Study 2 - Underwriting the Risk: Overview
1. What are the two categories of risk? Give an example of each. (p. 3-4)
· Speculative risk: chance of a gain or loss. (lottery)
· Pure risk: only a chance of loss. (insurance)
2. What is the subject of insurance? What is the object of insurance? (p. 4)
The subject of insurance is a person or a business: the applicant for a new policy or the insured under an existing policy.
The object of insurance is the thing being insured or for which insurance is sought.
3. Why is product knowledge important for the underwriter? (p. 5)
It is the underwriter who identifies or composes the insurance policy appropriate to the need for insurance represented by the risk. The underwriter must understand the potential obligation to the insured that they are undertaking for the insurer when he/she agrees to provide coverage using a particular policy wording.
Part of the understanding includes anticipating how the policy is likely to be interpreted in a court of law.
4. Explain the principle of contra perferentem. (p. 7)
All policies share a need for clear and umambiguous wording. Insurance policies are governed by the legal principle of contra proferentem or “against the offeror.” Any dispute caused by ambiguity over the policy’s wording will be decided against the insurer.
5. Why should an underwriter understand general principles and characteristics of insurance policies? (p. 6-7)
When analyzing policy wordings, an underwriter must look for or be aware of legal precedents that indicate the interpretation that the courts have given to various clauses in the contract. Also, not only the wording but the intent of the wording, the reasons the insurer has for using wording that it does in a policy.
6. What should an underwriter look for in assessing a manuscript wording? (p. 8)
The underwriter must be able to read and understand the manuscript policy and be able to assess the coverage it offers to determine whether he or she wants to participate on the risk.
7. Briefly explain how policy wording changes over time. (p. 8-10)
Policy wordings arise to meet a need for coverage and over time, evolve to reflect change in society and risks. Also, policy wordings are also shaped by legal considerations over which the insurer has no control.
8. Explain what makes an insurance policy a contract. (p. 10-11)
A contract is a deliberate engagement between competent parties upon a legal consideration to do or abstain from doing some act.
9. What are the five elements of a contract? (p. 12-13)
i. Offer and Acceptance (Agreement)
ii. Capacity of Parties to a Contract
iii. Consideration
iv. Genuine Intention (Meeting of the Minds)
v. Legality of Object
10. What are the four requisites to a binding contract in Quebec
i. Consent
ii. Capacity to Contract
iii. Cause of Contract
iv. Object of Contract
11. What is insurable interest? Why is it required in an insurance agreement? (p. 14)
Insurable interest exists when the insurance buyer stands in such a legal relationship to the object of insurance as to be financially benefited by its continued existence or financially prejudiced by its loss or damage.
12. Explain the principle of indemnity? (p. 14-15)
To indemnify means to return someone after a loss to the same financial position he or she enjoyed immediately before the loss. The principle of indemnity provides that an insured person should recover no more or less than the amount of his or her loss.
13. Why is the principle of utmost good faith so important in insurance contracts? (p. 15)
The higher standard for insurance contracts reflects the unequal access to information between insured and insurer. Only the insured has direct knowledge of the material facts about a risk, the facts that would influence a prudent underwriter in deciding whether to accept or decline a risk and on what terms it would be acceptable.
The law imposes a duty to disclose any information that is basic to the acceptance of the risk or the terms of the policy but ultimately, the insurer and insured must be able to trust one another.
14. What is the difference between an insurance policy and a contract of insurance? (p. 16)
An insurance policy is a document that provides evidence of a contract of insurance. It states in details the terms of the contract between the insured and insurer.
All insurance policies have certain common features: 1) Declarations 2) Insuring Agreements 3) Statutory or General Conditions 4) Policy Conditions 5) Signature Clause
15. What do the declarations of an insurance policy identify? (p. 16)
The declarations are usually placed on a separate page. They identify:
· The parties to the contract (insured and insurer)
· The effective and expiry dates
· The amount of premium
· The amount insured
· Other interested parties (such as an mortgagee)
· Sometimes a description of the objects of insurance
16. What does a condition clause typically state? (p. 16-17)
They establish the rights and responsibilities that the law assigns both the insured and the insurer under the policy, apart from any terms they negotiate between themselves.
17. Why is knowledge of regional issues important to an underwriter? (p. 19)
Different areas offer unique challenges to insurers, depending on the states of local economies, weather conditions, geographical features, regulatory constraints, cultural considerations and other factors.
18. What specific aspects of a business should an underwriter be familiar with? (p. 20)
A successful underwriter should have a sound knowledge of the insurance market in general: typical policy wordings of different insurers, underwriting tendencies and pricing habits of competitors.
It is important for a commercial insurance underwriter to be familiar with many different types of business enterprise:
· The products they manufacture
· The goods they sell
· The services they provide
· The legal, regulatory, technological, and economic environments they operate in
Additionally, the underwriter should be aware of market conditions for these businesses and their place in the larger economy.
19. Give some examples of internal and external resources that might be useful to an underwriter. (p. 21)
Internal sources: include colleagues in other departments of the insurance company: actuaries, loss control engineers, claims adjusters and examiners, and other fellow underwriters.
External sources: include reinsurers, underwriters with other insurers and through networking.
20. Why is claims knowledge important to an underwriter? (p. 21)
The record of losses that a risk has incurred in the past is a critical tool for assessing the exposure to loss that the risk represents. The record of past losses would describe not only the types of loss but also the amounts of loss. These features of the loss experience become a benchmark for assessing how reasonable the coverage and other requested terms are, as well as the price being charged.
Thus, losses are connected with pricing.
21. What is an IBNR factor? (p. 22)
For automobile risks, claims may have been incurred but not yet reported, thus underwriters must understand that most summaries of claims experiences include an allowance for such unreported loss experience called an IBNR factor (incurred but not yet reported).
22. What two basic elements does an underwriter use to analyze loss experience? (p. 22)
Underwriters must be able to analyze loss experience in terms of two basic elements: frequency and severity.
23. Why might an underwriter have less control over severity than over loss frequency? (p. 23)
The underwriter may have less control over loss severity than over loss frequency because he/she cannot control inflation, cost of repairs, size of court awards, among the many factors that may determine the size of a claim.
To make proper use of the loss experience of a risk, the underwriter must understand “frequency” and “severity” as:
· Descriptions of a risk’s loss experience;
· As measures of the exposure that the risk poses or would pose to the insurer;
· As determinants of the price and other terms under which the insurer might insure the risk.
24. What are reinsurance skills? Why are they important to an underwriter? (p. 24)
These entail the ability to determine from the line guide which capacity the insurer will make available to insure a given risk; judge how much of that capacity to commit to the risk; and the structure the limit of liability to accommodate any reinsurance.
25. Why is it important for an underwriter to be comfortable and familiar with words? (p. 25)
Being comfortable with words is as important to an underwriter’s ability to communicate as it is to his/her best ability to evaluate complex policy wordings, avoid being misunderstood and be sensitive to the ways in which others use words, both in writing and in discussion, to avoid misunderstanding what another person may say.
26. Discuss organizational skills required by an underwriter. (p. 27)
Documentation skills: an underwriter must document their file for a risk whenever something is done with significant in respect to the risk.
Computer skills: important for analytical skills to be used in risk assessment, loss information, the preparation of rating schemes and proposals, the writing of reports and memoranda and general research on the risk.
Time management skills: like all busy professionals, the underwriter must learn to set priorities and to reconcile a necessary concern for detail with the need to manage a large volume of work.
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