GENERAL INSURANCE

UNDERWRITING
BY
RAJIV R.JOSHI
VICE PRESIDENT
DECCAN INSURANCE &REINSURANCE
BROKERS
INTRODUCTION TO UNDERWRITING
INTRODUCTION TO UNDERWRITING
U/W is a core Insurance Function
Risks offered for Insurance are evaluated for loss potential on the
twin parameters of Insurability of the Risk viz.-
1. Severity
2. Probability
--and if the Risk can be assumed, the premium, terms, and
conditions for the same
. Insurance is a Risk-Transfer Mechanism. It involves the pooling of
Risks of the Individual policy-holders and sharing the losses of the
FEW through the common premium fund formed out of the
contributions of the Many
. Thus, Insurance converts Uncertainty to Certainty .It collects a
certain amount of premium from each policy-holder and
constitutes a premium fund out of which the uncertain losses of
the unfortunate few are paid.
. Premium is a Certainty whereas losses is an Uncertainty.
There may or may not be a loss and the quantum is also an
uncertainty, if at all the loss occurs
 WHAT IS UNDERWRITING?
The name UNDERWRITER was coined in the 17th Century when

Cargo and Hull Risks were offerred for Insurance as per the S.G.
Policy form and the Underwriters used to sign their acceptance on
the Risk Details form committing their extent of liability

Today, the Underwriter evaluates and selects the Risks for

Insurance. Access to real-time information on the risk-profile and
claims statistics by computer applications has reduced the time and
refined the process of Underwriting

Underwriting is the process of determining the level of Risk

presented by the Proposer and deciding whether to accept
the same and if so, at what terms and at what price

Each Underwriting decision involves a balance between the Insurers

desire to get the Business in a competitive Market and the need to
charge sufficient premium to make the portfolio robust enough to
handle the claims payout, acquisition costs, management expenses,
catastrophic losses and earn a reasonable Underwriting Profit
WHAT IS UNDERWRITING?...contd.
Underwriting attempts to classify Risks based
upon their Risk Characteristics so that each
Insured in a specific Class/Subclass pays a
premium commensurate with the Risk
transferred to the pool and generating sufficient
funds to meet the policy commitments.
Classification of Risks into homogeneous Groups /Sub-
Groups by applying the proper Rating parameters, in
each Business portfolio was the hall mark of the
erstwhile Tariff eg.Motor,Fire,Engineering,W.C. etc.
Insurance is the standard Risk Transfer
mechanism practiced Worldwide
Insurers being Professional Risk Takers, they need to
maintain a Balance Portfolio and ensure that each
Business vertical is Self-supporting
PURPOSE AND OBJECTIVES OF UNDERWRITING
Sound Underwriting is the key differentiator
which enables the Insured to stay competitive, and
at the same time maintain Solvency and
Profitability
Good Underwriting helps the Insured to
appreciate the magnitude of the Risk proposed and
try to implement Loss Prevention/Minimisation
measures to reduce the hazards and avail
handsome discounts in premium
Efficient Underwriting by the Insurers paves the
way for organised and sustained growth of the Risk-
taking Industry and contributes to and supports the
growth of the Economy and provide sufficient
Social cushions to absorb Catastrophic losses
 PURPOSE AND OBJECTIVES OF
UNDERWRITING..contd.
Charging too little a premium may lead to
Insolvency and charging too much premium will
lead to loss of Business to the Competitors
An Insurer has a responsibility to its current policy-
holders to meet all the obligations of its existing
policies .Hence the Underwriting process needs to
be carried out meticulously in the interest of equity
and long-term Business sustainability
IRDA expects each Insurer to establish reasonable,
non-discriminatory standards for accepting Risks
and work within the File and Use and File and
Approved Regulatory framework and related
guidelines issued from time-to time
 FUNCTIONS OF UNDERWRITING
Process of Underwriting involves 4 Basic
Functions-
Risk Selection
In this step, the U/W decides whether or not to accept
the Risk. This involves securing factual information
,evaluating the same and deciding on a course of action.
The U/W examines the material disclosures in the Proposal
Form and supporting documents such as valuation
reports/medical reports etc. to evaluate the Risk Potential
Classification and Rating
Once the Risk is accepted, the U/W then classifies and
rates the Risk. The purpose of using Classifications is to
separate Risks into homogeneous Groups to which rates
can be assigned based on the past claims experience. In
classification and rating, Insurers use the expertise and
skills of Actuaries to convert raw claims data into a
meaningful proposition for future projections
 FUNCTIONS OF UNDERWRITINGcontd.
Policy Forms/Clauses/Warranties
The U/W must ensure that the correct Policy
format with necessary additional
warranties/conditions/deductibles/special
endorsements, if any, is issued to the client
Retention and Reinsurance
Reinsurance is an essential part of Underwriting,
as it helps the Insurer to expand its Underwriting
capacity,spread Major Risks globally, maintain stable
earnings inspite of Catastrophic losses.A robust
Reinsurance Programme with proper
Retention/Cession and combination of
Treaties/Pools/Facultative arrangement is an
essential element of good U/W practices and
ensures U/W profits over the long-term
 UNDERWRITING DECISION AND RATE-MAKING
ESSENTIAL FEATURES OF RATE-MAKING
1. Rate-Making is the process of calculating a price to
cover the future cost of Insurance Claims, Management
Expenses, Commissions, Reserves and Profits
2. To formulate premium rates, Insurers critically
examine past losses on the twin parameters of
frequency and severity, current changes in the
Market and likely future trends
3. Rates will be proportional to the degree of
hazard as manifested by the Physical Risk
features and claims experience in that particular
class/sub-class
4. The basic objective of Rate-making is that Rates should
be adequate and reasonable to cover claims, expenses,
commissions, reserves and profits and at the same time
equitable and affordable to the Consumer
 UNDERWRITING DECISION AND RATE-
MAKING..contd.

