liability for the claim
● Sue for damages
● Waive the above rights and let cover continue (e.g., making an ex-gratia payment)
Insured needs to comply with the principle of Utmost Good faith
● Negotiations/ inception
● Midterm of the insurance contract/period
● During claim and
● During renewal

Duty of Disclosure
pady heakin patis the duty on both farties to an insurance contatis
from the principle of Utmost Good Faith.
a) Duration of the duty of disclosure
The duration of the duty of disclosure in non-life insurance can be required at inception of the
policy, midterm of the policy, at renewal and or as a policy wording requirements; e.g., in Group
Personal Accident where the employer is expected to disclose the names, their monthly earnings,
etc. of employees that are recruited or terminated from the cover to determine either a premium
refund or need to pay additional premiums.
b) Consequences of non-disclosure
Breach of Utmost Good faith or duty of disclosure can arise in two circumstances:
misrepresentation and non-disclosure. If the non-disclosure or misrepresentation is fraudulent
(concealment):
● The policy is voidable.
● The insurer can keep the premium and due for damages.
● The insurer can ignore the breach of good faith, in which case the policy continues and
the insurer would have to pay the claims.

Obtaining material facts

Material facts can be obtained through a number of ways including but not limited to the
following:
● Proposal forms: the proposal form is the most common way for the underwriter to obtain
information regarding the risk. There are however, alternative ways of obtaining material
facts available to underwriters, their use depending on the class of business involved.
● Brokers through Risk Notes/registers: brokers are used extensively in arranging
commercial insurances where their role may extend to preparing documentation for use
by the underwriter in the assessment of the risk.
This documentation could include risk registers highlighting individual exposures and claims
experience, site inspection reports and preparation of health and safety reports.
● Risk surveys: surveys are used to obtain information where the risk is large and/ or
complex such as is the case with many commercial insurance risks for instance Kinyara
Sugar Works factory insurance would require a survey by a professional surveyor to
obtain the relevant underwriting information.
 ● Supplementary Questionnaires: These are used when dealing with particular aspects of
the risk. Examples of such areas include; money risks involving high value transits, fire
risks in respect of old or obsolete buildings
● Meeting with clients: This is again useful for commercial insurance risks where the
underwriter desires to pick the attitude of the client in respect to risk being insured. It is
very useful in mapping out the extent of moral hazard the underwriter will have to deal
with should the risk be accepted.
● Call centres: For personal lines, some underwriters operate call centres.
These centres are considered to be cost effective with supporting computer systems which
process documentation very quickly.
Internet: again, for simple risks insurers may make use of internet technology where material
facts are declared following a series of questions on the website.

The underwriter obtains this information from a wide variety of sources. The most important
sources are:
● The agent’s report: the agent does an evaluation of the prospective insured. The agent
must have first hand knowledge about the applicant’s operations and reputation. It is the
agent’s responsibility to screen the applicant initially according to the company’s
specified requirements.
● government records: these records include information from civil and criminal courts,
property tax records, bankruptcy filings etc. These may be referred to if required.
● Pre-insurance inspection report: for property insurance, this consists of a physical
assessment of the building or plant to be insured.
● Claim files: these are helpful when renewing an existing policy. The underwriter can gain
an insight into the policyholder’s character by reviewing the claim files or through
investigation.
● Reinsurers – in the case of large risks
● Others sources of information are: meeting with clients, Call centers supplementary
Questionaire. Quotations. Intenert.

Proposal Forms
A proposal form may not be necessary where the insurer provides a quotation on the assumption
that the quotation was done on the basis of available sufficient information. However, if a
quotation is provided without a proposal form, it will normally be subject to the proposer
completing one.
Section of proposal form
1. General questions e.g. proposer’s name, address, occupation , period of insurance etc. or
2. Specific questions e.g. proposer’s age, description of the subject matter to be insured,
business details, past insurance history, sum insured or limit of liability etc.
3. Statement of declaration; the insured declares that the provided information are true with
utmost good faith.
The proposal form should be read together with the insurance policy or contract.

Quotation
A quotation specifies the price/premium, features or benefits, terms and conditions of the
potential cover without being actually committed to the contract and accepting the terms and
conditions.

JK is buying a car and needs motor insurance. He calls AIG for a quotation. Pauline the
underwriter asks a number of questions about JK and the car to be able to decide whether to
insure JK and if so at what price and on what terms. What questions would you ask if you were
Pauline?

