IRU 07421:

UNDERWRITING
.
MANAGEMENT
INSTRUCTOR: KELVIN L. MKUNDI. MSC.(DIST) IN
INSURANCE AND ACTUARIAL SCIENCE & BSC. (HONS)
INSURANCE AND RISK MANAGEMENT,CII (UK)

ASSISTANT LECTURER (IFM), CONSULTANT,

RESEARCHER AND TRAINER IN INSURANCE AND
RISK MANAGEMENT.

TEL: 0713271953
KELVINMKUNDI@YAHOO.COM,
P.O.BOX 2372 MWANZA (IFM)
INTRODUCTION
What is underwriting?
 Process of analyzing the risks brought by the
proposer.
 Decide whether to accept or not and how much
 Decide the terms ,conditions and scope of cover
to be offered
 Calculate the suitable premium
Trace the historical development and
advancement in underwriting practice.
OBJECTIVE OF UNDERWRITING
Producing a large volume of premium
income
Earning a reasonable amount of profit
on insurance operations
Maintaining a profitable book of
business
More spread – across the profile and
geography.
UNDERWRITING PRINCIPLES
Selecting insured's who fit the
company’s underwriting standards
There should be proper balance
within each rate classification
Charging equitable rates
Each portfolio to be self sustaining
without assuming any cross-subsidy
NEED FOR UNDERWRITING
To check adverse selection
Competition
To ensure fair price and subsidizing
UNDERWRITING AUTHORITY
Power vested to which party
Solely the function of the insurer
Can take to forms
o Centralized
o Decentralized
Need to exactly what should be
decentralized to limit risk exposure.
 UNDERWRITING ACTIVITIES
Types of underwriters
 Staff
 Line
Not all companies are based in this
distinction.
Perform different task allocated within the
companies.
 LINE ACTIVITIES
Choosing insured's with care.
Categorizing the risks involved
Premium rate establishment
Assistance to companies agents.
 STAFF UNDERWRITERS
 On the basis of research done and
knowledge about the market
 They update the rates and rating plans of the
company
 Preparing and updating the underwriting
guides and bulletins
 Underwriting audits are conducted to
monitor the line underwriting activities
STAFF UNDERWITERS CONT..
 Staff underwriters also offer advice to
other underwriters
 Staff underwriters also conduct training
programs and other educational activities
 UNDERWRITING POLICY
Developed by staff underwriters
Translate the owners of the companies
and managements goals into rules and
procedures.
Determine the book of insurers business
Impact of desired position in the
insurance marketplace.
Different techniques might be employed
by the substandard risk specialist. Such
high premium rates, loss control and
limited coverage.
DIMENSIONS OF THE BOOK OF BUSINESS

Class of business written

The lines of business
The territories involved
The rating plans
Reinsurance
Retention patterns
Levels of centralization/decentralisation.
POLICY DEVELOPMENT FACTORS

Financial capacity (capital and reserve)

