UNDERWRITING FROM THE INSURANCE VIEW POINT

Underwriting is a constant process of Risk Assessment and Decision Taking

STEP 1: RISK ASSESSMENT

Underwriter can obtain the risk assessment information from the completed Proposal Form, Risk Surveyor Report; Photographs of the Risk, Company's Annual Financial Report, Manufacturing Flow Chart, Check Lists, Fault Trees Study and even from site visitation to help him/her made an indepth assessment and evaluation of the risk proposed for insurance.

Underwriter should  identify the physical hazards and moral hazards that are present in the risk and where necessary prompt a decision on how best to control, treat, transfer or eliminate the hazards from originating and causing loss, damage or destruction to the properties insured or injuries or loss of lives to self and others etc

Hazard is defined as "a condition that increases the likelihood of happening".

Example of  "Physical Hazard"

• Use of any flammables in manufacturing process (Fire) increases the likelihood of fire explosion
• Too much cash in Transit (Money) increases the likelihood of armed robbery
• Overcrowded children playground (Public Liability) increases the likelihood of injury/death
• Deplorable gondola for window cleaners (Workmen) increases the likelihood of accidental injury or death
• Bungee jump or parachuting as a hobby (PA) increases the likelihood of accidental injury or death

  

Example of "Moral Hazard"

• Tendency to underinsure his property
• Financial constraint to run the business
• Anti-Selection against Insurer
• Reluctance to carry out any risk improvement measures to safeguard his properties
• File claims at the slightest opportunity
• Falsifying or Inflating claims beyond his losses for a profit
• Bad paymaster of premium

     
Increases the likelihood of fraudulent claims


STEP 2: DETERMINE THE LEVEL OF RISK

Risk with low probability of claim and low consequent of damage can be classified as "Satisfactory" or "Good".

On the contrary, risk with high probability of claim and high consequent of damage can be classified as "Poor" or "Below Average".

However most of the risks in the market are in the "average or below average" range.  Challenge is for the Underwriter to rid of the hazards by way of risk improvement in order to improve the level of risk and to enhance acceptance.


STEP 3: DECISION TAKING

Decision to accept the risk on normal terms or with additional terms and conditions or to reject the risk is made after careful identification and assessment of the physical characteristics and moral defects in the risk

Underwriter (UW) should adopt a pro-active approach to underwriting. Meaning, the UW should look for all the reasons to accept the risk proposed for insurance unless there are high elements of physical hazards and moral hazards that decline is inevitable

Example 1 : A newly opened Sundry shop in a new township where 95% of shop houses there are still vacant.

The UW should not reject the proposal for a Burglary Insurance just because of the quiet neighborhood.

If the Sundry shop is fully equipped with burglar alarm, CCTV, reinforced iron windows/ doors, workers residing in the shop after closing for business, night lightings etc then why reject?

Example 2: A production machine about 20 years of age.

The UW should not reject the proposal for Machine & Equipment  Insurance just because of the old age of the machine.

If the machine is being regularly maintained in good working condition and operated in a secured area of the premise then why reject?

Example 3 : RM100,000 of money in transit.

The UW should not reject the proposal for a Money Insurance just because of the large amount of money in transit.

The person can impose certain underwriting terms and conditions as a prerequisite for acceptance.
If the Insured is prepared to pay a higher premium and to comply with the security warranty (money to be transported /accompanied by armed professional security guards) then why reject?

Example 4: PA for a 65 years old man.

The UW should not reject the proposal for a PA Insurance just because he has reached the last entry age for insurance at 65.  If the man is still physically fit and healthy then why reject?

The UW can spell out the terms that the insurance coverage is limited to Death/PD only and/or renewable up to age 75 only

UW is more inclined to accept risk classified as "Good or Satisfactory"

On the other hand, decline is inevitable for Risk graded as “Below Average” or “Poor” .

For average rated risk, additional Underwriting Terms / Conditions can be imposed in the form of:

• loading on premium
• higher excess or deductible
• risk improvement requirement
• restriction of cover
• reduced Limit of Indemnity

STEP 4: PREMIUM CHARGED

Final underwriting process involves the computation of premium to be charged for the risk in question. Premium charged must commensurate with the risk.