The document discusses the process of insurance underwriting. Underwriting involves evaluating risks to determine whether to issue an insurance policy to an applicant. It aims to select applicants that will likely have claims below assumed losses to ensure a profit. The underwriter considers the applicant's exposure, pricing alternatives like modifying coverage, and monitors policies to maintain satisfactory results for the insurance company. Underwriting balances risks across policyholders and ensures adequate premiums are charged for expected losses.

1. GROUP NUMBER
2UNDERWRITING
 Meaning
 Procedure
 Important Principles

2. INTRODUCTION
 The underwriting process is an essential part of any
insurance application. When an individual applies
for insurance coverage, he or she is essentially asking
the insurance company to take on the potential risk
of having to pay a claim in future.

3. Introduction Cont…
 In some cases, such as with life insurance, such
claims can be quite high. Therefore, it is important
that the insurance company not to take on too great
of risk when considering an applicant for coverage.

4. Introduction Cont…
 Therefore underwriting is critically important
function and is performed each time an insurance
application is taken.
 Its purpose is to determine whether or not the
insurer will issue a policy to an applicant.

5. Underwriting Meaning
 Underwriting refers to the process of issuing
insurance. In this process, an insurance underwriter
will evaluate the risk and potential exposure of
potential insured.

6. Meaning Cont…
 Underwriter is a financial professional that evaluates
the risks of insuring a particular person or asset and
uses that information to set premiums pricing for
insurance policies.

7. Meaning Cont…
 Insurance underwriters are employed by insurance
companies to help price life insurance, health
insurance, property/casualty insurance and
homeowners insurance, among others.

8. Meaning Cont…
 The business model is to collect more in premium
and investment income than is paid out in losses,
and to also offer a competitive price which
consumers will accept.

9. Meaning Cont…
 Profit can be reduced to a simple equation:
profit = earned premiums + investment
income - incurred loss - underwriting
expenses

10. Meaning Cont…
Insurers make money in two ways;
 Trough underwriting, the process by which insurers
select the risks to insure and decide how much in
premiums to charge for accepting those risk
 By investing the premiums they collect from insured
parties.

11. PRINCIPLES
Generally underwriting consists of two components,
risk assessment and pricing. There are basics
principles which are applied in the concept of
underwriting;

12. Principles cont….
Attain an underwriting profit.
 The primary objective of underwriting is to attain an
underwriting profit.
 The underwriter constantly strives to select certain
types of applicant and reject others to obtain a
profitable portfolio of business.

13. Principles cont….
Select prospective insured according to the
company’s standards.
 The underwriter should select only those insured
whose actual loss experience is not likely to exceed
the loss experienced assumed in the rating structure.

14. Principles cont….
Provide equity among the policy owners.
 This means that, equitable rates should be charged
and each group of policy owners should its own way
in terms of losses and expenses.

15. Example…
 If identical rates were charged to both groups,
younger persons would subsidize older persons,
which would be in equitable. The impact on that is
that, once younger persons become aware that they
were being overcharged, they would seek other
insures. And this will not be profitable.

16. Principles cont….
Proper balance within each rate
classification.
 This means that, a below-average insured in an
underwriting class should be offset by an above-
average insured, so that on balance the class or
manual rate for the group as a whole will be
adequate for paying all claims and expenses.

17. Continue…
 Therefore, the above principles are applied by
underwriters in the selection of risks.
 To make an underwriting decision, the following
steps are considered;

18. Underwriting steps
Evaluating loss exposure.
 In this step information is gathered about an
applicant’s loss exposure.
 The underwriter must understand the activities,
operations and character of applicant.
 An underwriter can gather information through
application containing the insured’s statement.

19. Steps cont…
Determining underwriting alternatives.
 There are three underwriting alternatives which are;
 Accept the submission as is,
 Reject the submission and,
 Make a counteroffer to accept the submission subject to
certain modifications

20. Steps cont…
Four major types of modifications are;
 Loss control measures to reduce hazards
 Change insurance rates, rating plans or policy limits.
 Amend policy terms and conditions.
 Use facultative reinsurance.

21. Steps cont….
Selecting an underwriting alternative.
 The underwriter must decide whether to accept the
submission as offered, accept it with modifications or
reject it.
 Rejection is sometimes unavoidable, however,
rejections produce neither premium nor
commission, only expenses.

22. Steps cont….
Determining the appropriate premium.
 Underwriters must ensure that each loss exposure is
properly classified so that it is properly rated.
 Miss classification can produce adverse result,
including insufficient premium to cover losses and
expense and inability to sell policies because prices
are high than competitors.

23. Steps cont….
Implementing the underwriting decision.
Implementing underwriting decision generally
involves three steps;-
 Contact the producer (and other involved) with the
decision, good or bad.
 Put coverage into effect.

24. Steps cont….
 Record the policy and applicant information for
accounting, statistical and monitoring processes.

25. Steps cont….
Monitoring the loss exposures.
After an underwriting decision has been made on a
new business submission or a renewal, the
underwriter must monitor activity on the individual
policies to ensures that satisfactory results are
achieved.

26. CONCLUSION
 Therefore underwriting is critically important
function and is performed each time an insurance
application is taken. Its purpose is to determine
whether or not the insurer will issue a policy to an
applicant.

27. THE END