Regulation
Personnel and physical resources
Reinsurance
portfolio of companies business
UNDERWRITING GUIDES
Underwriting guides outline the ways to
realize the objectives stated in the policy.
(basically ‘do’s and ‘don'ts)
They contain the standards for
acceptability
Summaries the underwriting authority
requirements.
UNDERWRITING GUIDE
PURPOSE
Framework for formulating underwriting
decisions
Selection process is uniform and
consistent
Underwriting guides help to unite the
insights of experienced underwriters
The guides enable routine decisions to be
handled at lower levels of authority
UNDERWRITING PRACTICE
Coverage of this topic includes
the followings:
Underwriting process
Asymmetric information’s
Underwriting and distribution
channel
Underwriting cycle
 UNDERWRITING PROCESS
The process involve the
followings:
Assimilation of information
Analysis and evaluation
Making decision
Executing the decision
Maintain the profitable book of
business
ASSIMILATION OF INFORMATION
The information which are material facts
What is material facts-influence to the
underwriter decisions.
Describe examples of material facts
relevant to fire, theft and good in transits
insurance.
Duty of disclosure-the utmost good faith
What exactly need to be disclosed?
CONT.…….
 What exactly should not be disclosed?
 Breach of utmost good faith
 What options are available to insurer for
non disclosure?
o how does options differ between
consumer and commercial clients?
 When does the insured need to comply
with the principle of utmost good faith?
SOURCE OF INFORMATION
Proposal form
Brokers
Risk surveys
Meeting with the client
Call centers
Internet
Government
Inquires from insurer
Supplementary questionnaire
Claim files
SOURCE OF INFORMATION
 Review the structure and contents of
various insurance proposal form and make
discussion on that.
 Describe the use of the proposal form.
 Do all policies require the use of the
proposal form?
 Debate on the significant of the proposal
form in insurance business practice.
SOURCE OF INFORMATION
 Discuss properly the use and contents of the
surveyors report in dealing with property
insurance risk analysis.
 What kinds of information are extracted from the
claim files and to what extent do they relates to
underwriting procedures.
 What is a quotation?
 What is relevance use of quotation?
 Which information are consisted in the quotation?
 Point out the important facts about quotation
procedures.
DISCUSSION QUESTIONS
 What are the underwriting consideration
for the followings property insurance
products.
o Fire insurance
o Theft
o Money insurance
o Health and life insurance
o Good in transits
o Household insurance
 DISCUSSION QUESTIONS
 What are the underwriting consideration for the
followings property insurance products.
 Business interruption
 Credit insurance
 Bond insurance
 Legal expenses
 Fidelity guarantee insurance
ANALYSIS AND EVALUATION
Needs critical analysis of the information
with a clear comparison of the standard.
It involve classifying and categorization
of clients risks.
Task appropriate done by experienced
underwriter.
The things which must be considered and
evaluated to make reasonable decision.
Good evaluation bring good results.
MAKING DECISIONS
Decision varies basing on the risk
categorization.
Be accountable when something goes wrong.
Decision should be consistently and fair.
Having a clear base for those decisions.
Should not contradict the underwriting policy
of the company.
Looking on both cases client and business
case.
EXECUTING DECISIONS
Simply means put the decision into actions.
Involve three important issues including
keeping records.
Once there is provision of insurance coverage
different documents must be provided to the
clients.
Should comply with any legal provision
within the given regulatory environments.
MONITORING THE ACTIVITIES
What should be monitored after the provision of
cover?
 Review the entire book of business
 Use premium and loss statistics to determine the
possible exposure.
Premium audit and loss control reports also help to
review individual policies.
 Finding out whether the underwriting policy is
being complied with.
MAINTAINING A PROFITABLE BOOK

 Evaluating the profit realized by the company.

 Considering the period of time, territorial limit,
producer and class of business under review.
 Which factors should be considered:
 Adequate premium volumes,
 The coverage of fixed costs,
 The loss ratio and
 Overhead expenses.
The problem relating to the portfolio of business
should identified and corrected.
ASYMMETRIC INFORMATION’S
Need to understand the concept which underlying
the asymmetric information.
Is it possible to have symmetric information?-how
How does relate to insurance business?
Is there any difference when you compare handling
of this problem between insurance and other
business?
How do insurers deal with the problem?
What are the major consequence brought by this
problem?
ADVERSE SELECTION
Selection of more risky insured.
Understand the theory of insurance demand and how
does it relate to adverse selection.
Not only covering bad risky also charging less than
the fair price.
Which factors might increase the possibility of
adverse selection?
Discuss the impact of adverse selection in insurance
business.
Made comparison between private and social insurer
HANDLING MADE BY THE INSURERS

Identification and quantification of risk factors.

Well-functioning system in place to verify
information provided by insurance applicants.
Place limits, or ceilings, on coverage, referred to in
the industry as aggregate limits of liability.
MORAL HAZARD
What does it entails in general meaning?-taking
more unnecessary risky because of certain
assurance.
Risk one party takes knowing it is protected by
another party.
Describe the impact of moral hazard in insurance
business.
How can the problem be solved?
Provide different examples of moral hazard relating
to general insurance business.
UNDERWRITING AND DISTRIBUTION
CHANNEL
 There are different channel for the distribution of
products.
The choice of the channel depends on the
complexity of the products.
The issue relating to the delegated authority.
The direct and intermediary business has different
impact on price models.
Payments to intermediaries might be influenced by
the level of administration and delegated authority.