2. Analysis & Evaluation

Evaluating and making a decision
The underwriter can accept a proposal, reject it or accept it with certain modifications. Some of
the modifications that can be made are:
● Hazard can be reduced: For loss prevention and minimisation, underwriters can
recommend certain changes that will safeguard against physical hazards. For example,
installing sprinkler systems and better fire-fighting equipment in offices will reduce
damages in case of fire. This advice can either be followed by the applicant or rejected.
 ● Changing rating plans and policy terms: Sometimes a proposal that seems unacceptable at
one rate may become a desirable business under another rating plan or with Special
Conditions such as ‘compulsory excess’. A rate that will fetch the insurance company a
decent profit as well as be acceptable to the applicant is fixed on the basis of how the
underwriter judges that particular case.
● Facultative reinsurance can be used: When the business is not covered by the insurer’s
reinsurance treaty or the amount of insurance needed exceeds the net treaty capacity, the
underwriter can transfer that excess to a facultative reinsurer. As an alternative to this, the
insurance can also be divided among several insurers.
Analysis
After collecting & having information of insured and the subject matter is to do risk analysis
where;
● Clients analysis
● Subject matters analysis
To estimate the probability of risk to occur. It’s subjective activity tha measure the U’ting factors
of particular risk and test them their occurrence and impact.
After analyzing the risk and subject matter we EVALUATE THE RISK BROUGHT.
To compare the risk brought and the risk appetite (level of risk acceptance) of the insurance
companies for both of categories of clients. Sub standard risk and decline risk. Considering
parameters of decision are to be checked here and the effect of them.
Due to their outside of capability of risk acceptance the insurance will decide to
If the insurance will choose the decline and sub standard he will arrange the following
● Co insurance
● First loss policy
● Reinsurance

3. Making an Underwriting Decision

After the under- writer evaluates the information, an underwriting decision must be made. There
are three basic under- writing decisions with respect to an initial application for insurance:
● Accept the application with standard price
 ● Accept the application subject to certain restrictions or modifications (terms and
conditions)
● Accept with different policy
● Reject the application
● Postponed

First, the underwriter can accept the application and recommend that the policy be issued.

A second option is to accept the application subject to certain

restrictions or modifications. Several examples illus- trate this second type of decision. Before a
crime insurance policy is issued, the applicant may be required to place iron bars on windows or
install an approved burglar alarm system; the applicant may be refused a homeowners policy and
offered a more limited dwelling policy; a large deductible may be inserted in a property
insurance policy; or a higher rate for life insurance may be charged if the appli- cant is
substandard in health. If the applicant agrees to the modifications or restrictions, the policy is
then issued.

The third decision is to reject the application. However, excessive and unjustified rejection of
applications reduces the insurer’s revenues and alienates the agents who solicited the business. If
an applica- tion is rejected, the rejection should be based on a clear failure to meet the insurer’s
underwriting standards. Computerized underwriting is widely used for certain personal lines of
insurance that can be standardized, such as auto and homeowners insurance. As a result,
underwriting decisions can be expedited.

4. Executing the decision

After perusing all the alternatives and making a decision, it now remains for the decision to be
put into action. There are three courses of action to be taken.
● The applicant should be briefed about the decision along with all the modifications made.
If any application has been rejected, the underwriter must convey this decision to the
agent in such a way that it does not further damage any business relations they may have.
 ● The underwriter is also in charge of preparing the documents, which include a binder or a
policy work sheet to be sent to the policy writing department and also issue of certificates
of insurance.
● The final step is concerned with recording information about the applicant and the policy
for accounting, statistical and monitoring purposes. Information like the location,
coverages, limits, risk features etc must be coded, as these are essential for the purpose of
rate making, financial accounting and business evaluations.

5. Monitoring the activities

The underwriter must always be alert to any change in the loss exposures of the insureds. This
type of monitoring usually takes place when policy changes and losses are brought to the
underwriter’s attention. Premium audit and loss control reports also help to review individual
policies.

When a claim is made or after a premium audit has been carried out, the underwriter can contact
the reinsurance personnel and secure first-hand knowledge of the insured. This will help in
uncovering any additional hazards, that will in turn help the underwriter to re-evaluate the
account and decide on its continued acceptability.

The underwriter must also monitor the entire book of business and use premium and loss
statistics to determine what causes the problems that make a business deteriorate. This will also
help in finding out whether the underwriting policy is being complied with.

