Underwriting Management Chapter Slides

1. Chapter 4
UNDERWRITING POLICY AND PRACTICE

2. PHYSICAL AND MORAL HAZARDS
Physical hazards – Physical aspects of a risk that directly impact on its insurability or terms,
conditions and exceptions at which insurance may be accepted – Hazards identification is the
basis of successful underwriting e.g.:
Material damage
• Construction of the premises / Nature of the contents
• Location of the premises:
 Proximity of the fire services
 Proximity of the sea or inland water
 Earthquake zone including tsunami risk
• Sprinklers, alarm and other loss minimisation devices e.g. fire doors or fire breaks.
Business Interruption
Alternative back-up sites for revenue-generating sites
Alternative suppliers of key ingredients or components

3. PHYSICAL AND MORAL HAZARDS
Liability
Motor
Compliance with health and safety requirements Nature of the activities carried out
Condition of the premises Proximity of the third parties
Number of vehicles in a fleet and nature of the
vehicle
Compliance with driving hours
restrictions
Age and condition of the vehicle Driver training and experience

4. PHYSICAL AND MORAL HAZARDS
Moral hazards relates to the conduct and attitude of the proposer / insured
Three scenarios of moral hazards:
Pre-inception – Proposer is required to answer of proposal form & other
questions truthfully. So that underwriter could assess the risk properly.
Poor risk management depicts poor moral hazards e.g.:
Pre-inception Post-inception Post-loss
Poor maintenance of premises or vehicles Poor or inadequate training

5. PHYSICAL AND MORAL HAZARDS
Post-inception poor moral hazards e.g.:
• Attitude to surveyor’s recommendations for risk improvement
• Response to requests to visit premises / operations
• Delays in premium payments
Post-loss moral hazard is evident from e.g.:
• Delays in loss notification with full details of circumstances
• Lack of readiness to assist insurers in determining the value of the loss
• Exaggerating the value of the loss

6. RISK CLASSIFICATION AND CATEGORISATION
Classification of risk facilitates the underwriting process. Risks are classified by
account and class of business, e.g.:
Within the class of business, individual covers / perils will be classified separately
(e.g. fire, explosion, storm, flood, escape of water under a material damage policy).
Package policies designates their own class of business but the individual covers
underwriting is done through their appropriate account e.g. motor or property
Personal insurances Motor Property
Private car Commercial vehicle Material damage
Household Motor fleet B.I
Personal accident Motor trade Theft
Pet money

7. RISK CLASSIFICATION AND CATEGORISATION
UK insurance industry also use insurance industry-wide code for
classification, usually based on trade / occupation e.g.:
• ABI coding
• Standard Industrial Classification (SIC)
• Own classifications e.g.:
Motor Property Liability
Vehicle type Occupation of building Occupation
Vehicle use
Driver’s age Construction material Product

8. RISK CLASSIFICATION AND CATEGORISATION
Categorisation – Risks with similar features and characteristics (similar degree of
hazard & claim profiles) are also categorised by the insurers in comparable groups for
ease of analysis & rating. E.g. :
Car rating group
Insurers band models of cars with similar characteristics together as it would be
unworkable to assess each model of car individually. Factors considered are:
Theft rating areas
Risk categorised by allocating post codes to different rating areas based on claim
experience, crime statistics etc.
Insurers regularly review their categorisation criteria.
Damage & parts costs Repair times Car security

9. UNDERWRITING AND RISK IMPROVEMENT
CRITERIA
In underwriting process, after risk classifications and categorisations, insurer define the
risk acceptance criteria (degree of hazards for risk acceptance).
Underwriting criteria derived from underwriting strategy it includes:
Examples of Underwriting criteria:
Material damage
Physical hazards Classification Categorisation
Accepting a highly protecting risks e.g. risks with fire alarms & sprinkler
Restricting the trades i.e. prohibiting the risk acceptance of all risks falling into a particular trade
Restricting the geographical location for underwriting

10. UNDERWRITING AND RISK IMPROVEMENT
CRITERIA
Liability
• Excluding trade using asbestos.
• Limiting the use of heating & welding equipment .
Motor
• Offer cover to young & inexperienced driver (e.g. below 23).
• No underwriting fleets of high performance or high value vehicles.
Underwriter can accept non-standard risks with imposition of some terms and
conditions.