UNDERWRITING CYCLE
 Understand the concept of underwriting cycle in
insurance.
 Describe the operation of the cycle- considering the
soft market and hard market.
 Discuss clearly features of the soft and hard market.
 What factors influence the cycle movements?- point
to note-no uniform pattern.
 How can the cycle be managed by the insurers?
 Is the cycle claim or price driven?
 Is Tanzania market experience the cycle?
 SOFT MARKET
Lower insurance premiums
Broader coverage
Relaxed underwriting criteria, which means
underwriting is easier
Increased capacity, which means insurance carriers
write more policies and higher limits
Increased competition among insurance carriers.
Expenses ratio increases
Low profit realized
 HARD MARKET
Higher insurance premiums
More stringent underwriting criteria, which
means underwriting is more difficult
Reduced capacity, which means insurance
carriers write fewer insurance policies
Less competition among insurance carriers.
Decrease in expenses ratio
High profit to insurers
LEGISLATION INFLUENCE
Varies from one country to another basing on the
available legal provisions.
In most of the market emphasize is made on the :
 Data protection
 Equality
 Insurance act and regulations
 Insurance consumer rights
 Compulsory insurance
Examine the Tanzania legal environment which
influence the underwriting practice.
 CODES OF CONDUCTS
TUTORIAL QUESTION
Discuss various legal provisions provided by
Tanzania sources of insurance law which govern the
underwriting practice in the market.
 CAPITAL AND SOLVENCY
REQUIREMENTS
 Describe the concept of capital and solvency in relation to
insurance business.
 Is there different kind of capital and solvency requirements in
Tanzania?
 Discuss the direct relationships between the book of business
and the capital of the insurers.
 In management of the capital there are basic issues which
must be known all the time such as:
o How much capital do we have at any time.
o Capital which is required to procure and support the business
o Regulatory requirements capital
o Too much or little capital what should we do?
CONTRACT CERTAINTY
Understand the whole concept of contract certainty.
What is the significance to each party of the
contracts?
Full understanding of the risk and provision of
policy as soon as possible.
Sometimes guided by the contract of certainty code
of practice guidelines.
How to demonstrate the performance?
What are the checklist for the contract certainty?
INSURANCE PRICING
 Elements of premium
 Pricing techniques
 Use of minimum ordinance rates
 Use of claim data during pricing
 Roles of an actuary
 Competitor analysis
INSURANCE PREMIUM
 The rate must be high enough to pay for any
expenses or losses incurred
 The rate must not be too high
 The rates must not be inequitable i.e. if two
exposures are similar as far as losses are concerned,
they should not be charged significantly different
rates
 The system of rating must be simple and
understandable so that premiums can be quoted
promptly
INSURANCE PREMIUM
 The rates must not keep fluctuating i.e. they must be
stable. Otherwise consumers may look to the
government to regulate the rates
 The rating system must provide the insured with a
strong incentive to adopt loss control
 The rates must change with the changing economic
conditions- rates must increase when loss exposure
increases.
MAIN ELEMENTS OF PREMIUM

oRisk premium
oExpenses
oMargin profit
oReturn on capital employed
 RISK PREMIUM
 What is risk premium relevantly to general and life
insurance?
 Discuss the factors which might influence the risk
premium components such as:
o Subject matter
o Scope of cover
o Exposure and rating factors
o Historical claim experience, large and catastrophic
claims
o Future such as inflation, economy, climates, crimes and
 EXPENSES
Insurer do incur some cost which must be born by
the clients such as:
o Variable cost
o fixed cost
o Claim adjustment cost
o Calculation expenses
o Reinsurance cost
o Levies and tax
o Intermediaries remuneration
PROFIT MARGIN AND ROCE
 A margin of profit for each portion of P. amounts.
 Which kinds of underwriting policy might be
archived by the insurer in relation to profit?
 Remember the relation between capital and risk
acceptance?
 What do investor expect after giving capital?
 ROCE-can be viewed as semi fixed expenses
 How can the company meets investors expectation?
 ROCE- need to carefully handled.
PRICING TECHNIQUES
Judgment rating method.
Class rating method
Pure premium method(burning cost method)
Loss ratio method.
Merit method technique
Schedule rating
Experience rating
Retrospective rating
Discuss each method and it’s applicability.
 MINIMUM ORDINANCE RATES
Discuss the context of minimum ordinance rates.
Why there is a need to regulate premium rates?
Why then do we have minimum without maximum
rates?
Discuss various types of rates laws such as prior
approval laws and competitive laws.
Does extent of regulations varies depending in class
of business?
What is a situation in Tanzania, what are the
possible reasons?
What are the impacts brought to the market?
MINIMUM ORDINANCE RATES
Some of the underlying reasons for having no
regulatory rates for some products.
 The large number of complex products and covers
 Policies being highly heterogeneous even within the
same product
 Poor, scarce or incomplete data
 High level of underwriting judgment applied to
pricing of individual risks
 Be heavily impacted by large losses
THE USE OF CLAIM DATA
 Calculation of premium rely on the credibility of the
data used.
 What kind of data exactly are required?
 Data segmentation and analysis must be done.
 Taking account the impacts of other factors to data.
 Should make the use of claim triangulation.
 Analyze the impacts and dealing with the issue of long-
tail claims, catastrophic losses, IBNR and IBNER.
 All in all large quantities of claims data are necessary to
make usefully and reliable projections.
CLAIMS AND UNDERWRITING LIAISON

