Insurance Underwriting and Risk Assessment
Insurance underwriting and risk assessment tests how an insurer decides whether to accept a risk, on what terms and at what price, and how that decision is controlled across a portfolio. Questions typically ask you to identify a rating factor, classify a hazard, or compute a ratio and interpret it.
Assessing the risk
- Physical hazard (construction, occupancy, protection), moral hazard (dishonesty or intent to claim) and morale hazard (indifference to loss once insured).
- Adverse selection: those most likely to claim buy cover most readily, which is why exclusions, excesses and accurate disclosure exist.
- Information sources: proposal forms, surveys, claims experience, medical evidence, credit and sanctions screening, and data from telematics or drones.
Rating and terms
- Technical premium = expected losses + expenses + profit margin + allowance for risk and uncertainty.
- Exposure rating uses the size and nature of the risk; experience rating uses the insured's own loss history; burning cost uses past losses trended forward.
- Deductibles remove small losses and give the insured an incentive to control risk, but do not substitute for proper pricing.
- Warranties, conditions and sub-limits control unacceptable features; capacity, aggregation and probable maximum loss drive reinsurance buying.
Governance and portfolio management
- Underwriting authority limits, referral rules, delegated authority binders and MGAs must be documented and monitored.
- Combined ratio = loss ratio + expense ratio; below 100% is an underwriting profit before investment return. Loss ratio uses earned premium, not written.
- PROD and Consumer Duty require a defined target market and fair value assessment before launch and during review.
Worked example
An insurer writes £10m gross premium, earning £9.5m in the year. Incurred losses are £6.2m and expenses £2.9m. Loss ratio = 6.2/9.5 = 65.3%; expense ratio = 2.9/9.5 = 30.5%; combined ratio = 95.8%, so 4.2% underwriting profit. Using the £10m written premium would understate both ratios and mislead.
Traps that cost marks
- Confusing moral hazard (deliberate) with morale hazard (carelessness).
- Assuming a higher excess always cuts the premium proportionally - it does not remove the severity risk.
- Mixing written and earned premium in ratio calculations.
- Ignoring accumulation of exposure across policies or territories.
- Forgetting that pricing must still evidence fair value under Consumer Duty.