Underwriting and Risk Assessment
This domain tests how an underwriter gathers, evaluates and prices risk, and how the resulting terms and reinsurance protect the portfolio. Expect questions on rating methods, technical versus market pricing, exposure measurement, and ratio analysis.
The underwriting process
Proposal and supplementary information, risk survey, claims history, then acceptance, declinature or terms. Material facts must be identified and rated; the underwriter sets the premium, excess or deductible, sub-limits, exclusions, warranties and conditions.
Rating methods
- Manual (class) rating - table rates applied to an exposure measure such as payroll, turnover, floor area or vehicle group.
- Experience rating - adjusts for the insured's own loss record, often via a loss ratio or no-claims scale.
- Judgement (individual) rating - used for large or unusual risks where no table exists.
Technical versus market pricing
Technical premium reflects expected losses, expenses, profit margin, capital cost and reinsurance cost. Market premium reflects capacity and the underwriting cycle. A soft market can push premium below technical level; that gap is the underwriting cycle risk.
Reinsurance and accumulation
Facultative reinsurance covers a single risk; treaty reinsurance covers a portfolio, on proportional (quota share, surplus) or non-proportional (excess of loss, stop loss) bases. Probable maximum loss and accumulation control determine how much capacity can be committed to a single event or geographic zone.
Worked example
Gross written premium 600,000 from 500 policies. Incurred claims including IBNR 300,000 → loss ratio 50%. Expenses 150,000 plus commission 60,000 → expense ratio 35%. Combined ratio 85%, so underwriting profit is 15% of premium, 90,000. Add investment income on reserves to reach the operating result.
Traps that cost marks
Using written premium where earned premium is required; forgetting IBNR and so understating the loss ratio; confusing a franchise (insurer pays the whole loss once the threshold is exceeded) with an excess (deducted from every loss); mixing facultative with treaty; and assuming a rising premium means a profitable portfolio.