What is underwriting?
Underwriting the process of determining the level of risk presented by the proposer and deciding whether to accept the same and if so at what terms and at what price.
Underwriting is essential in all forms of insurance. Understanding the concept of risk sharing or pooling makes it easier to understand the role of underwriting and asset classification. In life insurance, underwriting of healthy person and a sick person shall never be same.
Purpose and objectives of underwriting
Underwriting helps insurer to
•cover the risk properly
•offer competitive price
•cover suitable margin to pay claims and expenses
•compliance with regulatory requirements
•Reject Uninsurable risks
•Prevent Moral hazard
•Earn Reasonable profit
•Apply suitable deductibles
The importance of underwriting
For insurers: Underwriting helps the insurer to stay competitive, solvent and profitable.
For insured: Underwriting is important for the insured since the coverage required for insurance and premium can be determined only by way of underwriting. Underwriting can also suggest measures to be taken to reduce the risk and hazards.
Agents and brokers: Brokers are often involved in offering tailor-made solutions to the customers. By underwriting such possibility can be looked into and solution may be offered to the customer.
Society: Underwriting helps to improve the standards of safety and care and achievement of economic and social goals of a country.
Underwriting involves a proper exercise by the underwriter to evaluate the insurability of the risk and if the risk can be assumed, the price, terms and conditions at which the risk may be insured.
It is the responsibility of insurers to meet all contractual obligations of the existing policies. Insurer cannot resort to profiteering motive. In the interest of equity and sustainability the underwriting process needs to be carried out meticulously
Insurance regulators play an important role in underwriting process by listing out guidelines is so that insurers take suitable measures for proper underwriting.
Functions of underwriting
1.Selection of risks
2.classification and rating
4.retention and reinsurance
1. Risk selection
In this stage underwriter decides whether or not to accept the risk. It gathers information from proposal form, inspection report, valuation report and other supporting documents to get the details of the risk is to be covered.
If the risk is suitable it is accepted. In case of extra hazardous risk or cases involving moral hazards the risk is rejected.
2. Classification and rating
After the acceptance of the risk that the underwriter classifies and rates the risk. Risk is segregated into homogeneous groups to which rates can be assigned. Insurer has different rates for different kinds of risk.
Insurers may their own classification and rating system Compliant with the guidelines of the regulator.
Underwriters utilizes the expertise and skills of actuaries, engineers and surveyors to find out the actual status of risk and it’s severity.
After thorough examination of all data underwriter decides the final rates, terms and conditions.
3. Policy forms
Risk may be classified into various classes and several policy forms will be available to cover each class. After classification the underwriter must decide the applicable policy form and add suitable warranties, special conditions as may be required in case of the risk.
4. Retention and reinsurance
All insurers have limited capacity to accept the risk. They cannot retain all the risk since if any catastrophe occurs the whole capital of the company may be wiped out. In order to have the risk evenly spread the underwriters resort to reinsurance wherein they transfer a portion of risk to reinsurer.