UNDERWRITING DECISION
While evaluating Risks, U/W determine whether
Insurance on the Proposal will be issued on
1. Preferred Basis--- Proposal falls within the lowest Risk
boundaries of U/W standards and the Risk factors do not
pose any major potential for claims
2. Standard Basis--- Proposal falls within the normal Risk
boundaries of U/W standards for that type of policy
3. Substandard Basis---- Proposal is considered to be a high
Risk within the Risk boundaries of U/W standards for that
type of policy. In such cases, the U/W may take one or more
of the following measures---
. charge higher premium
. limit the benefits
. add more exclusions
METHODOLOGY AND
PROCEDURES OF
UNDERWRITING
METHODOLOGY AND PROCEDURES
OF UNDERWRITING
Underwriting needs a combination of various
skills. The U/W should be able to
1. Visualize the Subject Matter to be insured
2. Identify the probable causes of loss
3. Estimate the peril-wise loss potential in terms of
severity and probability and aggravation due to
combination of perils
4. Claims processing implications
. The U/W equipped with information as above and
after critically examining the submissions in the
Proposal Form, may decide to accept the Risk on
certain rates/terms/warranties/conditions. In
order to be effective, he should continuously
update his skills/ knowledge/field exposure, etc.
 METHODOLOGY AND PROCEDURES OF
UNDERWRITINGcontd.
The Policy being a legal document should be
properly checked before signing. Any
ambiguity will be viewed against the Insurer
U/W of Risks can be classified into the following
broad Categories
1. Property Risks
2. Business Interruption
3. Personnel Risks---P.A./Mediclaim
4. Liability Risks
5. Package Policies
6. Motor
7. Marine
8. Rural Insurance Business
UNDERWRITING OF NEW BUSINESS
Insurers have developed and provided
Underwriting and Claims Manuals to their
Operating Offices and most of the simple
Proposals can be underwritten by the Operating
Offices based upon the instructions/guidelines
provided therein. These guidelines will normally
pertain to
1. Acceptance of Simple Risks irrespective of Sum
Insured
2. Acceptance of Specified Risks with limitations
on Sum Insured
3. Acceptance of certain Business lines only with
the prior approval of the Controlling Office
4. Acceptance of certain Risks with U/W
 UNDERWRITING OF NEW BUSINESS..contd.
The Operating Office scrutinises the Proposal
and Additional Questionaire /Risk Inspection
Report, wherever applicable and if the Proposal
is within their acceptance limit, collect the
premium and complete the Underwriting
formalities keeping in mind the Underwriting
safeguards, wherever applicable
In case acceptance is subject to Controlling
Office approval, the proposal, alongwith all
supportings, past loss experience will have to
be sent for their approval. Normally Aviation,
Mega-Risk, Credit Insurance, IAR/Special
Contingency /Engineering Policies beyond
specific Sum Insured may have to be referred
UNDERWRITING OF RENEWAL BUSINESS
Most General Insurance covers are granted on an
annual. Long-term policies are issued in Fire Department
for Dwellings. Project PoliciesCAR/EAR/ALOP/PI may be
issued for the Project duration, including Defects
Liability period
Renewal of the annual policy is not automatic. It
depends upon the consent of the Insurers and the
payment of renewal premium as quoted and subject to
terms/conditions specified by the U/W based upon
claims experience of the expiring policy
As a good Business Policy,Insurers send a Renewal
Notice to the Insured one month in advance of the
expiry date
Renewal is normally deemed to constitute a fresh
contract and the duty of Utmost Good Faith is revived
and the Insured has to disclose any material changes in
UNDERWRITING OF RENEWAL BUSINESS..contd.
Renewal terms may be incorporated in the policy to
avoid embarassment at a later stage. Post De-
tariffing, Insurers have become more strict with the
renewals and may introduce in the Insurance
Contract specific Clauses/Conditions to this effect.
There are 4 predominant types
1.Non-cancellable renewals-- where premium, terms
and conditions remain the same,
2.Guaranteed renewals where terms and
conditions remain the same but premium rates may
vary depending upon underwriting results,
3. Optionally renewable where Insurers may re-
evaluate the Risk and review the premium, terms and
conditions
4.Non-Renewable for stated reasons
PRINCIPLES OF RATE-MAKING
 PRINCIPLES OF RATE-MAKING
In order to decide the premium to be charged,
the U/W needs to examine thoroughly all the Risk
Factors affecting the Subject Matter of Insurance
The U/W evaluates the Risk Factors and decides
the degree of Insurability. In case the Risk falls
in a particular Class/Sub-class, the acceptance
and rating will become simpler
However, if the Risk is new and cannot be
accomodated in any existing Classification
framework, the basis for acceptance/rating could
be similarity of features with existing classified
Risks and PML assessment for the new Risk
Factors contained in the Subject Matter
PRINCIPLES OF RATE-MAKING..contd.
Theory of Rate-Making is based on three Principles
1. Premium will be proportional to the Degree of Hazard
2. To arrive at the Degree of Hazard, the various Risk
Factors are evaluated in terms of Frequency and
Severity and based on that the Risks are categorised
into various homogeneous Classes/Subclasses
3. In each Class/Sub-class, the past Claims experience
with trend adjustment will be the guiding factor for
arriving at the Pure Premium
. The pure premium/premium rate will be loaded for cost of
Administartion/ cost of acquisition/reserves for Catastrophic
losses/reserves for unexpired risks/margin of Profits. It is the
loaded premium/premium rate which is quoted to the Insured
. As per IRDA File and Approved guidelines, Insurers are obliged to
file all the Products, alongwith their pricing, to the IRDA and
launch them in the Market only after specific approval.
 PRINCIPLES OF RATE-MAKING..contd.
IRDA ensures, amongst other things, that the rates are
not inadequate, excessive, unfair or discriminatory as
between risks of like type and quality
Subsidiary objectives while developing a premium
rating system are
1) Rates should remain stable over a period of
time
2) At the same time, they should be responsive
i.e. flexible within a predicable range to
accommodate changes in loss exposures
3) The rates should provide necessary cushions to
accommodate AOG perils
4) The Rating System must offer necessary
incentives to the Insured for loss
prevention/minimisation measures
 PRINCIPLES OF RATE-MAKING
Premium Rates/Rating Systems fall into three broad
Categories
1. Generic Rates---- rated as per internal tariffs or manuals
prepared by the Insurer for the different classes/subclasses
of Risks in a particular Business portfolio. The Tariffs/Manuals
are prepared on sound U/W principles by applying the law of
Large Numbers and acturial systems, thorough
understanding of the Risks and their behaviour, sound
judgement of the impact of current
economical/technological/social/political/environmental
developments on the future loss potential
2. Individual Experience based Rates--- rated as per the
intrinsic Risk factors and the loss experience for the
particular Risk Category
3. Exposure based Rates--- applicable where loss experience
is not available. In such cases ,Insurers carry out a detailed
exposure/PML analysis to find out the Degree of Hazard
 PROCESS OF RATE-MAKING
Premium Rates need to be reviewed periodically in the
light of loss experience and changing circumstances
which may materially alter the existing rating factors
and compel the Insurers to introduce new rating factors
into the Severity V/S Probability Rating Matrix
The Rate-Making process in the preparation of internal
Tariff/Manual rates generally follows either of the
following methods
Pure Premium Method This is represented
by the formula
Rate of Pure Premium= L X 100
V
where- L =Losses and
V =Values at Risk
 PROCESS OF RATE-MAKINGcontd.
This Pure Premium Rate is loaded for:-
I. Procurement Costs
II. Expenses of Management
III. Reserve for Unexpected Heavy/Catastrophic Losses
IV. Unexpired Risk Reserve
V. Margin of Profits
---- to arrive at the final rate.
The formula for Pure Premium Method is--
R= P+F
----where R= Rate per unit
Exposure, 1-V-Q
P= Rate of Pure
Premium,
F=Fixed Expenses per
Exposure,
Eg. P= 1%0,F=0.8%0, V= Variable
 PROCESS OF RATE-MAKINGcontd.
Loss Ratio Method--- This is used to indicate Rate Changes rather
than Rate per se. The formula is ----- R=ARo
-where R=Indicated Rate, Ro = current rate, A= W/T =adjustment
factor
wherein W=Experience Loss Ratio and T=Target Loss Ratio
Experience Loss Ratio=W= L where L=Experience Losses,
ERo E= Experience Period
Earned Exposure
Ro= Current Rate
Target Loss Ratio= T= 1-V-Q where-- V= Premium Related
eg. Ro =2% 1+G Expense Factor
L=10.5 crs.,E= 350 crs. Q= Profit and Contingencies Factor
G= 5%, 1+G=105%,1-V-Q=90% G=Ratio of Non-premium related
expenses to Losses Therefore- W =10.5/7=3/2
T =90%/105%=90/105=6/7
A=W/T=3/2 X 7/6 = 7/4
R = AR0=7/4X2% =3.5%
PROCESS OF RATE-MAKING..contd.
If the data is based on consistent assumptions, both
methods would lead to almost same results. The
differences between the two methods are
PURE PREMIUM METHOD LOSS-RATIO METHOD