11. UNDERWRITING AND RISK IMPROVEMENT
CRITERIA
Risk improvement criteria is derived from the implementation of underwriting criteria
i.e. it is the part of the underwriting criteria e.g.:
Home insurance
• Final exit door (FED) from the home to be fitted with a 5-lever mortise (wood
working) deadlock which meet British standard
Motor insurance
• Car is kept overnight in a locked garage.
Risk improvement criteria for commercial lines and high risk personal lines:
• Make the risk acceptable to the insurer and reduce the probability of loss prior to any
claim events
• Counter the impact of claims resulting from a common cause

12. UNDERWRITING AND RISK IMPROVEMENT
CRITERIA
Risk surveys
Two main purpose of risk surveys:
• Accurately describe or classify the risk
• Insurer propose ways for risk improvements
Two categories of Risk improvements:
• Necessary improvements for a risk to be acceptable
• Optional improvements – May result in wider cover or a reduced premium for the
insured if implemented.
Common claims trends – If insurer finds claim trends then discuss it with insurance
surveyor / risk engineer and take measures to address the issues of claim frequency
through risk control measures (Involve costs) which is the part of underwriting criteria.

13. POLICY COVER, TERMS, CONDITIONS AND
RESTRICTIONS
Policy wordings – Reflect the underwriting policy of the insurance company and so
insurer often use model policy wordings.
Standard policies are drafted:
• To provide the extent of cover the insurer is willing to give
• To meet the policyholders’ needs in the sector or niche market at which it is aimed
• To compare favourably with competitors
• To achieve a balance between the risk exposure and premium charged
• To satisfy all the legal requirements
• To provide clarity in the event of the claim for quick settlement

14. POLICY COVER, TERMS, CONDITIONS AND
RESTRICTIONS
Pre-printed booklet is published for high volume, low premium risks
of personal lines and small commercial risks.
4 key elements of an insurance policy:
The Operative Clause – Tell about the insured event coverage.
Cover provided by the operative clause is derived from the
underwriting policy.
Operative clauses Exemptions or Exclusions
Conditions clauses Schedule

15. POLICY COVER, TERMS, CONDITIONS AND
RESTRICTIONS
The exemptions or exclusions clause
2 types of exclusions:
Criteria for exclusions is determined by:
Specific exclusions – Apply to certain parts or sections of the policy e.g.
Theft exclusions in packaged policies
General exclusions – Apply to the whole policy
Underwriting policy AND Cost of providing cover
Reinsurance protection available to the insurer

16. POLICY COVER, TERMS, CONDITIONS AND
RESTRICTIONS
The conditions clauses express the policyholders’ rights & obligations.
Generally Insurance policies include following conditions:
Ensure fairness e.g. policyholder must advise the insurer of any alteration in risk as
soon as reasonably practicable & insurer may amend the term as required
Ensure the policyholder take reasonable care & cooperates in mitigating or avoiding a loss
Follow market practice e.g. cancellation condition

17. POLICY COVER, TERMS, CONDITIONS AND
RESTRICTIONS
The schedule described the subject matter of insurance (Insured address, name etc.),
sums insured or limit of indemnity and specific to each policy written.
Endorsement and Memoranda are used to amend the policy.
Warranties – A warranty is an undertaking by the insured that the something shall or
shall not be done or that a certain state of affairs does or does not exist.
It must be strictly complied by insured otherwise insurer can avoid the policy.
Insurers apply warranties to ensure:
• Insured complies the requirement to make the risk acceptable within underwriting policy
• Certain features of higher hazards are not introduces without the insurer’s knowledge

18. POLICY COVER, TERMS, CONDITIONS AND
RESTRICTIONS
Excesses:
Compulsory excesses are applied by the insurer as an underwriting measure
with the aim of:
• Reducing claim costs
• Eliminating small ‘nuisance’ claims which are costly to administer
• Making the insured more cautious regarding the prevention of loss
• Excluding some or all claims of an unacceptably high frequency, so premium can be
kept at a competitive level e.g. windscreen claims.
Voluntary excesses are applied at the request of the insured to eliminate small
claims and provide a reduced claims costs for the insurer, a discount premium is given.

19. POLICY COVER, TERMS, CONDITIONS AND
RESTRICTIONS
Criteria for using excess:
Deductibles – Common in commercial policies for insured’s self-
insurance and same operations as excesses.
Policy limits – are determined by insurer’s capacity & reinsurance
arrangements and may be variable depending upon the nature of
risk.
Suitability Accurate costing

20. RISK EXPOSURE AND CONTROL
Losses may arise either from a single event or a single risk.
Single risks – Senior management assessed & established the
maximum capacity (S.I or limits of indemnity representing a claim
potential) that can be provided by a single risk. Underwriter must
ensure that the maximum exposure to a risk is acceptable within
the parameter of underwriting policy.
Single event can triggered losses from a number of policies e.g.:
Tsunami in Japan 9 / 11 terrorist attack – WTC

