Underwriting, Rating and Claims Handling
Domain 4 tests underwriting judgement, rating mechanics and claims arithmetic - the part of Paper 2 where one wrong assumption, such as applying the average clause backwards, costs an entire scenario question.
Underwriting inputs and outcomes
Proposal form, claim history, survey and inspection reports, financial statements for liability limits and business interruption values, moral hazard signals, and the relationship between sum insured and actual value. Outcomes: accept at standard rates, accept with loadings, excesses, warranties or exclusions, or decline.
Rating mechanics
Premium = rate × exposure unit. The exposure unit varies by class: sum insured for fire, payroll or turnover for liability, vehicle group and driver profile for motor, destination and trip length for travel. Adjustments include no-claim discount, excess discount, experience rating, minimum premium, commission and expense loadings.
Claims sequence
- Notification and registration against the notification condition.
- Coverage check - policy in force, peril covered, exclusion, condition compliance.
- Investigation - loss adjuster or surveyor for large or suspicious losses; proof of loss and supporting documents.
- Reserve, negotiate, settle; salvage retained; subrogation pursued against negligent third parties.
The average clause
Where the sum insured is below the value at risk, the claim is reduced proportionately: payable = loss × (sum insured ÷ value at risk), then the policy excess is deducted.
Worked example
Stock is insured for HK$800,000; the value at risk on the fire date is HK$1,000,000; the fire loss is HK$400,000 and the excess is HK$5,000. The insured is 20% under-insured, so 400,000 × (800,000 ÷ 1,000,000) = HK$320,000, less HK$5,000 = HK$315,000 payable. The excess comes off after averaging, and the same proportion caps a total loss at HK$800,000 - which is why the sum insured must be reviewed at each renewal.
Traps that cost marks
Deducting the excess before averaging; forgetting average also caps total losses; confusing salvage (the insurer's right to the damaged property) with subrogation (the right to sue the wrongdoer); paying without checking a reasonable precautions or notification condition; rating liability business on sum insured instead of payroll or turnover.