Based on Exposure Based on Premium

Does not require existing Requires existing

rates rates

Gives indicated rates Gives indicated rate

changes
 PROCESS OF RATE-MAKINGcontd.
Data and assumptions should be based on logical and consistent factors

viz.--
1.Most recent loss experience period must be used and should
contain sufficient loss experience in order to make statistical laws
applicable and arrive at credible results
Difference in coverage should be treated separately
2.
Earned Premium underlying the loss ratio calculations must be on a
3.
current level rate basis
In general, the internal Tariff Rates should be based on direct
4.
premium with accounting Reinsurance ceded
.In the Rate-making exercise, trended, projected ultimate losses are of
paramount importance. The projection can be on a pure loss basis or on
allocated loss adjustment basis
Projection of unpaid and unreported losses to their ultimate settlement
.
values is done through the loss development method which is based on the
assumption that claims move from the domain of unreported to the
reported and unpaid to the paid in a pattern which is sufficiently uniform so
that past experience can be used to predict future losses
 PROCESS OF RATE-MAKING..contd.
Inflation in repair /replacement costs, exaggerated
Court awards, continued medical inflation ,etc. are
trend factors which adversely affect Severity
Similarly, frequency may show adverse trends due
to socio-economic factors,environmental impacts like
global warming leading to ice-caps melting and
consequential floods
Once the Pure Premium/Pure Premium Rate is
established, the same has to be loaded for factors like-
commissions, taxes, management expenses,
catastrophe reserves and profit margin. U/W must
guard against the two factors which may Jeopardise the
entire Rate-making exercise
1. Parameter Risk risk associated with the selection of
parameters. Selecting the wrong parameters will
result in Under-pricing of Products
2. Process Risk--- risk associated with the projection of
 PROCESS OF RATE-MAKING..contd.
INDIVIDUAL RISK RATING
When Individual Risks are large enough so that their experience
is CREDIBLE enough and has been studied over a long duration so
that the variations are evened out, Individual Rating can be
considered. There are two Risk rating systems in vogue-
1. Prospective--- where past experience is used to
determine the costs of coverage for the future.
2. Retrospective--- where actual experience for the period is
used to determine the final cost of coverage for that
period. It is less stable as the experience can be volatile
. EXPERIENCE RATING
This is ideal when with appropriate adjustments, the past
experience is predictive of the future. The adjustments will
relate to factors like social and economic inflation, changes in
the number, size and types of units covered, changes in policy
limits/terms/conditions, etc. Four different combinations are in
practice and the experience duration should not be less that 5
yrs.
 PROCESS OF RATE-MAKING..contd.
COMPOSITE RATING
This is a tool to rate large complex risks
where detailed Risk Inspection has been
carried out and regular Safety Audits are
conducted. In this Rating system ,instead of
rating different coverages using different
exposure bases, all applicable coverages are
rated using one, composite exposure base
CONCLUSION
Premium Rates shall not be excessive,
inadequate or unfairly discriminatory.
Normally, rates will not be considered
excessive in a competitive market. Due credit
must be given for past and prospective loss
RATING APPROACHES IN
PRICING
 RATING APPROACHES IN PRICING
The Insurance Industry estimates future payments
based on actuarial methods
Thus, the price of Insurance Products results from
the estimate of future obligations by converting past
loss experience into a meaningful proposition by
applying sound actuarial principles, the law of Large
Numbers and credible process of loss-forecasting
The cost of Risk Transfer =Risk Premium will be
proportional to the Hazard factor and the premium
rating will vary across products/portfolios
depending upon the Risk Classification
The File and Use Guidelines of IRDA classify all
General Insurance products into the following major
categories based on the Rating plan/approach used
in the Rate-Making exercise
RATING APPROACHES IN PRICING.contd.
CATEGORIES OF PRODUCTS
Class Rated Products--- which are further
classified into:-
1. Internal Tariff Rated Products
2. Packaged or Customised Products
. Individual Rated Products ---- which are
further classified into:-
1. Individual experience rated products
2. Exposure rated products
3. Insurance of Large Risks
RATING APPROACHES IN PRICING..contd.
CLASS RATING
Most of the Rates used today are class rates determined either
on Pure Premium Method or Loss Ratio Method. Class Rating
means that Risks with similar characteristics are placed in the
same class/subclass and charged the same rate based upon a
pre-defined Tariff which in turn is formulated by applying the
standard Insurance Methodology of Degree of Hazard and the Law
of Large Numbers. The methodology for arriving at class rates of
Insurance is as follows--
1.Determine the most commonly used factors to rate the
Product
eg. Construction, Situation, Occupation ---in Fire
Insurance
2.Collect data for all Rating Factors over a suitable time
period
3.Claims Frequency and Severity should be modelled
separately by fitting appropriate distributions to the
data. The pure risk premium is the product of claim
frequency and claim severity per unit of exposure
RATING APPROACHES IN PRICING..contd.
Class Rating contd.
4.The pure risk premium is loaded for
management expenses, commissions, reserves,
inflation, taxes and profits etc. to arrive at the
technical premium
5. The Tariff Rating systems in India were an
example of Class Rating. Within the
Class/Subclass there was loading for adverse
features and Discount for favourable features
eg.loading for Kutcha Construction, discount for
installation of FEA/good features
6. The System demarcates risks on the basis of
loss-producing characteristics into identifiable
specific classes, representing the average
expected costs for that particular class
 RATING APPROACHES IN PRICINGcontd.
INDIVIDUAL OR MERIT RATING
The current trend is to rate a Risk according to its
individual merit or to rate it based on a small
homogenious sub-segment of the overall population
This is primarily because the loss producing
conditions differ from place to place, technology to
technology, company to company depending upon
the loss prevention/ minimisation measures being
adopted,social/political/environmental
circumstances prevailing
Individual Risk Rating supplements Class Rates by
modifying the Group Rates in whole or in part to
reflect an Individual entitys loss exposure. However,
there should be appropriate balance between Risk
Sharing and Risk Bearing
RATING APPROACHES IN PRICING..contd.
Individual or Merit Rating approach was devised
to identify and recognize the Individual Risk
differences in determining the premium rates
It measures the extent to which a particular
risk deviates from the average rate of its
class. It tries to identify the characteristics
peculiar to the risk and modifies the
average rate based on these
characteristics
Individual or Merit Rating can be classified into
1. Schedule Rating
2. Experience Rating
 RATING APPROACHES IN PRICING. contd.
Schedule Rating
This system does not directly reflect an entitys claims
experience. It recognizes the characteristics that are
expected to have a material effect on the claims experience
but are not actually reflected in that experience. These
characteristics could result from recent changes in ---
1. Exposure
2. Risk Control Programmes
. System is also used for entities that are too small to qualify
for experience rating
. System takes the form of percentage Credits and Debits.
These Credits and Debits are sometimes applied before
and sometimes after experience rating. Credits are given
for Risk Reducing or good features and Debits for Risk
Aggravating or bad features.
 RATING APPROACHES IN PRICING..contd.
Each exposure is individually rated or class
rate is modified in view of desirable or