6. Maintaining the records of business

This involves evaluating the profitability of all the business written during a particular period of
time, covering a specific territory and for a certain type of insurance. This evaluation should be
able to weed out any problems in that line of business. The insurer’s primary concerns are the
development of adequate premium volumes, the coverage of fixed costs, the loss ratio that
develops and overhead expenses. For the purpose of evaluation, the business can be subdivided
on the basis of its class, size of the account, the territory and producer.
The producer or agent’s records concerning premium volume, policy retention loss ratio etc must
be evaluated. The goals that had been initially decided by the insurer and the agent and the
progression made towards these goals must be considered while evaluating.

NEED FOR UNDERWRITING

The need for underwriting arises because of some basic reasons: To avoid the concept of adverse
selection and certain other hazards, to maintain fair prices and subsidisation and stay ahead of
competition.
● To check Adverse selection
This term is used for a situation where the insurance applicant presents a possibility of loss that
is higher than the average expected from a random sample of all applicants.
It arises when the information presented to the insurer and the actual material facts relating to the
risk are different.
For example, flood insurance is more likely to be purchased by those businesses that expect
flooding rather than by all other businesses. Or people already suffering from a disease or
belonging to the high mortality rate group will be eager to claim coverage while those enjoying
good health may not go in for insurance.

Along with adverse selection there are certain types of hazards that an underwriter must watch
out for. These are -
● Physical hazards
● Moral hazards, and
● Morale hazards.

Physical hazards
These are hazards that affect the physical characteristics of whatever is being insured. For
example a building made of wood represents a higher level of physical hazard than one made of
brick. An untrained driver, faulty fire- safety equipment are both examples of a physical hazard.

Moral hazards
These hazards refer to the defects that exist in a person's character that may increase the
frequency or the severity of loss. Such a character may tend to increase the loss for the company.

Morale hazards
The fundamental postulate of insurance is that the insured should always conduct himself as if he
is uninsured. However, if there is a situation of a wilful carelessness on the part of the
policyholder because of the existence of insurance, then it is a case of Morale hazard.

● To ensure fair pricing and subsidising

Underwriting helps in determining the expected loss potential of the proposed insured and
selecting a price in line with this expected loss. Insureds with an approximately equal loss
potential are put into one group and charged the same rate.
● Competition
An underwriter can also help an insurance company stay one step ahead of its competitors. Some
of the ways this is done is through lower premium rates, innovative marketing strategies etc. The
underwriter provides all necessary information and thus helps the insurer make the best possible
decisions.
● Other risks
There is also another category- the ‘Declined Risks’. These are extra hazardous risks that should
be rejected. Sometimes, a premium is fixed after imposing restrictive conditions, clauses and
warranties. The acceptance of such risks is called ‘Accommodation’. Some examples of such
risks are Ammunition works, Camphor boiling works.

Underwriting Authority
Underwriting authority refers to the degree of autonomy granted to individual underwriters or
groups of underwriters. This authority will differ by position and experience. Different insurance
organisations have varying degrees of decentralisation. In India, the underwriting authority vests
with the insurance company. Post opening up of the insurance sector, some private insurers are
decentralizing certain classes of business like travel insurance, where an insurance intermediary
is allowed to issue (better to put it as ‘generate’) the policy.
Specially lines like aviation and livestock mortality have retained centralised underwriting
authority, while some other insurers are delegating a considerable part of their authority to
selected brokers. Insurers who follow the decentralization system state that it eliminates
duplication and makes the most of the producers’ familiarity with local conditions. In return,
brokers receive a higher commission rate and a larger share in the profits.

The degree of decentralization permissible depends upon several factors like the line of business
involved, the experience and the track record of the producers. There may be insurers who allow
their brokers to issue personal lines policies and bill the policyholders. This is certainly a
significant amount of underwriting authority. Some other insurers may permit a high degree of
authority but restrict policy issuance only to the company, so that control over the brokers’
activities is maintained.

There are also lines of business where the producer may have no underwriting authority at all.
These usually include very hazardous or specialised classes of business.

Underwriting Activities
Underwriting activities can be divided into two types –
● Line underwriting – Where daily underwriting tasks are carried out; the underwriters are
usually located in regional offices of the insurer.
● staff underwriting – Where the underwriter helps the management in formulating and
implementing underwriting policy. They are usually located at the Head Office.