Policy wording-payment regards and adequacy

Recording of data- interpret in the same manner
Individual claims-experience
Backlogs-can affect claims data such as loss ratio
Fraud- effectiveness of underwriting procedures
Emerging trends-unusual claim no. and patterns
 Setting premium rates-assistance in the interpretation
of the claims data.
ROLES OF AN ACTUARY
Use of the mathematical, analytical and statistical
models to predict future claims and timing. This
assist on the:
 Rating
 Individual risk analysis
 Claim reserving and IBNR
 Return on the capital employed
 Solvency of the insurer
They play very significant role in ensuring good
financial planning and reserving philosophy.
ROLES OF AN ACTUARY
Coordinating the calculation of technical provisions.
Ensuring the appropriateness of the models and
methodologies used.
Assessing the sufficiency of the data used.
Expressing an opinion on the overall underwriting
policy.
Expressing an opinion on the adequacy of the
reinsurance arrangements.
FACTORS CONSIDERED BY ACTUARY

Historicalexperience
The impact of legislation
Policyholder behavior
How business operates
Economic and financial position
The risk environments
COMPETITORS ANALYSIS
 Very important to consider market influence.
 But what exactly do you analyze? Which has influence
on your retention and customers acquisitions.
 What happen during the soft market when the capacity
is high and competition is aggressively- How can the
insurer reacts?
 Point to note-The purchase is not totally price-driven.
 Think of any other possible things which might
influence the purchase.
 What is the influence of underwriting cycle?
 UNDERWRITING PORTFOLIO
EXPOSURE MANAGEMENT