undesirable features.The areas of study will
include Construction/ Occupation/Operating
Methodology/Protection and Safety
Measures/House-Keeping and Maintenance /
Control Measures for Loss Prevention
&Minimisation, etc.
The additional characteristics may include---
I. Physical Hazard
II. Moral Hazard
III. Existence of Safety Programme and
Management Controls
IV. Compliance of Corporate Governance
 RATING APPROACHES IN PRICING..contd.
Experience Rating
In Experience Rating, the loss history is used to draw
conclusions about the future loss probability. The salient
features of Experience Rating are-
1. The method can be applied in situations where
previous losses, after adjustments, are representative
of the losses that can be expected during the period to
be rated
2. There must be sufficient representative data for the
portfolio being rated to calculate a proper estimate of
the premium
3. Both Claim Size and Claim Frequency will be taken into
account for arriving at the premium rate
4. In Experience Rating, we go one step further from the
Merit Rating. Here, the class rate is further adjusted
upward or downward based on the past loss experience
of the particular client for the past five years
 RATING APPROACHES IN PRICING..contd.
Experience Rating.contd.
5. This System is generally restricted to Large
Customers paying huge premium involving
different classes of Business. The object is to
determine a more equitable rate for each
Business Portfolio
6.The steps taken to arrive at the premium are-
Determine the Class Rates- Adjust Upwards or
Downwards for new exposure characteristics-
Adjust Upwards or Downwards for past loss
experience of that particular client
7.The basis for Experience Rating are the
existence of intrinsic variations in the Hazard
factor associated with the Class Rate due to the
unique features of the particular risk
 RATING APPROACHES IN
PRICING..contd.
Types of Experience Rating---There are two
types
1. Prospective Rating-- in which the experience
of a Risk over a continuous past period of
atleast 3-5 years is used to calculate the Rate
for the period for which the coverage is being
provided. The experience period should be
broad enough to ensure that the claims
pattern is properly reflected
2. Retrospective Rating--- in which premium is
collected by charging a provisional rate at the
commencement of the policy and the
provisional rate is modified upward/downward
at the policy renewal based upon the claims
 RATING APPROACHES IN PRICING..contd.
Applicability of Experience Rating
This method is applicable wherever there is a large
variation among the Risks which make-up the classification
and the Individual Risks are big enough to generate a
claims experience of appreciable value
Essentials of Experience Rating
The actual Individual Risk experience and the Class
experience are compared on a common premium and loss
base by assigning relative Weightage Factors. The adjusted
Risk Rate or Experience Rate is the weighted average of
both the factors
Disadvantages of Experience Rating
1. Non-availability of complete, credible and reliable
historical statistical data
2. Wrong method adopted in the claims projection and lack of
policy information
 RATING APPROACHES IN PRICING..contd.
Exposure Rating
This method is used when the occurrence of loss is an
uncommon event or where there are very few risks of that
class to develop a statistically supported Rating basis. Under
this method, the Premium Rate is determined by an
evaluation of the exposure to the loss in respect of the Risk
concerned, independent of the actual claims. The salient
features are---
I. The Rate may be derived from rates for similar Risks
in other markets or be based on hazard evaluation
of the Insured Risk
II. Exposure Rating considers the Insured Risks----the
portfolio composition and the premium distribution
commensurate to the Risk
III. The premium/premium rate will be based on
portfolio analysis rather than on actual loss
experience
 RATING APPROACHES IN PRICING
IV. The rating approach tries to correlate and extrapolate the
data of similar Risks for arriving at the rate. It proves to
be an essential aid where there is no representative
claims experience available to calculate the Burning Cost
V. The reference Portfolio is put into a suitable form and
represented as a loss distribution in the form of
exposure curves by plotting the total premium under the
portfolio against the expected losses .The exposure
curves determine the premium the Insurer ought to
charge to cover expected losses
VI. The Insurer identifies the most important Risk Factors
and the premium rating is done by giving different
weightage to each of the identified Risk Factor. A basic
Rate is arrived at by taking the premium rate for similar
risks in other developed markets and each of the
identified Risk factors is superimposed on this basic rate
by giving a discount or applying a loading based on the
nature of the Risk factor being superimposed
TOOLS OF UNDERWRITING
 TOOLS OF UNDERWRITING
Underwriting is the process by which an
Insurer determines whether or not to accept
the Risk and, if accepted, the terms and
conditions to be applied and the level of
premium to be charged
The litmus test in U/W is the Individual Risk
Profile in relation to losses and not other
commercial considerations
The most desired quality in U/W is
consistency. To be consistent and profitable
in the U/W of Risks, we require certain tools
which can guide us in the direction of
achieving desirable U/W results
TOOLS OF UNDERWRITINGcontd.
The Risk Management framework of the Insurer in
relation to U/W 1s important in this comnnection. It
helps the U/W to identify and assess the Risk properly
and effectively in realtion to the expected losses and
decide on the premium to be charged for accepting the
Risk
The following approaches can serve as tools for U/W in
general
1. U/W Philosophy of the Company
2. U/W Policy of the Company
3. Reporting Forms on trends emerging on the
Claims front
4. U/W Process--- method and periodicity of
incorporating emerging Claims Experience into
the acceptance and rating of Risks
 TOOLS OF UNDERWRITING..contd.
The U/W Process can be made more effective with the help
of the following tools
1. Insurance Documentation
2. Exclusions/Warranties
3. Deductibles
4. Coinsurance
5. Reinsurance
6. Portfolio Management
. Insurance Documentation will include---
I. Proposal Form
II. Policy
III. Endorsements
IV. Reinsurance Placement Slip
V. Certificates of Insurance
VI. Cover Notes
VII. Renewal Notice
 TOOLS OF UNDERWRITINGcontd.
PROPOSAL FORM
Many Policies incorporate that the Proposal will form the basis for
the Insurance Contract
Insurance being a Contract of Utmost Good Faith, the Insured is
supposed to disclose all the material facts --which he knows and
also ought to know. Any non-disclosure or misrepresentation of
Material Fact in the Proposal Form will be construed as a violation of
the Principle of UGF and may lead to denial of the claim and in
extreme cases, render the contract null and void
The completed and duly signed Proposal Form is the OFFER under
the Insurance Contract an application for covering the Risk
The printed Proposal Form contains questions designed to elicit all
material information about the Risk proposed for Insurance.
Therefore the questions will vary depending upon the Class/Sub-
Class of the Insurance Portfolio
A Proposal Form is compulsory in all classes of Insurance, except
Marine Cargo. Additional Questionnaire Forms are also used in certain
Business Lines.
Pre-acceptance Risk Inspection Reports may be required for large
Industrial Risks, costly equipments, tail-end transits in Marine Cargo
for a proper assessment of the Risk factors and premium rating
 TOOLS OF UNDERWRITING
POLICY
The Policy is a Legal Document and evidences the Contract of
Insurance. It specifies the mutual obligations of both parties to the
Contract of Insurance
Insurance Policy is called a Contract of Adhesion and any error or
ambiguity in the Policy will be construed against the Insurer as per
the Legal Principle of Contra Preferentum
The Policy Document comprises of the following Sections---
1. Recital--- introduces the parties to the Contract
2. Operative Clause defines the scope of cover i.e the coverage and
