UnderwritingDefinition - “the selection of policyholders through hazard recognition and evaluation, pricing, and determination of policy terms and conditions”

Purpose - “the development and maintenance of a profitable book of business”

Must avoid adverse selection - applicants have greater loss exposure than general population

Evolution of UnderwritingPre-1950s - Monoline Policies

Underwriter’s career path

Map clerkJunior underwriter (apprenticeship)Replaced senior underwriter at retirement

Multiple-Line UnderwritingResult of McCarran-Ferguson Act - 1945More career flexibilityIntensive training programs in several linesContinuing education

Underwriting DevelopmentsTechnology

Underwriting ActivitiesLine underwriting

Selecting insureds

Classifying risks

Determining proper coverage

Determining appropriate rate or price

Providing service to producers and policyholders

Staff underwriting

Formulating policy

Evaluating experience

Researching and developing coverages and policy forms

Revisng rating plans

Preparing underwriting guides and bulletins

Conducting underwriting audits

Participating in industry associations

Conducting education and training

Establishment of Underwriting Policy

Principal Dimensions

Lines of business

Territories

Forms, rates and rating plan

Constraining Factors

Capacity

Premium/Surplus ratio

Regulation

Personnel

Reinsurance

Implementation of Underwriting PolicyGuides and Bulletins

Provide for structured decisions

Ensure uniformity and consistency

Synthesize insights and experience

Distinguish routine form nonroutine decisions

Avoid duplication of effort

Assist underwriter in policy preparation

Measuring Results

Industry Trends

Difficulties

Premium volume changes

Loss development delay

Standards of performance

Selection

Product mix

Pricing

Accommodated risks

Retention ratio

Success ratio

Service to producers

Underwriting Process

Gathering information

Identifying, developing and evaluating alternatives

Selecting an alternative

Implementing the decision

Monitoring the exposures

Gathering InformationSources

Producer

Application

Consumer investigation reports

Government records

Financial rating services

Loss data

Inspection reports

Field marketing personnel

Premium auditors

Claim files

Production records

Hazard Evaluation

Physical hazards

Moral hazards

Weak financial condition

Undesirable associates

Poor moral character

Morale hazards

Poor personality traits

Poor management

Identifying, Developing and Evaluating Alternatives

Basic decision: Accept/Reject/Modify

Modifications

Loss control program

Change rates, rating plans or policy limits

Experience rating

Schedule rating

Retrospective rating

Policy limits

Amend policy terms and conditions

Use facultative reinsurance

Selecting an Alternative and Implementing the Decision

Selecting Alternative

Underwriting authority required

Presence of supporting business

Mix of business

Producer relationships

Regulatory constraints

Implementation

Communication of decision

Execution of appropriate documentation

Recording information

MonitoringChanges in loss exposure

New driver

Notice of loss

Monitoring a book of business (by tracking loss ratio)

Class of business

Territory

Producer