Unit 4
1.Concept of Underwriting
2.Basic Underwriting Principles
3.Steps in Underwriting
4.Procedure to Insure the Property Under Fire Insurance
5.Procedure to Settle the Fire Insurance Claim
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Concept of Underwriting
Underwriting refers to the process of selecting, classifying, and pricing applicants for insurance. The underwriter is the person who decides to accept or reject an application. An insurer must establish an underwriting policy that is consistent with company objectives. The insurer’s underwriting policy is determined by top-level management in charge of underwriting.
The underwriting policy is stated in detail in an underwriting guide that specifies the lines of insurance to be written; territories to be developed; forms and rating plans to be used; acceptable, borderline, and prohibited business; amounts of insurance to be written; business that requires approval by a senior underwriter; and other underwriting details.
Basic Underwriting Principles
Attain an underwriting profit:
The primary objective of underwriting is to attain an underwriting profit. The objective is to produce a profitable book of business.
Select prospective insureds according to the company’s underwriting standards:
The underwriters should select only those insureds whose actual loss experience is not likely to exceed the loss experience assumed in the rating structure with purpose of reducing adverse selection against the insurer.
Provide equity among the policyholders:
Every policyholder's premium should not be same because of age factor, sex factor etc.Different people have different level of associated risk. Highly risk associated insured should be charged higher premium than lower risk associated insureds.
Steps in Underwriting
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.
1.Agent as First Underwriter
2.Collecting Information
3.Making an Underwriting Decision
1. Agent as First Underwriter:
This step is often called field underwriting. The agent is told what types of applicants are acceptable, borderline, or prohibited. In property and casualty insurance, the agent often has authority to bind the company immediately. Thus, it is important that the agent follow company policy when soliciting applicants for insurance. In life insurance, the agent must also solicit applicants in accordance with the company’s underwriting policy.
2. Collecting Information:
The underwriter requires certain information in deciding whether to accept or reject an applicant for insurance.
Important sources of information:
Application:
The type of information required depends on the type of insurance requested. In property insurance, provides the physical features of the building and in life insurance provides age; gender etc.
Agent’s report:
Many insurers require the agent or broker to give an evaluation of the prospective insured. In life agent may be asked how long he or she has known the applicant, the applicant’s annual income etc.
Inspection report:
In property insurance, the company may require an inspection reported by some outside agency, especially if the underwriter suspects moral hazard. In life insurance, the report may provide information on the applicant's financial condition, marital status,etc.
3. Making an Underwriting Decision:
If all requirements are submitted to Underwriter and all information are in favour of underwriting standards then underwriter accept the policy otherwise he may reject the policy.
Procedure to Insure the Property Under Fire Insurance
For insuring any property under the fire insurance policy, the following is the procedure:
1)Filling of proposal form
2)Inspection of the property
3)Payment of premium
4) Issue of Cover note
1. Filling of Proposal Form:
The fire proposal includes the following information about the property.
- Construction of external walls and roof, number of storeys.
- Occupation of each portion of the building.
- Presence of hazardous goods.
- Process of manufacture.
- The sums proposed for insurance.
- The period of insurance.
- History of previous losses.
- insurance history-whether previously other insurers had declined the risk, etc
2. Inspection of the property:
In case of property of any business organization, manufacturing or other type of organization, a risk inspection report is submitted by the engineers. The engineers submit in their report the nature of risk involved in the factory/ manufacturing unit.
3. Payment of Premium:
Based on the proposal form and the inspection report of the engineers, the insurance Company will submit the premium rates to the property owner and if these rates are acceptable to him then he should pay the amount to the insurance company.
4. Issue of Cover note:
On receipt of a completed proposal form and or inspection report, the cover note is issued, pending preparation of the policy document. The cover note is an unstamped document issued to provide evidence of cover till the time the policy is issued. The cover note provides insurance against specified perils on the usual terms and conditions of the company's policy.
Procedure to Settle the Fire Insurance Claim
A) Intimation of loss:
lf there are any damage or loss arising due to fire then the policy holder should immediately inform the insurance company in writing and with estimated amount of loss.
B) Survey Report:
If the amount of loss is small, the insurance company may depute an officer (surveyor) to survey the loss and decide on the settlement of the loss on the basis of the claim form and the officer's report. However, in large losses, an independent surveyor duly licensed by the Government is appointed to give a report on the loss. The survey report would generally deal with the following matters:
i. Cause of loss.
ii. Extent of loss.
iii. Compliance with policy conditions and warranties.
iv. Details of other insurance policies on the same property, and the apportionment of the loss and expenses among co-insurers.
C) Claim form:
The policy holder will submit the claim form with the following information:
(i)Name and address of the Insured.
(ii) Date of loss, time and place from where the fire started.
(iii) Cause of fire.
(iV) Details of the property damaged such as description, etc.
( V) Value at the time of fire, value of salvage and the amount of loss.
(Vi) Details of other policies on the same property
(Vii) Different report
D) Settlement of Claim:
On the basis of the claim form and the survey report, decision is taken about the settlement or otherwise of the loss. Insured is indemnified i.e insured is restored in the situation of before loss.
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