exclusions
3. Conditions--- regulate the Contract and also specify the DOs and DONTs.
There are three types of Conditions
I. Conditions Precedent to the Contract
II. Conditions Subsequent to the Contract
III. Conditions Precedent to Liability
1. Schedule----- contains full description of the Risk, name and address of
the Proposer, express warranties and special terms/conditions applicable to
the U/W of the Risk, reference to the clauses/endorsements attached to the
policy and the premium working
 TOOLS OF UNDERWRITING
ENDORSEMENTS
Endorsements are of two types
Endorsements passed subsequent to the issuance of the policy recording
acceptance of alterations /changes in the Subject Matter of Insurance, proposer
details, circumstances affecting the Risk,etc. If the Insured fails to intimate the
alterations in the Risk Profile to the Insurer, it may lead to a breach of policy
condition and consequential repudiation /reduction of liability under the policy. Such
Endorsements fall into two Categories-
i. Monetary which involve collection/refund of Premium
ii. Non-Monetary which do not involve any collection/refund of
Premium
. Endorsements used alongwith/attached to the policy stipulating the
additional terms or coverage restrictions or special circumstances applicable to the
Underwriting of the Risk eg. Endorsements under Motor/Engineering/Fire business
. REINSURANCE PLACEMENT SLIP
. This applies to Reinsurance placement on Facultative basis. The R/I
Broker prepares the Slip incorporating the terms,conditions, deductibles and
premium rates for the Risk proposed and each of the Reinsurers accepting
the Risk signs the Slip indicating the percentage of Risk accepted by him.
. The lead Reinsurer will issue the Reinsurance document evidencing
the formal Reinsurance Contract duly specifying the terms, conditions,
deductibles, premium rates, warranties and the names of other Reinsurers
alongwith their acceptance percentage
 TOOLS OF UNDERWRITING
INSURANCE CERTIFICATES
Certificates are compulsory in Motor Insurance as per the
provisions of the M.V.Act. They are required to be issued in
addition to the Policy document. Certificates may also be
solicited by Bankers under Marine Cargo Open Cover
Notes/Open Policies relating to specific consignments
wherein their Insurable Interest is applicable
COVERNOTES
A Covernote is provisional document issued on a
temporary basis pending preparation and issuance of the
signed policy. This may arise as certain material information
to be incorporated in the policy may be forthcoming and the
Insurer wants a documentary evidence of the receipt of
premium and acceptance of Risk by the Insurer
RENEWAL NOTICE
Renewal Notices are issued as a matter of healthy
Business Practice by the Insurers inviting policy renewal
 TOOLS OF UNDERWRITING
Exclusions/Warranties
The Policy Operative Clause specifies the General Exclusions applicable to
all Sections of the Policy and the Special Exclusions applicable to specific
Sections of the Policy. They specify the excluded perils, excluded property,
excluded circumstances of loss,etc. The Insurer will not be liable to pay for
any loss/damage proximately caused by an Excluded Peril.
Deductibles
Deductible/Excess is an amount which the Insured has to bear in the event
of loss/damage to the Insured Property. The Insurer will not be liable to pay
any claim which is less that the Deductible. In case the loss exceeds the
Deductible amount, the Insurer will pay over and above the Deductible
amount i.e. the amount which exceeds the Deductible. The reason for
imposing an excess is to eliminate small losses and reduce the
administrative work. The cost of doing business is lowered for the Insurer
and the Insured is rewarded by charging lower premium. Deductibles can be
compulsory or voluntary. There are three types of Deductibles prevalent in
the Market---
1. Straight Deductible--- expressed as a specific amount
2. Percentage Deductible----- expressed as a %age of the loss amount
3. Combination of Straight and Percentage Deductible expressed as a
%age of the loss or Sum Insured subject to specified minimum and
maximum amounts
 TOOLS OF UNDERWRITING
Co-Insurance
In India, Co-Insurance means sharing a percentage of the
premium (as also the claims in the same proportion) as
decided by the Insured. The policy will be issued by the lead
Insurer with the Co-insurance Clause attached.
In USA and other Western Countries, it means the %age of
the total Risk the Insured is made to bear in case of a claim
Reinsurance
Reinsurance is the mechanism used by Insurers to spread
the Risk assumed. The Primary Insurer transfers a part of its
Business to the Reinsurer in return for a Commission called
Ceding Commission. Benefits of Reinsurance are---
1. Reinsurance is often used to smooth out the peaks
and troughs of a Primary Insurer s profits and losses.
Thus, with the comfort of a robust Reinsurance
Programme in place, the Primary Insurer can plan for
steady flow of Profits
 TOOLS OF UNDERWRITING
2. Expertise of the Reinsurer can be used to
supplement the Underwriting capabilities of the
Cedant in different Business lines
3. Reinsurance leads to increased capacity, enhanced
stability over a period of time, protection against
catastrophic losses, diversification into new lines of
Business, access to the Insurance World Market and
superior Insurance Products
Special Features of Reinsurance
I. A fundamental aspect of all Reinsurance Programmes is
that there cannot be any Cession without Retention.
II. Retention is the net amount of each and every Risk which
the Ceding Insurer would like to retain for its own account.
This is the limit upto which the Cedant will pay for the
losses in connection with the portion of the Risks retained
on his own account.
 TOOLS OF UNDERWRITING
III. In Surplus Treaties, where the Cedant decides his Retention
Capacity in advance ,all Risks falling within his Retention Capacity
will not come within the Reinsurance Treaty arrangement and
those Risks which are beyond the Retention Capacity will be
Reinsured on the basis of the number of lines-a line is equal
to the retention on that particular Risk
IV. The Retention Limits are fixed for each Business Class
depending upon the average size of Risks in the portfolio and the
claims outgo and should be judicious so that it is neither too
high(leading to greater Risk exposure) nor too low(leading to
excessive Cession in respect of good business and consequential
erosion of profitability)
V. Amount of Retention will depend upon factors like - Paid-Up
Capital and Free Reserves, expected Gross Premium, class of
Business and Portfolio spread, past claims experience of the
portfolio,geographical location ,concentration of risks, foreign
exchange regulations,cost benefit analysis of the particular
Reinsurance Programme,etc. Important Treaty documents--
1. Treaty Slips -- Binding Agreements on behalf of Reinsurers
2. Bordereaux --is a Statement of Account provided by the Cedant to the Reinsurer on
a quarterly basis highlighting the Premium and Claims reported and incurred
 TOOLS OF UNDERWRITING
Portfolio Management
This is the Technique of managing a Business Portfolio in
such a way that it becomes self-supporting and profitable
The aim of Portfolio Management is to protect the Insurers
Balance Sheet and average out the peaks and troughs in the
Profit &Loss Account towards more stable results ,growth
and profitability over a period of time
Portfolio Management is effected through a judicious mix
and constant monitoring of
1. Individual Risks V/S Institutional Risks
2. Single Peril V/S Multi-Peril Policies
3. Individual Policies V/S Group Policies
4. Project Policies V/S Operational Policies
. Portfolio Management primarily depends upon the values
at Risk, portfolio mix, Reinsurance Programme for each
Business Class
TYPES OF POLICIES
 TYPES OF POLICIES
There are different ways of classifying Insurance
covers
First Method
1. Insurance of Property relates to assets
2. Insurance of Earnings/Profits--relates to earnings of the
Business
3. Insurance of Liability-- relate to liability under Motor and
various Miscellaneous Policies
4. Insurance of Persons-- relate to Individual and Group
Policies
MATERIAL
. Second Method--- DAMAGE