21. RISK EXPOSURE AND CONTROL
Aggregation means an accumulation of insured risk to a single insurer which exposes
that insurer to a significant flow of claims arising from a single cause of loss. E.g.:
Class of Business What is insured Nature of potential aggregation of risk
Motor Loss / damage. Liability to
3rd parties, property &
injury
Multi vehicle accidents & severe injuries to
people e.g. a motor way pile up
Household Home & contents loss or
damage. Liability to 3rd
parties
Weather e.g. storm affects a large multi
domestic dwellings
Comm. property All risk cover Multiple insureds affected by catas. loss
Travel People & their belonging.
Liability to 3rd parties
Pandemics or other natural disasters at
holiday resorts e.g. H1N1

22. RISK EXPOSURE AND CONTROL (IDENTIFICATION
AND CONTROL OF EXPOSURE)
Property insurance
Single risks – Maximum capacity of an insurer will laid be down in
the underwriting policy and it vary according to the nature and
quality of the risk such as plastic factory and spinning mill.
Maximum exposure on a single risk is calculated:
1. Total of the full value sums insured relating to a single location.
2. Estimated maximum loss (EML) is used to measure the exposure at a single
location.

23. RISK EXPOSURE AND CONTROL (IDENTIFICATION
AND CONTROL OF EXPOSURE)
Surveyors / Risk engineers establish correct EML by considering:
Underestimation of EML – Risk accepted over the maximum capacity – Less
reserves for loss – reduced profits.
Overestimation of EML – Risk not written because of insurer’s capacity or
unnecessary purchase of reinsurance.
Material used in the construction of the premises
Fire and sprinkler protection
Contents of the premises – Nature, distribution and combustibility
Use of location – hazardous processes & substances
Proximity to water course
Standard of management and house keeping

24. RISK EXPOSURE AND CONTROL (IDENTIFICATION
AND CONTROL OF EXPOSURE)
Accumulation logging – The insurer identifying & monitoring
accumulations at a single risk by recording of location of each risk
(usually via post code) and the maximum exposure at that location
(either via total S.I or EMLs).
Single events – Underwriting policy specifies the amount of capacity
available in specific geographical areas so the risk to natural perils can
be controlled.
Risk exposure aggregation is also being identified through
sophisticated computer programme, such as, risk zoning and a system
used for this purpose is the CRESTA (Catastrophic Risk Evaluation and
Standardising Target Accumulation).

25. RISK EXPOSURE AND CONTROL (IDENTIFICATION
AND CONTROL OF EXPOSURE)
Controlling exposure:
Liability insurance
Single risks – Maximum capacity of an insurer in respect of any policyholder
depends upon quality and nature of the risk.
Single events – Multiple policies can be triggered by 1.
Aggregation of liability insurance can be identified & controlled e.g. by:
• Examining exposure to similar trades.
• Examining proximity of insureds.
Purchase of reinsurance Co-insurance with other insurers

26. RISK EXPOSURE AND CONTROL
Approaches to issues of aggregation across a class of
business
Different insurers have different approaches but prudent risk selection is often
the key and the risk acceptance criteria will direct underwriter to:
Approaches to risk selection:
• Private Motor insurer not accepting business from young drivers.
• Insurer may set up a special unit to attract & handle high risk and then
reinsured it.
Positively specialise in some risks Avoid some risks altogether
Allow moderate exposure to others

27. DELEGATED AUTHORITIES & LINE SLIPS
Delegated authority can be restricted to e.g.:
• Issuing motor cover only
• Management of all or part of an insurer’s business in a particular territory.
Delegated authority holder is called cover holder.
Insurers / Underwriters are the risk carriers.
Agreement is known as binding authority.
Delegated authorities enable a business and underwriter to:
Gain access to business and Have the
local expertise and knowledge
Write in a sector in which it has little
expertise
Acquire income with low or without costs and risks of establishing branches or
employing underwriters

28. DELEGATED AUTHORITIES & LINE SLIPS
Delegated authority benefits intermediaries:
They incur fewer costs in placing business
Offer clients a quick turnaround on underwriting decisions
In many cases, can give cover immediately
Received enhanced levels of commissions to reflect the additional
work taken on
Participate in any profits from the risks written under the scheme

29. DELEGATED AUTHORITIES & LINE SLIPS
Operations of delegated authority
The binding authority details:
What risks can & cannot be covered e.g. class of business & trades
Rates of premium charged including any minimum levels
Limits, e.g. limits of indemnity, any minimum excess to apply etc. with maximum limit of
liability cover-holder can accept in aggregate.
Cover that may be granted and the wording to be used
Period of binding authority and geographical limit
If claim settlement authority is included then parameters are also identified

