Study 1 - Introduction to Underwriting
1. Explain the three main ways to define “underwriter.” (p. 3-6)
i. An underwriter is an insurance professional employed to accept or reject risk on behalf of an insurer.
ii. An underwriter is a shareholder of capital.
iii. An underwriter is an insurance professional employed to implement an insurer’s strategic plan.
2. What is a contract of bottomry? (p. 6)
It appears that, for thousand of years, the characteristic form of insurance was a contract of bottomry, which applied to commercial journeys, by land caravan and by sea.
Bottomry was essentially a kind of loan extended by a money changer or money lender to the owner of goods or ships in transit between ports. If a ship against which the loan was taken out completed its journey, the borrower repaid the loan with interest. If the ship was lost, the borrower kept the amount of the loan, thus being in effect indemnified for his loss as in an insurance contract.
3. What role does Lloyd’s of London play in the development of the insurance industry? (p. 7)
It was in the coffee house of Edward Lloyd, where the seed was planted for what would eventually become today’s Lloyd’s of London where it became the important centres of social, intellectual and commercial activity.
4. Where does the term “underwriter” come from? How has the meaning of the term changed over the years? (p. 7)
A person looking for insurance, or his agent acting as do today’s insurance brokers, would circulate about a coffee house a document describing, for example, a ship and its cargo, crew, and destination. Underneath the description of risk and the proposed terms, merchants or other people of means who wanted to assume part of the risk for the buyer would sign their names and the amounts of risk they were willing to assume.
These people came to be known as “underwriters” for the practice of literally writing their names under the document’s text.
With the development of insurance companies, underwriting became a discipline practiced by specialists employed by those companies.
5. Explain the function of the line guide. (p. 7-8)
The line guide is the criteria of the insurer’s strategic plan in which an underwriter or accepts or rejects a risk. Thus it is the guidance for the underwriter in which to accept or reject risks.
6. Why is licensing an important consideration for an underwriter? (p. 8)
It is important to know where the insurer is licensed to accept business.
7. How does territory affect an underwriter’s assessment of risk? (p. 9)
It is important for the underwriter to know the geographical area or territory in which a risk is located as some territories may be more prone than others to certain kinds of environmental hazards.
Some territories are urban; others are rural. For these reasons, there is an overlap in underwriting considerations between territory and types of business. There are also overlaps between territory and other underwriting considerations such as capacity, pricing and reinsurance.
An underwriter must know which territories his or her employer considers acceptable or desirable areas from which to solicit and accept business.
8. What is a table of limits, and how are the amounts determined? (p. 10-11)
The Table of Limits are the amounts of insurance an underwriter may authorize for risks of varying types which are set out in a matrix or table of limits.
The amounts are determined by criteria such as the following:
· The occupancy of the risk: The nature of some businesses pose inherently greater risks of loss or damage than do others.
· The level of public fire protection: The Fire Underwriters’ Survey (FUS) maintained by CGI Insurance Business Services grades each municipality in Canada
· The type of construction: The table of limits establishes a maximum amount of insurance for fire-resistive construction and fractions of that amount for more hazardous types of construction such as noncombustible, steel on steel and brick veneer or wood frame.
9. What is reinsurance? Explain the difference between facultative reinsurance and treat reinsurance? (p. 12)
Reinsurance is “insurance for insurers.” An insured transfers part of its risk by buying insurance, so an insurance company transfers part of its risk by buying insurance.
The two types of reinsurance are:
· Facultative reinsurance: negotiated between an insurer and reinsurer on an individual risk or policy.
· Treaty reinsurance: agreement between insurer and reinsurer to reinsure a block or portfolio of business without the insurer has to submit each risk to the reinsurer.
10. How is reinsurance beneficial to insurance companies? (p. 12)
It allows increased capacity for the insurer. That is, the amount of capital an underwriter may authorize on or “invest” in a risk is the sum of what the insurer would authorize from its own capital and what one or more insurers make available for the underwriter to authorize or invest on their behalf.
11. In what ways might an underwriter be responsible for applying the line guide? (p. 13)
An underwriter might be responsible for underwriting individual risks or a group of risks. As the underwriter gains experience, they will be given larger or more complicated risks to underwrite.
12. What is the difference between first-party loss and third-party loss? Give an example of each. (p. 14)
· First party loss: loss directly arising from loss of or damage to property of any kind. (home, automobile, personal possessions)
· Third party loss: loss raising out of legal liability for loss or damage or other harm caused to another person/business.
13. What is the difference between physical hazard and moral hazard? Give an example of each. (p. 15)
· Physical hazard: any physical hazard that makes a loss more likely.
· Moral hazard: hazards pertaining to the moral obligation of a risk and are more subjective than physical hazards.
14. Why is it important for underwriters to look for ways to say “yes” to risks? (p. 16)
· The insurer’s business is to earn premium while minimizing loss.
· There exists a bias on the underwriter to accept as much business to accumulate premium.
15. Discuss the three main reasons that an underwriter might reject a risk? (p. 16)
i. Class is not permitted: the risk is of a class not permitted by the line guide or falls short of a minimum requirement specified in the line guide.
ii. The market: market conditions or due to competitive considerations.
iii. The risk is flawed: the risks is on its own merits, too flawed to be accepted and it is not possible to negotiate terms on which the risk could be made acceptable.
16. How does the approach of a reinsurance underwriter differ from that of an underwriter for a primary insurer? (p. 17)
The goal of the reinsurance underwriter to “underwrite the underwriter” as they are one step further removed from the risk than is the insurer’s underwriter.
17. Identify and explain the “Big Five” categories of knowledge that an underwriter needs. (p. 18-20)
i. The Environment: understanding of political, social and economic environment.
ii. The Legal System: 3 systems of law in Canada (common, statute and the Civil Code); division of jurisdiction between federal and provincial levels of government; the structure of our federal and provincial court systems; the distinction between civil and criminal law; aspects of civil law including the law of tort and contract; the insurance contract itself.
iii. The Business: understanding of the environment, insurance industry and other related industries.
iv. The Product: understanding that different kids of risk require different kinds of policies.
v. The Risk: understanding the applicant.
18. What is the difference between hard and soft skills? Give an example of each as it would apply to an underwriter. (p. 20-21)
· Hard skills: tangible, measurable skills uniquely associated with a particular job. (technical and analytical skills)
· Soft skills: intangible skills that is hard to measure and generally useful in any job rather than only one job in particular. (communication and organizational skills)
19. What does the power of “why” refer to? Why is this important characteristic of an underwriter? (p. 22)
A good underwriter will always seek to understand a risk and its context as thoroughly as time and resources permit. He/she will be create as is possible or necessary to insure the risk on terms acceptable to both the insurer and insured.
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