RMIN 4000 Chapter 6 Rating and Ratemaking Underwriting 1 Ratemaking refers to the pricing of insurance and the calculation of insurance premiums 2 A rate is the price per unit of insurance An exposure unit is the unit of measurement used in insurance pricing which varies by line of insurance 3 The person who determines rates and premiums is known as an actuary An actuary is a highly skilled mathematician who is involved in all phases of insurance company operations incliding planning pricing and research 1 Underwriting refers to the prices of selecting classifying and pricing applicants for insurance The underwriter is the person who decides to accept or reject an application 2 Underwriting starts with a clear statement of underwriting policy 3 The insurer s underwriting policy is determined by top level management in charge of underwriting The line underwriters persons who make daily decisions concerning the acceptance or rejection of business are expected to follow official company policy 4 Three important principles are as follows a Attain an underwriting profit b Select prospective insureds according to the company s underwriting standards c Provide equity among the policyowners 5 The primary obejective of underwriting is to attain an underwriting profit 6 The second principle is to select prospective insureds according to the company s underwriting standards 7 The purpose of the underwriting standards is to reduce adverse selection against the insurer 8 A final underwriting principle is equity among the policyowners This means that equitable rates should be charged and that each group of policyowners should pay its own way in tterms of losses and expenses Steps in Underwriting 1 After the insurer s underwriting policy is established it must be communicated to the sales force Initial underwriting starts with the agent in the field 2 This step is often called field writing The agent is told what types of applicants are 3 acceptable borderline or prohibited In property and casualty insurance the agent often has authority to bind the company immediately subject to subsequent disapproval of the application and cacellation by a company underwriter Sources of Underwriting Information 1 Important sources of information include the following a Application b Agent s report Many insurers require the agent or broker to give an evaluation of the prospective insured Inspection report c d Physical inspection e Physical examination issued modifications 2 There are three basic underwriting decisions with respect to an initial application for insurance a First the underwriter can accept the application and recommend that the policy be b A second option is to accept the application subject to certain restrictions or c The third decision is to reject the application Other Underwriting Considerations 1 Rate adequacy and underwriting 2 Reinsurance and underwriting 3 Renewal underwriting Production 1 The term production refers to the sales and marketing activities of insurers Agents who sell insurance are frequently referred to as producers Life insurers have an agency or sales department 2 3 Property and casualty insurers have marketing departments 4 The marketing of insurance has been characterized by a distinct trend toward professionalism in 5 recent years In life and health insurance The American College has established the Chartered Life Underwriter CLU program An individual must pass certain professional examinations to receive the CLU designation 6 The American College also awards the Chartered Financial Consultant ChFC designation for professionals who are working in the financial services industry 7 A similar professional program exists in property and casualty insurance The American Institute for CPCU has established the Chartered Property Casualty Underwriter CPCU program 8 The first objective in settling claims is to verify that a covered loss has occurred 9 The second objective is the fair and prompt payment claims 10 Fair payment means that the insurer should avoid excessive claim settlements and should resist the payment of fraudulent claims because they will ultimately result in higher premiums 11 A third objective is to provide personal assistance to the insured after a covered loss occurs 12 The person who adjusts a claim is known as a claims adjustor 13 An insurance agent often has authority to settle small first party claims up to some maximum limit 14 This approach to claims settlement has several advantages it is speedy it reduces adjustment expenses and it preserves the policyowner s good will 15 A company adjustor can settle a claim The adjustor is usually a salaried employee who represents only one company 16 An independent adjustor can also be used to adjust claims An independent adjustor is an organization or individual that adjusts claims for free 17 A public adjustor can be involved in settling a claim A public adjustor however represents the insured rather than the insurance company and is paid a fee based on the amount of the claim settlement Steps in Settlement of a Claim 1 The first step is to notify the insurer of a loss 2 After notice is received the next step is to investigate the claim 3 The most important questions include the following a Did the loss occur while the policy was in force b Does the policy cover the peril that caused the loss c Does the policy cover the property destroyed or damaged in the loss d Is the claimant entitled to recover e Did the loss occur at an insured location f g Is the type of loss covered Is the claim fraudulent 4 An adjustor may require a proof of loss before the claim is paid A proof of loss is a sworn statement by the insured that substantiates the loss 5 After the claim is investigated the adjustor must make a decision concerning payment 6 There are three possible decisions a The claim can be paid b The claim can be denied c Finally the claim may be valid but there may be a dispute between the insured and insurer over the amount to be paid In the case of a dispute a policy provision may be specify how the dispute is to be resolved Reinsurance 1 Reinsurance is an arrangement by which the primary insurer that initially writes the insurance transfers to another insurer called the reinsurer part or all of the potential losses associated with such insurance The primary insurer that initially writes the business is called the ceding company The insurer that accepts part or all of the insurance from the ceding company is called