Risk modelling
Law of large number
Underwriting risks
Portfolio loss control measures
RISK MODELLING
 Modeling and quantification of risk.
 Very important to model the risk in financial industry
relevantly to various risk category and nature of the
financial institutions.
 It involve mathematical presentation and probability
distribution application.
 It determine the future frequency and severity of an
event.
 Distributions of continuous random variables that
assume positive values only and have “fat tails” (or
“heavy tails”), that is distributions which allow for
MODELLING CONT.………
Model by using predictive analysis
modelling.
Understand the importance of modelling in
insurance business.
Describe the application of modelling in
general and life insurance.-exactly what is
it modelled?
Does it differ any how in other industries?
EXPOSURE AND CLAIMS
Dictate the standard measure of insurer exposure
from various insurance policy.
What are the effects of the of various risk and rating
factors to the base premium.
Consider various rating factors on different property
insurance policies.
The question is how do we establish exposure
basing on the claim data available?
How to do we control the particular exposure?
CLAIM DATA USE
The data used are historical selected from given
period.
Too many data hence have to simply its use.
Some important dimension of data need to be
cached during the usage of data.
Statistically it is very important to understand and
use these dimensions available so as to give the
remarkable prediction.
Understand various measure of the central tendency
used.
DATA USE CONT.…….
Measure of how data are distributed from the mean
and other important statistically measures to avoid
misleading assumptions.
Using the frequency distribution technique to
calculate the mean.
How can you compare subset of data?
How can the data be statistically distributed?-what
implication to insurer with regards to setting of
premium and claim forecast?
How to determine the risk exposure to the insurance
company ?
EXPECTED VALUE OF CLAIM
It provide the exposure of the insurer to the risk
accepted.
It is combination of frequency, severity and
probability.
How to establish frequency?
How to establish severity of the claim?
Calculate the probability of occurrence using
various probabilities techniques.
Calculate the expected value of frequency and
severity using the probabilities.
EXPECTED VALUE CONT.……
How do you calculate expected value for less
frequently and complex events?
What is an implication of expected value of claims
How does it reflects the pricing of insurance
products?
Understand the law of large number and it’s
statistical significance relating to the insurance
business.
LAW OF LARGE NUMBER
 It reduce the estimation error: difference between
actual occurrence and expected occurrence.
 Increase in the number of experimented events base
on the historical data.
 The law of large numbers states that “an observed
sample average from a large sample will be close to
the true population average and that it will get closer
the larger the sample”.
 The law of averages is the commonly held belief that a
particular outcome or event will, over certain periods
of time, occur at a frequency that is similar to its
LAW OF LARGE NUMBER
Itis established from the common pool.
Charging equitable premium is equally important.
Why is it important to base on homogeneous risk
and not heterogeneous risks?
Regardless of how good the data are still there is
limitation to it use- point out those limitation and
how can it be handled?
RISK AND EXPOSURE CONTROL
Understand the maximum exposure of the insurance
company relevant to the single risks and single
events.
Describe the concept of single risk and single
events.
How does underwriter establish maximum capacity
of their single risk exposure.
 Full value of the property or. In singular location
either single loss or cumulative loss.
 Estimated maximum loss-
Expressed within the underwriting insurance policy.
UNDERWRITING RISK
Understand the individual risks accumulated at the
single location to determine insurer exposure.-
accumulation logging. For property insurance
 Think of the possible examples of accumulation
logging.-on the single location.
 How do you do risk logging?-identify the possible
individual risk locations.
 Set the appropriate maximum capacity either full
sum insured or EML.
 Impact of the Failure to determine the cumulative
loss.
RISK AND CONTROL EXPOSURE
How does underwriter establish maximum capacity
of their single event (catastrophic event).
 The use of risk horizon and appropriate
computerized system. Such as CRESTA
 Determine the aggregation and maximum exposure
on the certain area
What are the available options to control the
exposure when the single or the aggregate exposure
is greater than the maximum insurers capacity?
What is the case for liability insurance in the
similar issues?
 AGGREGATION RISK
What are the aggregation risks ?-accumulation of
single risks to insurer which results to the payment
of several losses arising from the single events.
It is difficult to determine how the claims can be
caused by the single cause.
Think of various series of claims caused by the
same cause/event.
Point out the impact on various insurers categories.
Because of low frequency and high severity natures
it require special modelling. So called catastrophic
modelling- by using stochastic models.
 MODELLING OF AGGREGATED RISK
Historical simulation data to provide frequency and
severity.
Simulation is made basing on singular form.
The insurer need to have a reference points on
future frequency and severity to determine their
exposure limit.
Period of analysis is usually for the long time scale.
High level of uncertainty to the results because of
large number of assumptions used.
Understand why we need to model the risks and role
played by reinsurance in exposure management.
DISCUSSION QUESTION 7

Discuss various features of the

Tanzania insurance minimum
ordinance rate of 2018 and the
impacts of the ordinance to the
Tanzania insurance market
business practice.
DISCUSSION QUESTION 8
You are an underwriter for the great plc, an insurer, and have been asked
to cover a large property risk. The risk, a warehouse where there are no
aggregation issues has recently had a new sprinkler system installed.
The property falls within your target market and seems to fit the great
plc’s underwriting policy of writing quality, well managed properties.
However, the market is hardening and capacity is very limited.
(a) Explain the position of the great plc under the insurance policy they
have issued.
(b) Explain how the underwriting considerations might differ if the great
plc were operating in a ‘soft’ market.
(c) Explain how the cost and availability of reinsurance will affect your
decision as to whether to cover the new risk.
DISCUSSION QUESTION 5
Insurance pricing is vital role in insurance company which
makes sure that the insurer will full fill the promise given
within the policy wording. Hence is it very important for both
underwriting and claim department to have consensus with
regard to the information used and obligation to be paid with
the policy.
a) Point out all the data which might be usefully in
underwriting department and explain the one used in
pricing insurance policy.
b) Describe the important three things which must be
considered when using the claims data in pricing.
c) Illustrate the pricing techniques which might be employed
to establish the effective premium rate.
DISCUSSION QUESTION 6
Risk modelling can be simply explained as the means of
quantifying the risks within an organization considering all
the areas where the risks might attach. One of the significant
task which must be shared between the underwriter and an
actuary of the company is to model the underwriting risk.
a) Explain the risk modelling as it applies in underwriting
department and entire insurers operations.
b) Describe the use of measure of the central tendency in
making the conclusive decisions and future prediction of
the claims frequency and severity.
c) Is the measure of the central tendency reliable to make
conclusive decision ? Justify your answer and explain
other statistical measure to improve the situation.