Underwriting and Risk Selection
The underwriting decision
Underwriting selects and prices risk. The underwriter gathers information, assesses hazard and exposure, applies terms, and decides to accept, accept with conditions, apply a higher premium or excess, or decline. Know the sources of information: proposal forms, surveys, loss histories, financial data, and third-party reports. Understand the difference between standard, substandard and declined risks, and the role of reinsurance capacity in acceptance decisions.
Rating and terms
Candidates should understand manual rating, experience rating, exposure rating, and the use of deductibles, limits and exclusions to control risk. Know how sum insured, indemnity period and policy limits interact, and how coinsurance and average clauses affect claims. Moral hazard and adverse selection are central concepts: the underwriter must identify behavioural and information asymmetries.
Traps in questions
A common trap is treating a higher premium as the only response to a poor risk; terms, exclusions and deductibles may be more appropriate. Another is confusing decline with non-renewal. Questions may also test whether reinsurance transfers the underwriting decision; it does not, though it may change capacity and appetite.
Worked example
A property risk has a poor claims history and inadequate fire protection. The underwriter may impose a higher excess, require a risk improvement, apply a fire exclusion, or decline. The correct answer depends on whether the risk is curable; always consider risk improvement before declining.
Exam technique
State the underwriting factors, the proposed terms, and the rationale. Use the language of exposure, hazard and appetite.
Practical note
Underwriting discipline depends on accurate data and consistent application of authority limits.