1. Fire Insurance
LOSS OF PROFITS

CARGO

2. Marine Insurance MOTOR

HULL
HEALTH
3. Miscellaneous Insurance
ENGINEERING LIABILITY &P.A.
 TYPES OF POLICIES
Third Method
Named Perils Policy could be a Single Peril Policy or Multi-Peril Policy
egs.of Single Perils Policy--- Burglary/Plate Glass
egs. of Multiperil Policy-Standard Fire Policy/Motor
Package Policy/Marine Cargo Policy
All Risk Insurance Policy-- covers direct Physical Loss/Damage to the
Insured Property due to any causes other than those specifically
excluded
egs. All Risk Policy/EEI Policy/EAR and CAR Policies/IAR
Policy
Package Policies---- are like a bouquet wherein various individual covers
are packed into one comprehensive policy document. Cosmetic
needbased changes are made in the Individual Covers to make them a
useful and attractive and Section Discounts are also given
Customised Policies--- these are tailormade policies designed to suit the
special requirements of the clients,eg.Special Contingency
Special Covers-- these have evolved to suit Industry needs, egs.First
Loss Policy,Fire Declaration and Floater Policies, Valued Policies,Event
Covers,etc.
 NAMED PERILS POLICY
This could be Single Peril Policy eg. Burglary Policy or Multi-
perils Policy eg. Standard Fire Policy
In named perils policy, the loss/damage to the Subject Matter of
Insurance must be proximately caused by the Insured Peril
named in the Policy to enable recovery under the policy
If loss/damage is proximately caused by an Excluded/Uninsured
peril, there will be no liability under the policy
Named Perils policies are further classified into those policies
with only basic covers eg. ICC-C Clause in Marine Cargo and
those with Add-On covers eg. Standard Fire Policy
The operation of a Named Peril Policy is conventional and
simple and Loss experience is available for the Insured Perils
The burden of proving that the loss has been proximately
caused by an Insured Peril will be upon the Insured. In case the
Insurer maintains that the loss is attributed to an excluded or
uninsured Peril, the onus of proof shifts on them, unless the
policy provides otherwise
 ALL RISK INSURANCE POLICY
The Policy covers physical loss/damage to the Insured Property
by any cause, other than those specifically excluded
In effect,the Insurer will be liable to indemnify any loss/damage
which cannot be attributed to the operation of an excluded peril
In the Indian Market, the All Risk Policy is mainly issued in
Marine,Engineering and Miscellaneous classes of Business egs.-
1. Industrial All Risk Policy
2. ICC-A Clause
3. All Risk Policy for Jewellery/Valuables
4. Electronic Equipment Policy
5. Erection All Risk/Contractors All Risk Policies for Project
Insurances
. The onus of proof is on the Insurer
. The loss must be fortuitous, accidental, sudden and unforeseen
. The policy must be clear as to the property
details,geographical scope, sectionwise coverage/special
exclusions/conditions and the General Exclusions and
Conditions applicable to all Sections of the Policy
 PACKAGE POLICIES AND CUSTOMISED POLICIES
Package Policies
These are created for Businesses that generally face similar hazards
eg.Shopkeepers,Jewellers,Offices,Householders,Banks,etc.
The Special Features are
1. Bundling of various Individual Policies already available with the Insurer into a sort
of Bouquet Policy Document with necessary cosmetic changes, addition and deletion
of perils and incorporating adequate warranties, clauses, wherever applicable
2. Section Discounts are given based upon the number of Sections selected by the
Insured
3. The biggest advantage for the Insured is comprehensive coverage, choice of sections
and competitive premium rates
4. The Insurer benefits by receiving more premium ,better spread of risk ,customer
loyalty and a reduction in the clerical work and marketing cost
. Customised Insurance Policies
. These are specially designed covers tailormade to suit the specific
commercial or trade requirements of the Customers and keeping in mind the
Risk exposure
. The need for customised products arises when the existing products do not
meet the Insureds risk exposure and the special requirements of that
particular commercial transaction.The special features are
1. Specialised Risk Assessment based on the Risk profile
2. Collection of exhaustive data/information to analyse the Risk and charge appropriate
premium
3. Stating the coverage/exclusions/conditions/warranties in unambiguous terms
 SPECIAL COVERS
First Loss Policy
This is a Property Insurance cover in which the Insured seeks cover for an amount
below the full value of the items insured and the Insurer agrees not to penalise
him for the deliberate Under-Insurance
In all such cases, a Total Loss is virtually impossible,eg. Heavy Machinery,bulk
commodities stored loose like sulphur,rock phospate,coal etc.
The First Loss amount is the Maximum Probable Loss due to the operation of the
Insured peril and this is specifically stipulated in the policy
There are special U/W safeguards taken and restrictions imposed by Insurers
while underwriting these proposals.The policy is subject to the Condition of
Partial Average wherein the Insured will be penalised if the total value of Stocks
at the time of loss is greater than the total value declared for the purpose of
Insurance
Floater Policy
Some times, an Insured is not able to keep day to day account of his stocks
in various godowns. He can give only the total value of all his stocks lying in
various locations / godowns. To cater to such clients a floater policy is
issued.
The floater policy covers in one sum insured , stocks stored in different
godowns/locations
The policy can be granted only on stocks. The address of each
location/godown must be declared by the insured.
The highest rate applicable is charge with a loading of 10%
 SPECIAL
Fire Declaration Policy
COVERS
Many insured may have stocks which frequently fluctuate in value. To take care
of such fluctuation in quantity/ value , a declaration policy is issued.
The sum insured will be the maximum possible value at any point of time during the
policy period. The minimum sum insured will be Rs. 1 cr. in one or more locations
and shall not be less than Rs.25 lacs in atleast one of these locations.
Monthly declarations based on
a) The average of the values at risk on each day of the month or
b) The highest value at risk during the month.
must be submitted by the insured before the end of the succeeding month.
If declaration is not received for a particular month, the sum insured will be treated
as the declaration for the month.
Reduction in sum insured is not allowed. Increase in sum insured can be done with
prior agreement.
Refund of premium on adjustment basis on the declarations / cancellations shall not
exceed 50% of the total premium.
Basis of value for declaration will be the market value.
Declaration policy cannot be issued for stock in process/ retail stores /short period
insurance.
Floater Declaration Policy
Floater Declaration policy can be issued subject to a minimum sum insured of Rs. 2 crs.
and compliance with rules for floater and declaration policy.
Minimum retention of premium on the expiry of the policy will be 80% of the annual
premium.
 SPECIAL COVERS
Marine Cargo Open Declaration Policy
Policy is also known as FLOATING POLICY. It is worded in GENERAL
TERMS and is issued to cover ALL SHIPMENTS/SENDINGS coming within
its scope and sent/received during the Policy period.
Declarations are made on a per despatch /weekly /fortnightly/monthly basis
& these go to reduce the Sum Insured
SPECIAL FEATURES are as follows :
* Policy issued for ONE year
* Reinstatement of Sum Insured permitted any number of TIMES subject to
advance payment of premium.
*REDUCING BALANCE Method for sum Insured/Premium
Special Declaration Policy is issued with certain pre-requisites
Premium REFUNDED on the UNDECLARED BALANCE at the end of the year
* Generally issued to cover Inland Transits
* Automatic & Continuous Insurance Protection
Collective/Blanket Policies in Fidelity Guarantee ---cover
all Employees under a single Guarantee amount
Valued Policies-- are issued in Fire Dept. to cover curios,
works of art, obsolete machinery and in Motor Dept. to cover
Vintage Cars
UNDERWRITING PROFITABILITY &
REUNDERWRITING STRATEGIES
 UNDERWRITING PROFITABILITY &
REUNDERWRITING STRATEGIES
Profitability is required in U/W of Risks so as to ensure an
increasing financial strength for the Insurer and the capability to
assume more Risks, pay claims and meet all liabilities in case of
unforeseen catastrophies
The premium underwritten must be more than the combined
outgo towards incurred claims, reserves,acquisition and admin.
costs so that the Insurer makes a reasonable profit on the
Business
