This document discusses the principles and process of underwriting in insurance. It defines underwriting as assessing and selecting risks to determine premiums, terms, and conditions. The key purposes of underwriting are to guard against applicants with high probability of loss and to charge premiums commensurate with risk. Common underwriting features include identifying hazards, selecting risks, and setting premiums, terms, and conditions accordingly. Risks with abnormal hazards may be accepted with risk improvements, warranties, exclusions, restricted coverage, excesses, or franchises. Premiums are set using individual, class, or merit rates and cover expected claims costs plus expenses.

1. L E A R N I N G O U T C O M E S :
1 . D I S T I N G U I S H C L E A R L Y T H E V A R I O U S
P R I N C I P L E S I N I N S U R A N C E R E L A T E D
A R E A
UNDERWRITING
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2. What is underwriting?
A process of assessing and selecting
risks, and determining the
premium, terms and conditions
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3. What is the purpose of underwriting?
 To guard against anti-selection
- an applicant who has a very high probability of loss,
submits a proposal for insurance
 To charge a premium that is commensurate with the
risk transferred
- higher premium charged to those with higher
probability of loss
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4. Common features of underwriting
Identify &
evaluate risk
• Physical & moral
hazards
• Physical hazards
associated with the
subject matter of
insurance
• Eg. Motor
insurance – type
of vehicle; fire
insurance – type
of construction
• Moral hazards –
carelessness,
unreasonableness,
fraud
Select risk
• Accept or reject a
risk
• Proposal of risk is
not rejected unless
it posses a
considerably bad
physical or moral
hazards associated
with it
Determine
premium, terms
& conditions
• Premium is the
price for insurance
• The rate charged
must reflect the
degree of hazard
and total units of
coverage required
reflect the value of
risk transferred
• Risk with normal
hazard be charged
normal rates
• Terms &
conditions
imposed
dependants on the
hazrads
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5. Risk with abnormal hazards
 These risks are acceptable subject to the following
underwriting measures :
i. Risk improvement
ii. Warranties
iii. Exclusions
iv. Restricted cover
v. Excess
vi. Franchise
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6. Risk improvement
 It requires the proposer to undertake certain
improvements on the risk before risk is acceptable to
the underwriter
 Install fire alarm, automatic sprinkler water
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7. Warranties
 Is imposed to control hazard
 To ensure no additional hazards introduced during
the policy period; and
 Insurer’s recommendations are carried out
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8. Exclusions
 Inserting a clause to exclude the insurer’s liability
from certain losses
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9. Restricted cover
 Offer a narrower insurance coverage than originally
proposed by the insured
 Eg proposer proposed for a comprehensive motor
policy, instead offered for third party policy
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10. Excess
 The insured is required to bear a specified amount of
every losses
 Eg. losses of less than RM400, cannot be claimed
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11. Franchise
 Insured is entitled to make a claim if loss exceeds a
specified amount
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12. Confirmation of acceptance
 Terms and conditions accepted by the proposer, the
insurer will confirm acceptance of risk proposed
 Cover note will be issued as a temporary evidence
until the policy is issued
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13. Re-insurance & Co-insurance
 Re-insurance
- The insurer reinsures (cedes) the part of the risk
which is in excess of his retention, to the reinsurer
 Co-insurance
- Two or more insurers share the original risk and each
of them is directly responsible for that proportion of
risk
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14. Premium rating
Individual
Rates
• Rate charged on
each risk
separately
without referring
to a manual or
formula
Class rates
• A large number of
risks to be insured
under a class of
insurance is
classified into
various classes
• To establish a
premium rate
known as class rate
Merit rates
• A combination of class
and individual rates
• Underwriter
determines the class
rate and adjust
depending on the
merits
• Merits is determined
through the evaluation
of physical factors
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15. Gross premium rate
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 Is made up of :
i. Pure premium rate
- Premium rate calculated based on the expected
claims cost
i. Expenses and commissions margins
ii. Contingency margins
iii. Profit margins

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Minimun
premium
• To cover
administrative
expenses
incurred in
issuing a general
insurance policy
Minimum sum
insured
• To cover
administrative
expenses
incurred in
issuing a life
insurance policy

17. Refund of premium
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 Premium is refundable for failure of consideration or
through a provision in the policy
 Failure of consideration arises when the liability
which the insurer assumed has not attached or
commenced
 Total failure of consideration exists under the
following situations :
i. A vessel is insured for 12 months from a date and
becomes a total loss before that date
ii. A cargo policy has been issued but the contract of
sale is cancelled and no shipment takes place

18. Short Period Premium Rates
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 Is charged when insurance is effected for less than
12 months