Underwriting and Risk Selection
Purpose of underwriting
Underwriting selects and prices risks so that premiums reflect expected losses and the insurer remains solvent. The underwriter assesses frequency and severity, applies the insurer's appetite and capacity, and decides to accept, decline, modify terms, or refer. Key inputs include the proposal form, loss history, surveys, financial data, and third-party reports.
Rating and terms
Know manual rating, experience rating, schedule rating, and retrospective rating. Understand premium loading for higher risk and discounts for protective measures. Terms used to control risk include excesses, deductibles, limits, exclusions, warranties, and conditions. Reinsurance supports capacity for large or catastrophic risks.
Selection hazards
Distinguish adverse selection (higher-risk applicants seek cover) from moral hazard (behaviour changes after cover) and morale hazard (carelessness). Anti-selection is managed through disclosure, medical or survey evidence, and policy terms. Financial underwriting assesses whether the sum insured is proportionate to need and income.
Traps and worked example
Questions often confuse declinature with cancellation and confuse an exclusion with a condition. Underwriters must document reasons and comply with fairness and discrimination rules. Worked example: a commercial applicant reports two fire losses in three years and no sprinklers. The underwriter might impose a higher excess, require sprinklers, apply a loading, or decline. Rule of thumb: price for expected loss, control for severity, and decline only where risk cannot be managed within appetite.