To ensure U/W Profits in a competitive market, the Insurer must
put in place sound U/W practices through an Underwriting
Manual and premium rating tables. The Insurer, before preparing
such a Manual, has to factor-in the following aspects
1. Lines of Business to be Underwritten
2. Competitiveness of Premium Rates
3. Comprehensiveness of the covers offered
4. Segments/Areas where the products are to be sold
5. Commissions to the Agents/Brokers and Management Expenses
6. Policy servicing issues and Claim Settlement
UNDERWRITING PROFITABILITY & REUNDERWRITING STRATEGIES
In order to estimate the U/W profitability, the Insurer has to
calculate the following---
Loss Ratio= Incurred Losses X100
Earned Premium
Expense Ratio= Underwriting Expenses X 100
Written Premium
Combined Ratio = Loss Ratio +Expense Ratio
---- where
1. Incurred Losses-= Claims registered during the F/Y (+)Claims O/S at the
end of the F/Y (--) Claims O/S at the beginning of the F/Y (+) 10% IBNR
2. Earned Premium= that part of the premium in the various policies
underwritten which falls within a particular financial year=Earned Premium of
the current F/Y policies(+) Unearned Premium of the previous F/Y policies
(-)Unearned Premiums of the current F/Y policies
3. Written Premium = premium underwritten in a particular F/Y. This will
include earned plus unearned premium of that particular F/Y
4. Underwriting Expenses = all Fixed and Variable Expenses incurred in the
particular F/Y to underwrite the Business. This will include management
expenses, acquisition cost, claims cost, reserves for catastrophic losses
A Combined Ratio of over 100% indicates U/W Loss and below
100% indicates Profitability
UNDERWRITING PROFITABILITY & REUNDERWRITING STRATEGIES
Profitability can be increased by taking the following measures---
1. Raising the premium rates
2. Underwriting more Risks but with proper U/W safeguards
3. Moving to segments which are less price sensitive
4. Reducing Claims outgo by leveraging deductibles and appointing
competent Surveyors/TPAs
5. The following are the areas where adverse results can appear---
i. Premium Rating premiums are inadequate to cover loss exposures
ii. Underwriting--- U/W guidelines are not being implemented by the sales
force
iii. Policy Wording--interpretation in the policy wordings are open to larger
Risk coverages resulting in more and higher value claims claims than
expected
iv. Reserving---- Loss reserves are not being correctly computed
v. Claim Processing--- Inefficiency in claim settlement and non-elimination of
frauds/overpayments
vi. High Exposures---- can be countered by increasing the deductibles,
introducing sublimits, imposing compliance with safety measures/codes, re-
rating loss prone segments, avoiding high risk concentrations
vii. High Expenses-- reduced expenses can be passed on to the customers as
reduction in premium rates, which may in turn result in high premium
volumes and goodwill
 UNDERWRITING PROFITABILITY &
REUNDERWRITING STRATEGIES
RE-UNDERWRITING
Re-Underwriting is the process by which the profitability of a
portfolio is managed the claims arising are examined for
identifying the loss-exposures and taking necessary corrective
measures
Computer Systems enable the Insurer to sort out the data and
obtain various reports which can be analysed for the claims
pattern and any unusual frequency and high severity. If the
loss frequency is more, the problem lies in the policy selection
and very high severity of losses may have to be tackled by
increasing the premium rates
Losses can be analysed causewise and also under various
categories of Insureds, Intermediaries, Zones, etc.
The analysis may reveal garages/repairers nexus, hospitals
inflating bills, spate of claims and recurring losses arising from
particular locations, increasing trends of Court Awards biased
against Insurance Companies
 UNDERWRITING PROFITABILITY & REUNDERWRITING
STRATEGIES
The corrective actions can be implemented by taking one or
more of the following steps---
1. Non-renewal of all policies which reveal moral/morale hazard
2. Mid-term cancellation of policies wherein misrepresentation of
material facts is discovered by the Insurer
3. Modification of coverage/terms/conditions/premiums at the
time of renewal if loss experience is consistently bad
4. Examining adequacy of Sum Insured at inception and also at
the time of renewal
5. Periodical Valuation of Assets under IAR/Mega-Risk policies
6. Modifying the Risk profile/underwriting guidelines of a portfolio
to ensure that it is Self-supporting and generates U/W profits
7. Modifications in Premium Rates/Product profile-- based on
changes in the environmentincreasing cost of labour/spares, adverse
Court Awards
8. Incentives to the Insured for Claims-free policy renewals and loyalty
bonus
9. Segmentation of Customers/ Markets based on Claims Profile and
Risk exposures
 UNDERWRITING PROFITABILITY &
REUNDERWRITING STRATEGIES
UNDERWRITING AUDIT
The purpose of U/W Audit is to give feedback to the
Underwriter on the correctness of the implementation of
the U/W Policy and the procedures laid down in the U/W
and Rating Manuals. The deviations, if any, need to be
closely monitored on the adverse impacts. Corrective
action to be taken by the Higher Management to ensure
overall profitability and customer retention
REVIEW OF CLAIMS AND SPECIAL EVENTS
Review of Claims should be causewise, sizewise,
geographical areawise, customer segment wise, sales
channelwise,etc.to find out emerging patterns and
corrective steps taken.Claims outgo need to be
monitored on both countsFrequency and Severity
 PROTECTION OF
POLICYHOLDERS INTEREST
PROTECTION OF POLICYHOLDERS INTEREST
Insurers have the duty to protect the Interest of Policyholders as
the Specific Regulation passed in this regard in 2002
This Regulation is intended to ensure, among other things, that
Insurance is provided on equitable terms and conditions
It is the duty of each Insurer to promote greater Market Discipline
The Regulation wants that the right of Policyholders to make
informed choices regarding their selection of Insurance products
and service providers need to be respected and preserved
The important provisions pertain to
1. Stipulations to be followed at the point of sale
2. Contents of the proposal and policy form
3. Minimum requirements as regards the claims procedure
4. Issues relating to Policy servicing
5. Establishment of an effective Grievance Redressal
mechanism to resolve the grievances of policyholders
 PROTECTION OF POLICYHOLDERS INTEREST
Stipulations to be followed at the point of sale
1. Prospectus : of any Insurance Product must clearly
state the scope of Benefits, extent of Insurance Cover,
and explain the warranties, exceptions, conditions,
riders/Add-On covers regarding their scope of cover
2. Complete Disclosure : Insurer/Agent/Broker will
provide all material information in respect of the
proposed cover to the Prospect so that he can make an
informed choice .Where for any reason, the proposal
and other connected papers are not filled by the
prospect,a Certificate must be incorporated at the end
of the Proposal Form from the Prospect that the
contents of the Proposal/Prospectus have been fully
explained to him and he has understood the
significance of the proposed contract
PROTECTION OF POLICYHOLDERS INTEREST
Contents of the proposal and policy form
1. Proposal Forms are necessary in all General
Insurance portfolios, except Marine Cargo
2. Proposals shall be processed speedily and
efficiently and decisions on
acceptance/rejection/queries must be
communicated to the Proposer within 15 days
from the date of receipt
3. The Policy must state full details of the Insured,
subject matter of Insurance, period of
Insurance, sum insured, deductibles,special
warranties applicable, premium computation,
termend adjustment basis if the premium
collected is provisional, obligations of the
PROTECTION OF POLICYHOLDERS INTEREST
Minimum requirements as regards the claims
procedure
The Insured must give immediate notice of loss in writing
and the Insurer must respond immediately giving clear
indications on the procedures to be followed
In case a Surveyor has to be appointed, the same must be
done within 72 hrs. of the receipt of claims intimation
Surveyor shall communicate his findings to the Insurer
within 30 days of his appointment
He may seek extension under special circumstances but he
must furnish his report within 6 months from the date of
appointment
Insurer shall dispose off the claim within 30 days of receipt
of the Survey Report
Any delay in settlement, once the offer amount has been
accepted by the Insured, shall attract Interest at a rate 2%
above the prevailing Bank Rate
PROTECTION OF POLICYHOLDERS INTEREST
Issues relating to Policy Holders servicing
Any communication received from a Policy Holder must be
