CHAPTER 5 UNDERWRITING insurance uitm .

insurance

1. TOPIC 5: UNDERWRITING

2. ●Upon completion of this chapter, you should be
able to:
➢Describe concepts of underwriting.
➢State the objectives of underwriting
➢Identify the elements of an premium.
Learning Objectives

3. Overview
05 06
03
04
01 02
The pricing of
premium Calculation
Underwrting’s process
Premium
Underwriting
Underwriting’s
objectives

4. Underwriting
•Choosing who
and what the
insurance
company
decidesto
insure which is,
•The insurer will
determine who
will be insured
and how much
premium should
be.
•The process is
by which an
insurer decides
whether or not
to sell a
contractto the
prospective
insured (the
proposer) and if
so, on what
terms.

5. 1 2 3 4
Pricing Profit Access & Afford Equity
Underwriting’s Objectives

6. Underwriting
Risk Selection
Venus has a beautiful
name, but also a
poisonous atmosphere
Risk classification
Methods by which
an underwriter
chooses applicants
that an insurer will
accept
The underwriter’s job
is to spread the costs
equitably among
members of the
group to be insured.
The selection process
may involve rejection
of the proposer’s
offer.
This classification can be according to
whether a risk is fundamental, particular,
pureor speculative.In life a company
determines how much to charge for a
policy according to an applicant’s age,
occupation, sex, and health.
The process involve of assigning the
insured to a group of similar(if not
homogeneous) insured which have the
same probability distribution of losses, so
that all members of the group can be
insured on the same terms and conditions.
It only takes place if there is a large group of
homogeneous risks (i.e.insured with identical
loss distributions) to enable the operation of
the law of large numbers and avoid unfair
cross-subsidization within the pooled
premium.

7. Underwriting Process
Assess the risk
•Underwriterofaninsurance
companymustevaluatethe
insurance applicationto
determinethedegreeofrisk.
•Willidentifyandmeasurethe
characteristicswhicharemost
likelytoinfluenceannualclaims
costsundertheinsurance
contract.
Accept or decline
•Decidetodeclinetheriskifhethinks
thattheriskis,forexample,too
hazardousorcannotbeinsured.
•Iftheunderwriteragreestoaccept
therisk:determinetheterms,
conditions,scopeofcover&also
decidehowmuch(retentionlimit)to
accept.
Calculate suitable
premium
•Calculate and
determineasuitable
premiumthatwillbe
paidbytheinsured.
•The contribution
mustbefairand
mustreflectthe
degreeofhazard
%
1
2
3

8. The example of the underwriting’s procedure
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1. Agent will help the prospective
insured in fill up the proposed risk
into their system.
2. Website

9. ….Contributionsfrom the many insured.
PREMIUM

10. EXPENSES
LOADING
CONTIGENCY
LOADING
PROFIT
RISK PREMIUM
THE PRICING OF PREMIUM
31 2 4

11. Theportionoftheofficepremiumthattheinsurance
mustrecoverfromeachpolicyholderinordertocover
theexpectedclaimcostsintheperiodofinsurance.
Risk Premium Rate = Average Total Claims x 100%
Average Total Value Insured
Risk Premium = Risk Premium Rate x Value at Risk
Average Total Claims = Overall Average Mean Loss
The Risk Premium

12. -Insuranceclaimsareexposedtovolatility(actualclaim
mightmorethantheexpectedclaimcost)andtocover
thispossiblevariabilityfromtheexpectedclaimscosts,
thecontingencyloadingisaddedtocushiontheinsurer
from unexpectedly large claims.
-Thiscanbeaffectedbyaddingcertainamounttotherisk
premiumrate.
CONTIGENCY LOADING

13. -Amountwhichisaddedtotheriskpremiumtocover
thepolicyholder’sfaircontributiontotheexpenses
incurredbytheinsurer(costofactuarialvaluation,
inspection,lossprevention,sellingexpenses,
commission and etc).
-Loadingcanbeaffectedbyaddingacertainamountto
the risk premium rate.
EXPENSES LOADING

14. PROFIT LOADING
•Thisisloadedtocovertheexpected
dividendpaymenttotheinsurer’s
shareholders.
•Thisisdonebyaddingcertainamountto
theriskpremiumrate.

15. Inmachineryinsurance,claimshistoryshowsthatinthepast10years,the
averagetotalclaims(overallaveragemeanloss)foraunitofgrinding
machineisRM150,000andtheaveragetotalvalueinsuredisRM
20,000,000.Thepurepremiumratetobechargedonrisksbelongingtothe
machineryclassis:
STEP1
Riskpremium=RM150,000 x100%
rate (RPR) RM 20,000,000
RPR = RM 0.75% (i.e.RM 0.75 per RM100 sum insured)
Now we have the risk premium rate, and to calculate the risk premium for a
piece of grinding machine valued at RM 74,000 is:
RISK PREMIUM:
risk premium rate x value at risk
= RM 0.75% x RM 74 000
= RM 555

16. ❖The Expenses Loading
In our example, we could addRM0.05 to the risk premium rate.
❖The Contingency Loading
In our example, we could add RM0.03to the risk premium rate.
❖The Profit Loading
In our example, we add RM0.04to the risk premium rate
OFFICE LOADING

17. Theofficepremiumis:-
Expensesloading=0.05%/100xRM74000=RM37.00
Contingencyloading=0.03%/100xRM74000=RM22.20
Profitloading =0.04%/100xRM74000=RM29.60
Therefore,totalofficepremiumis:-
=RM(37.00+22.20+29.60)
=RM88.80

18. TOTAL ANNUAL PREMIUM
STEP 1 + STEP 2 + STAMP DUTY
= RM555 + RM88.80 + RM10
=RM643.80 + RM38.60 + RM10
=RM692.40
WHO WILL PAY THE ANNUAL PREMIUM?

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