Line underwriting activities:

The line underwriters take care of the following activities: -
● Choosing insureds with care. This is an ongoing process – once an account is accepted, it
must be monitored to check on its continued acceptability. Corrective action may be
required in certain cases. Here, the underwriter must watch out for adverse selection.
● Categorizing the risks involved. Insureds having similar expected loss frequency and loss
severity are pooled together. Only then will the insurer be able to develop a sufficient rate
to pay the losses incurred and to generate profit.
 ● A rate should be so set that it not only allows the insurer to make a profit but also is
competitive when compared to the rates of other insurers. The underwriter must make
this after thorough appraisal of the application.
● The underwriter allows the agent to issue certain types of policies and endorsements by
making use of an independent agency marketing system. The underwriter also prepares
quotations, files for the policy typist and assists the agent with drawing up proposals.
staff underwriting activities
The staff underwriters take care of the following activities: -
● On the basis of research done and knowledge about the market, they put together the
company’s underwriting policy. They must determine the company’s capacity for
business. Capacity refers to the volume of premium that an insurer can safely write, based
on the policyholder’s retained earnings or surplus.
● They update the rates and rating plans of the company. This is done to address the effects
caused by changing competition, inflation and loss experience. Examining the operational
costs and the profit requirements and combining them with the loss costs decides the final
rate.
● Preparing and updating the underwriting guides and bulletins that contain the company’s
underwriting policy. The guides also differentiate between acceptable and unacceptable
business.
● Underwriting audits are conducted to monitor the line underwriting activities. The audit
is a control tool used by the management to make sure that the underwriting policy is
being properly implemented. This is done through statistical analysis of underwriting
results and also through field audits.
● Staff underwriters also offer advice to other underwriters – by virtue of their own
experience in handling complex accounts.
● Staff underwriters also conduct training programs and other educational activities for the
benefit of line underwriters. They also act as instructors when there is a need for
information on a technical insurance area.

The Underwriting Policy

Underwriting Policy is like the Constitution of a country. It provides the frame work within
which the company would develop products for the market. The basic purpose of an
underwriting policy is to transform the objectives of the management into rules and guidelines
that will direct the company’s underwriting decisions. The underwriting policy decides the
composition of the book of business.
An underwriting policy must take into consideration the following dimensions – the lines of
business, the territories involved and the rating plans, reinsurance and retention patterns, levels
of centralization/decentralisation. Any change in the underwriting policy must be evaluated on
the basis of other dimensions. Changes must also recognise the effects of certain limiting factors
that influence the underwriting policy. These include:
● The capacity – the relation between the premiums written and the size of the
policyholders’ surplus is called the capacity.
● Capital & Reserves – It helps to gauge an insurer’s solvency.
● Skilled human resources – insurers require skilled personnel to efficiently market the
product, employ loss control efforts and adjust any loss that occurs. The insurer must
ensure that there are enough personnel and that they are conversant with the company’s
policies.
● Insurers must also follow the rules and regulations laid down by the insurance regulator
in whose territory they operate. The impact of regulation varies from country to country.
They must obtain licenses for writing insurance by individual line within each state, and
all rates, rules and other documents must be filed with Government regulators.
● Portfolios in which the company operates, e.g., exclusive health insurer/ECGC/ other
than health, etc.
● Reinsurance sets limitations on what the underwriter can write. Reinsurance refers to the
contractual relationship by virtue of which, risks are shared with another insurer.

Application of the underwriting policy

Once the underwriting policy is set, it must be communicated to all concerned, as well as
applied. Presently, IRDA requires that it should be placed before the Board of Directors of the
Insurer and submitted to the Regulator with the board resolution. There should also be a
‘Compliance Officer’ for the underwriting policy. Underwriting bulletins and guides are utilised
for this purpose. Once the policy is established, underwriting audits are conducted to review the
effectiveness of the policy.

Applying the provisions given in the underwriting policy involves communicating whatever
decision has been taken, to the agent. Data about the policyholder including the class, location,
risks involved and coverages must be coded, so that the information can be used later.

Underwriting guides
Underwriting guides outline the ways to realise the objectives stated in the policy. (basically
‘do’s and ‘dont’s) They contain the standards for acceptability and summarise the underwriting
authority requirements. The chief purposes of an underwriting guide are as follows:
● Supplying a basic framework for formulating underwriting decisions: underwriting
guides identify the principal factors that should be weighed when a particular type of
insurance is written.
● The underwriting guide is a means of making sure that the selection process is uniform
and consistent. Submissions that are identical in all respects must be treated in the same
way. The guides are also a means of informing individual underwriters of a suitable
approach to evaluate policyholders.
● Underwriting guides help to unite the insights of experienced underwriters, which will
help those less familiar with a particular line of business. The guides contain significant
observations that have been gathered on the basis of the insurer’s past experiences.
● The guides enable routine decisions to be handled at lower levels of authority and allow
the experienced underwriters to concentrate on the more difficult cases.