Study 9 – The Underwriting Environment
1. What is the most obvious way in which an underwriter can accommodate to his/her internal environment? (p. 3)
The most obvious way in which underwriters can accommodate themselves to their internal environments is to follow the policies and guidelines established by their employers to direct their work.
2. What is one danger of the centralized approach to underwriting? (p. 4)
One of the dangers of the centralized approach to underwriting may be accountability without authority. That is, underwriters are generally held accountable for the premium volume and profitability of their assigned shares of the insurer’s book of business yet may be denied the authority they need to meet their objectives by the insurer’s centralized approach to underwriting decisions.
3. How does a decentralized insurer differ from a centralized insurer? (p. 5)
A decentralized insurance company is like its more centralized counterpart in that it requires underwriters to refer risks that fall outside their underwriting authority to the appropriate supervisor. But unlike the centralized insurer, the decentralized insurer gives much more latitude to its underwriters.
4. What is one danger of the decentralized approach to underwriting? (p. 6)
One of the dangers of the decentralized approach to underwriting is that too little direction or supervision may result in as many approaches to assessing risk and setting terms as there are underwriters working for the insurer. That may mean a more entrepreneurial approach to underwriting at the expense of a consistent approach and perhaps more predictable results.
5. How can mergers affect underwriting? (p. 6)
Where the companies involved in a merger were quite difference in corporate culture, the merger may pose many more obstacles. Underwriters may be much less clear about the underwriting rules they are to follow or the expectations they are to meet.
6. How has technology changed the information available to an underwriter? Given an example of a source of information that an underwriter might find useful? (p. 8)
One of the major contributors to the faster pace of life has been developments in technology. The explosion in technology has led some to characterize ours as an “information age.”
There are ever more sources of general news and comment with which the conscientious underwriter must try to stay current: television, newspaper, radio, magazines, books and the Internet.
7. How can too much information negatively affect an underwriter’s ability to make a decision? (p. 8-9)
All the mediums of information has created the problem of information overload in which they are confronted with more information from more sources than they can absorb and remember and the stress that accompanies that sense.
In addition to the stress that all this information can generate is the danger that it will misinform as well as inform the underwriter. This is a danger when the amount of information is too great to be properly digested in the time an underwriter has available to make a decision.
8. Why is it important for an underwriter to understand the relationship between the Canadian industry and practices and the industry and practices in other parts of the world? (p. 11)
Insurance had always been a global industry and that, by enhancing the ease and speed of communication worldwide, technology has helped make it possible to integrate the operations of large corporations on an international scale.
The enhanced global character of the insurance industry makes it important for underwriters in Canada
Traditionally, Canadian-owned insurance companies have accounted for only a bout one third of the Canadian industry’s annual premium volume. The rest has been divided in varying proportions between American and other foreign/European insurers.
9. How has Canadian society become more like that of the United States
With increased mobility and fewer personal boundaries has come a heightened perception of individual rights and entitlements. A result of that heightened perception has been an increase in litigation activities in Canada
10. Why is the aging Canadian population relevant to an underwriter? (p. 13)
This development has featured prominently in our continuing debate over health care. It is relevant to underwriters who may expect as a result to see more submissions for insurance on nursing homes and related risks that will become more important as the population ages.
11. Why should an underwriter consider environmental contamination when evaluating exposure to risk? (p. 14)
Canadians have also become increasingly aware of environmental contamination as a threat to their well-being. That raises the new possibility of lawsuits against the manufacturers for injuring people that might be attributed to their product and in turn, potential larger losses for the insurer.
12. Why should an underwriter write every note with care? (p. 15)
Due to technological developments such as electronic files in place of paper files, it makes it easy to forget thus, an underwriter should be careful even with personal notes about an account that nothing is written that might embarrass or undermine the insurer should the files ever have to be produced in court.
13. How has privacy concerns affected underwriting networks? (p. 15)
In light of concerns about privacy, it has also become more important that underwriters be more discreet about the informal networks they have traditionally used to exchange information among themselves about their underwriting restrictions and policies and approaches to rating and other terms of a policy.
14. What are judicial trends? Why should underwriters pay attention to judicial trends? (p. 16)
Social trends should be of interest to an underwriter because of the exposures to loss they create for insurers by the threat of lawsuits and findings of liability against insureds.
It follows that underwriters should pay attention to trends in the judiciary in the court decisions that help determine the exposures to loss that insurers face by resolving lawsuits in favour of their insureds or the parties suing them.
15. How does the state of the economy affect the insurance market? (p. 18)
The underwriter needs to understand that the economy in turn affects the market for insurance. The relationship between the demand for insurance and the state of the economy may be expressed in the abstract language of economists by comparisons of such measures as the insurance industry surplus and the gross domestic product (GDP) of the economy.
16. Why do insurers often find that the frequency of claims increases in difficult economic times? (p. 19)
When the economy deteriorates, more people and businesses find themselves under financial pressure as their incomes drop. A result of such pressure is more personal and business bankruptcies and insurers often find that the frequency of claims increases in difficult economic times.
One reason is that the financial pressure on insureds creates a moral hazard as the temptation presents itself to resolve financial difficulties by “selling the business to the insurer” by burning or otherwise damaging or destroying property oneself to reap the proceeds from a claim settlement by the insurer.
17. How does the state of the economy affect an insured’s maintenance and housekeeping? (p. 20)
When the economy is poor, a commercial insured may finds its business activity and its revenues reduced and feel corresponding pressure to reduce its expenses to maintain profitability or even to survive.
In such circumstances, the insured may consider maintenance and housekeeping as discretionary expenses that can be reduced or even eliminated until the economy improves, and with it, the insured’s revenues.
18. How does the global economy affect the insurance industry? (p. 20)
The state of economy in Canada
Insurance has always been a global industry, and the dramatic improvements in communication technology have made it even more so: The same developments that have enhanced the global nature of the insurance business have also made or a more integrated global economy.
19. How do laws and regulations shape the environment in which underwriters work? (p. 21)
Technological developments; social, judicial, economic trends; the environment; privacy; the aging population – all of these and more require decisions about limits, about what will and will not be permitted to members of society in their own interest.
In short, laws and regulations are required and they shape both the society in which we live and the environment in which underwriters work.
20. What are captive insurance companies? (p. 23)
A captive insurance company is usually created to write the parent company’s own insurance. The parent company may do this for a number of reasons such as reducing its basic insurance cost or because certain types of insurance are shortly or in short supply.
21. How has the increase in public concern about pollution changed legislation? Why does this concern underwriters? (p. 24)
In most provinces before the 1980s, legal disputes about the environmental liability were resolved largely through the common law, with lawsuits alleging negligence, nuisance and strict liability.
But the increasing public concern about pollution, more extensive statutes governing pollution control and the emergence of environmental regulation as an impendent field of law exists. Legislation now plays an important role in environmental liability litigation and is there an important consideration for underwriters of risks those operations may entail environmental hazards.
22. How does deregulation affect the insurance industry? (p. 25)
When such services become privately offered, the risks they entail become the responsibility of the private parties that offer them.
Those private parties thus become buyers of insurance and it becomes important for underwriters to understand something about the newly privatized services to assess the risk they would represent to their employers and the terms under which they might be prepared to accept such risks.
23. How has the Enron scandal affected the insurance market? (p. 27)
The market for directors and officers liability (D&O) insurance was directly and strongly affected by the Enron scandal and others. Capacity for the coverage tightened and rates and other terms hardened in light of the increased scrutiny of corporate directors and officers and questions about their possible contributions to the scandal and their proper role in preventing other such scandals.
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