responded to within 10 days
Such communication may relate to
1. Recording change of address and/or any other corrections
2. Issuance of Duplicate Policy/Certificate
3. Issuance of endorsement under the policy recording change of
Interest, Sum Insured, addition/deletion of perils
4. Incorporation of the Financial Interest of a Bank
. The Insurer/intermediary have a responsibility to ensure that
the Customers get educated in Insurance matters so as to
generate enhanced awareness regarding their Rights and
Duties under the policy and they can take informed decisions
. The policy holder is also duty-bound to furnish all the
information solicited by the Underwriter at the time of U/W
and assist the Insurer in the matter of prosecuting claims
recovery from Third Party arising out of Subrogation rights
 PROTECTION OF POLICYHOLDERS INTEREST
Establishment of an effective Grievance Redressal
mechanism to resolve the grievances of policyholders
Every Insurer must establish a Mechanism to address
complaints/grievances of policy holders with speed and efficiency
Information regarding Grievance Mechanism and Ombudsman
must be communicated to the Insured alongwith the policy
document
The Ombudsman entertains grievances pertaining to Personal
Line Insurances and his award is binding upon the Insurer.In case
the decision goes against the Insured,he is free to move the
matter in the Consumer Forum
Disclosures by Insurers
IRDA has stipulated various Disclosure norms for the Insurers
There are also regulations for Advertising by Insurers/
Intermediaries
The Insurers must strike a judicious balance between reasonable
and equitable pricing without jeopardizing their solvency margins
RESEARCH AND DEVELOPMENT IN
UNDERWRITING/RATING/PRODUCT
INNOVATION
 RESEARCH AND DEVELOPMENT IN
UNDERWRITING/RATING/PRODUCT INNOVATION
R&D is required in view of the dynamic nature of changes in the
profile of risks to be covered, customer expectations and new
innovations and technology impacting the subject matter of
Insurance
The challenges faced by the U/W arise due to various factors
viz.-
1. Continuous flux in the Risk Fields being dealt with
2. New and emerging profile of losses, including major Catastrophies
3. Changes in the economic, environmental,technological,legal and
social landscapes in which the Insurer operates
4. Genetic Solutions and their implication in Life and Health Insurance
5. New High-end vehicle models being introduced into the Market
. There are 4 Distinct Areas where new challenges are emerging-
I. New Potential Hazards posed by rapid innovation and technology
These are the unforeseen and new Risks emerging from rapid innovation,
technological changes, new improved products, sophistication in
Machinery lifestyle changes, globalisation, etc. The above factors coupled
with a fast Business Cycle implies more Insurance requirements in
untested areas of Risk Management
 RESEARCH AND DEVELOPMENT IN
UNDERWRITING/RATING/PRODUCT INNOVATION
II. New Vulnerabilities even though the hazards are the same
Due to Globalisation, activities in the world are becoming highly
interlinked. Therefore if one thing goes wrong, the whole interconnected
system may go wrong in unanticipated ways. Many Companies are linking
their strategic domains with supply/service chains of their Business
partners. The KPOs/BPOs are classic examples of this integration
III. Untested Insurance Products
New forms of Risks are posed by genetic research in agriculture and
medicine. Another untested area is Clinical Trials. Global warming has
escalated the Risks associated with Hurricanes/ Cyclones/floods resulting
in catastrophic losses worldwide
IV. Demand for Global Insurance Covers
Clients are seeking Global Insurance covers for their Property
and Liability Risks so that Insurance becomes seamless and
protects their Balance Sheet in a better manner. Weather based Crop
Insurance makes a calibrated payment once the Trigger event operates.
The subjective element being removed, there is no scope for
manipulating the losses. Besides, the claims can be settled very fast.
Such new innovative approach in various sectors is required to address
the emerging Risks better
 RESEARCH AND DEVELOPMENT IN
UNDERWRITING/RATING/PRODUCT INNOVATION
INNOVATIONS IN RATE-MAKING
Underwriters and Actuaries have begun to construct more
complex Risk Classes by considering various additional Risk
factors into the Rating Matrix to arrive at Individualised
Merit rating with the help of Information Technology
New Factors have been added in Motor/Fire/Health/liability
portfolios to arrive at further differentiation into smaller
homogeneous sub-groups sharing the same Risk features
and better monitoring of the premium rates
Data Mining is the method of choice for managing the
complexity introduced by using the additional variables.
Using predictive modelling on the Data collected, the major
determinants in respect of likely losses in the future due to
the Insured perils can be found producing much smaller
and more homogeneous subgroups. This will also ensure
differential rating based on good and bad features
 RESEARCH AND DEVELOPMENT IN
UNDERWRITING/ RATING/ PRODUCT INNOVATION
ESSENTIAL STEPS IN THE DATA-MINING PROCESS
1. Collection and Collation of Data--Availability of appropriate
data capturing information on the policyholders profile, perils
covered, perilwise claims frequency and severity, cumulative
Risk behaviour and a variety of additional factors which can be
introduced to bring in smaller more homogeneous groups
and a cohesive Risk Segmentation
2. Setting of Rates---The overall Risk Exposure based on
analysis of claims for the set of perils covered by the policy on
the probability x severity matrix will help the Insurer to set
the pure premium rate which will be loaded for the Fixed Costs
and profit element to arrive at the Final Rate to be charged
for each of the Subgroups in the portfolio
3. Monitoring of Rates --In addition to Rate Setting, there is
also the issue of Rate Monitoring on real-time basis for each of
the Sub-groups/Sub-classes in the light of current claims
experience and changing Risk profile
 RESEARCH AND DEVELOPMENT IN UNDERWRITING/
RATING/ PRODUCT INNOVATION
UNDERWRITING IN A COMPETITIVE ENVIRONMENT
U/W activity faces intense pressure in a deregulated market due to
fierce competition, overcapacity, customer pressure and unhealthy
practices adopted by competitors
Every Insurer faces the dilemmma of Volume V/S Profitability or
Topline V/S Bottomline growth. The job of the U/W is to carry out
a proper assessment of the Risk factors and arrive at a competitive
price for the product in question
He is also required to convince the Client that the price quoted by
him for the cost of Risk Transfer=Premium is the best value for
money
Errors in Underwriting can occur due to---
1. Faulty Information or inadequate data
2. Careless processing or improper understanding of the Information/Data
3. Errors in the adoption of Tools for arriving at the measurement of Risk
Exposures
4. Improper structuring of the Policy. This will include coverage, exclusions,
conditions, special clauses and specific warranties based on the
information given in the proposal form
5. Sudden and unforeseen spurt in claims due to moral/morale hazard
RESEARCH AND DEVELOPMENT IN UNDERWRITING/
RATING/ PRODUCT INNOVATION
PRODUCT INNOVATION
The Innovation Process involves-
1. Identification of Customer needs--- through direct/
intermediary/employee feedback ,media reports, market
research
2. Examining the reasons for change--- based on the
key market indicators
3. Changes/Modifications in the existing Products or
introduction of New Products to meet Customer
expectations--- This may involve corrections in the
policy wordings, elimination of ambiguity in coverages
and exclusions, imposition of new clauses, withdrawal of
benefits, correction in premium rates, etc.
4. Cost-Benefit analysis of the New Products and
Product changes
 RESEARCH AND DEVELOPMENT IN
UNDERWRITING/ RATING/ PRODUCT INNOVATION

. PRODUCT INNOVATION . Contd

5. Improvement in Procedures and Service
parameters---- 24 Hrs. helpline for customer care/claims
assistance, premium payment through EFT/Credit Cards,online
issuance of policies, cashless claim settlement etc.
6. Preparing the Product Proposal highlighting the
customer needs, the ways the product changes or new
product addresses the Customer needs,marketing
environment and potentiality, cost-benefit analysis,expected
premiums and monitoring process, recommended action
7. Regulatory compliances---- once the New Product
Proposal/Product amendment proposal is approved by the Top
Management, the New/Revised Product is filed with IRDA as
per their guidelines and launched in the Market after
necessary clearances