30. DELEGATED AUTHORITIES & LINE SLIPS
Importance of records and reporting
Delegated authority records is kept in bordereaux containing detailed information including:
Auditing and review – Risk carriers review not only parameters but also:
S.I & , in relation to major portfolio, the potential maximum amount of any 1 loss
A breakdown of income by section as well as details of individual premiums written
Identity of the client , The risk location and Retention rates of the business transacted
Adherence to the terms & conditions of the binding authority
Financial shape of the cover holder
Compliance with the legal & regulatory matters
Any other material development

31. DELEGATED AUTHORITIES & LINE SLIPS
Problems with delegated authority
• Conflict of interest – Acting for insured / proposer and insurer.
• Poor performance of the cover holder – Poor cash flow or a high level of losses
• Ambiguous terms – Liabilities remains with insurer
Line slips is an agreement between an individual broker and a group of 2 or more
insurers or underwriters whereby each insurer or underwriter agrees to accept a pre-
agreed proportion of a specified type of risk. Intermediary select the insurer or
underwriter as a lead underwriters.

32. LIAISON BETWEEN UNDERWRITING & CLAIMS
FUNCTIONS
Policy wordings
Claim department provide claim history and so wording is decided accordingly.
Recording of statistical data - Claim function allocate specific coding to each new
claims recorded on the claims data basis for analysis purposes. Generic coding for:
Type / cause of loss:
Type of vehicle involved in loss:
• Private car, commercial vehicle, special type.
Fire or storm for property insurance Fall from height or stress for EL
Hit in rear or windscreen breakage for motor fleet.

33. LIAISON BETWEEN UNDERWRITING & CLAIMS
FUNCTIONS
Individual claims – Queries on interpretation of the policy wording
will be directed to the underwriter so the original intent of the cover
to be provided can be established. For un-settled claims an
underwriter approaches the claim handler for back ground
information.
Backlogs – Underwriter should be updated with any backlogs of
claims department
Fraud – Claim personnel should notify to underwriters.
Emerging trends – Claims department should observe the claims
reported and advise underwriters of unusual pattern

34. COUNTER FRAUD INITIATIVES
Fraud (Crime) offence can be committed:
Opportunistic fraud-Examples of opportunistic fraud at underwriting stage:
• Fronting of private car policies.
• Omitting to disclose previous claims.
Examples of claims fraud:
• For theft claims, adding items to inventory which was never stolen
• Exaggerating the effect of insured event
• Inventing an insured event that can never took place
False representation Failing to disclose information Abuse of position

35. COUNTER FRAUD INITIATIVES
Pre-mediated fraud deliberate crime and engineered events of fraud e.g.
money laundering.
Fraud detection – Examples of fraud detection techniques:
Expert staff – Insurers built in-house fraud unit with expert staff to oversee the
implementation of fraud awareness policy. A claim handler must observe:
Claims for items where insured can’t produce any documentation
Claims made shortly after inception
Where several claims are made for similar loss or damage over a short period of time
Expert staff Covert surveillance
Investigative interviewing Photography and mapping

36. COUNTER FRAUD INITIATIVES
Market groups and associations - Formed for combatting fraud:
The Insurance fraud investigator’s group (IFIG) – has a membership
consisting of insurers, investigators, loss adjusters, and lawyers with the aim to
raise the profile of insurance fraud as a crime and discuss anti-fraud initiatives
and techniques and shares intelligence among its members to highlight potential
fraudulent activity.
Insurance Fraud Bureau (IFB) – establish to detect and prevent organised
insurance fraud and led by an operational steering group of insurance fraud risk
managers from various insurers and is funded by a levy on its members.

37. COUNTER FRAUD INITIATIVES
Aims of IFB :
• Analysing policy & claims records stored on industry data base for
suspicious activity
• Co-ordinating between insurers for investigation of potential fraud
• Working closely with police or other enforcement agencies.
Databases
Claims and Underwriting Exchange (CUE) – Central data base to prevent
multiple fraudulent claims and misrepresentation of claims history for motor,
home & personal injury and sickness incidents reported to insurance companies.
Details are held for 5 years.

38. COUNTER FRAUD INITIATIVES
Motor Insurance Anti-Fraud and Theft Register (MIAFTR) – Run by ABI and
enables motor insurers to share key information about motor claims.
MIAFTR assist insurers in identifying the most common form of fraud:
• Owner insuring their vehicle with several insurers and then claim total loss
from each
• Owners reporting a fictitious theft to the police and then storing the stolen
vehicle until insurer has paid out. Database automatically advise the insurer
when the police record that the vehicle has recovered.
Motor Insurance Database – Holds the insurance details of all vehicles
registered and insured in UK with the aim to combat uninsured drivers and
motor vehicle crime.