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CPCU 520 Chapter 4
CPCU 520 Chapter 4 The Underwriting Function
| Term | Definition |
|---|---|
| Line underwriter | primarily responsible for implementing the steps in the underwriting process |
| Staff underwriter | assists underwriting management with making and implementing underwriting policy |
| Policyholders' surplus | an insurer's assets minus its liabilities, which represent its net worth |
| Underwriting policy (philosophy) | a guide to individual and aggregate policy selection that supports an insurer's mission statement |
| Prospective loss costs | loss data that are modified by loss development, trending and credibility processes, but without considerations for profit and expenses |
| Trending | a statistical technique for analyzing environmental changes and projecting such changes into the future. |
| Premium-to-surplus ratio, or capacity ratio | a capacity ratio that indicates an insurer’s financial strength by relating net written premiums to policyholders’ surplus. Too high when it exceeds 300% or 3 to 1 |
| Statutory Accounting Principles (SAP) | the accounting principles and practices that are prescribed or permitted by an insurer’s domiciliary state and that insurers must follow. |
| Return on Equity (ROE) | a profitability ratio expressed as a percentage by dividing a company’s net income by its net worth (book value.) Depending on the context, net worth is sometimes called shareholders’ equity, owners’ equity, or policyholders’ surplus |
| Market Conduct Examination | an analysis of an insurer’s practices in four operational areas: sales and advertising, underwriting, ratemaking, and claims handling. |
| Predictive modeling | a process in which historical data based on behaviors and events is blended with multiple variables and used for construct models of anticipated future outcomes |
| Information efficiency | the balance that underwriters must maintain between the hazards presented by the account and the information needed to underwrite it |
| Premium audit | methodical examination of a policyholder’s operations, records and books of account to determine the actual exposure units and premium for insurance coverage already provided |
| Underwriting audit | income an insurer earns from premiums paid by policyholders minus incurred losses and underwriting expenses |
| Rating plan | a set of directions that specify criteria of the exposure base, the exposure unit and rate per exposure unit to determine premiums for a particular line of insurance |
| Retrospective rating | a ratemaking technique that adjusts the insured’s premium for the current policy period based on the insured’s loss experience during the current period; paid losses or incurred losses may be used to determine loss experience |
| Facultative reinsurance | reinsurance of individual loss exposures in which the primary insurer chooses which loss exposures to submit to the reinsurer, and the reinsurer can accept or reject any loss exposures submitted |
| Treaty reinsurance | a reinsurance agreement that covers an entire class or portfolio of loss exposures and provides that the primary insurer’s individual loss exposures that fall within the treaty are automatically reinsured |
| Account underwriting | a method of underwriting in which all of the business from a particular applicant is evaluated as a whole |
| Loss costs | the portion of the rate that covers projected claim payments and loss adjusting expenses |
| Combined ratio | a profitability ratio that indicates whether an insurer has made an underwriting loss or gain |
| Production underwriting | performing underwriting functions in an insurer’s office as well as traveling to visit and maintain rapport with agents and sometimes clients |
| Hit ratio | the ratio of insurance policies written to those that have been quoted to applications for insurance |
| Line underwriter activities | selecting insureds, classifying and pricing accounts, recommending or providing coverage, managing book of business, supporting producers and customers, and coordinating with marketing efforts |
| Staff underwriter activities | performing market research, formulating underwriting policy, revising underwriting guidelines, evaluating loss experience, researching/developing forms, reviewing & revising pricing plans, assisting on complex accounts, conducting underwriting audits |
| Constraints in establishing underwriting policy | Financial capacity, regulation, personnel and reinsurance |
| Activities to help realize maximization of Return on Equity | setting return thresholds, redirecting focus on target business classes, adjusting underwriting policy based on jurisdiction |
| Ways regulation affects underwriting policy | licensed to write in each state they write insurance; rates, rules & forms must be filed with state regulators; underwriting guidelines may be filed; and if consumer groups believe certain areas not served, regulators can require coverage to be extended |
| Purpose of underwriting audits | monitor adherence to practices/procedures; achieve uniformity and consistency; monitor statistics for books of business; provides staff underwriters with info on effectiveness of u/w guidelines |
| Steps in the underwriting process | evaluate the submission; develop underwriting alternatives; select an underwriting alternative; determine appropriate premium; implement the decision; monitor underwriting decisions |
| Underwriting performance standards | selection; product or line of business mix; pricing; accommodated accounts; retention ratio; hit ratio; service to producers; premium to underwriter |
Created by:
CHahnCPCU
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