Underwriting, Rating and Policy Documentation
Domain 5 tests how an insurer selects and prices risk and how the contract is documented. Questions often ask which factor a underwriter would use or what a document proves.
Core rules
- Underwriting is risk selection and classification: standard, substandard with loading, or declined.
- The proposal form records the customer’s declarations and usually forms the basis of the contract. Medical examination and financial underwriting may be required.
- Rating factors include age, sex, occupation, health history, sum insured, location, construction, claims history and deductibles.
- Loading increases premium for higher risk; discount may apply for better risk features. Coinsurance shares a large risk among insurers; reinsurance transfers part of the risk to another insurer.
- The policy schedule personalises the contract; the policy wording contains the standard terms; an endorsement changes the policy and must be issued in writing.
Worked example
A base annual term premium is ₹18,000. Age loading is 25% and smoker loading is 15%, applied multiplicatively. Premium = 18,000 × 1.25 × 1.15 = 18,000 × 1.4375 = ₹25,875. Reasoning: each rating factor adjusts the risk premium; applying both loadings to the base separately and adding them would understate the correct compounded effect.
Traps that cost marks
- Treating the proposal as a mere formality when it is the basis of contract.
- Adding percentage loadings instead of applying them correctly.
- Assuming an oral assurance can change policy terms.
- Confusing reinsurance with coinsurance.