III IC-45 cheat sheet

Underwriting is the process of selecting, classifying, and pricing risks so that each insured's premium reflects its expected loss cost plus expenses, profit, and contingency loading.

The underwriting equation: adequate premium = expected loss cost + expense loading + profit/contingency margin; a rate is adequate if it covers all three over the long run.

Eligibility (accept/decline) and rating (how much to charge) are separate decisions; an underwriter may accept a risk but apply exclusions, higher deductible, or substandard rating rather than decline it.

Field underwriting begins at the point of sale: the agent or producer gathers accurate information, completes the application truthfully, and forwards material facts to the insurer's home office underwriter.

Material facts are those that would influence an insurer's decision to accept a risk or set its terms; concealment or misrepresentation of a material fact can void coverage.

Utmost good faith requires the applicant to disclose material facts voluntarily, even those not asked about, because the insurer cannot inspect the risk as the applicant can.

Insurable interest must exist at inception (and, for life insurance, at the time of loss); without it the contract is generally unenforceable as a wager.

Sources of underwriting information include the application, inspection reports, loss runs, financial statements, credit-based insurance scores where permitted, and physical inspection of the risk.

The law of large numbers supports underwriting credibility: as the number of similar exposure units increases, actual loss experience converges toward the expected loss ratio.

Adverse selection occurs when higher-than-average risks seek insurance more actively than average risks; underwriting controls such as medical exams, loss-history review, and exclusions counter it.

Reinsurance supports underwriting capacity: a quota share cedes a fixed percentage of every risk, while a surplus share cedes the portion of each risk above a retained line.

Retention and ceding decisions affect the underwriter's net capacity; facultative reinsurance is arranged risk-by-risk, treaty reinsurance applies automatically to all risks within its terms.

Coinsurance clauses in property policies require the insured to carry a limit of at least a stated percentage of value; otherwise recovery is reduced by the ratio of carried limit to required limit.

The principle of indemnity limits recovery to the actual amount of loss, preventing profit from insurance; valued policies and replacement-cost endorsements are exceptions to strict indemnity.

Subrogation transfers the insured's right of recovery against a negligent third party to the insurer after payment, supporting indemnity and loss prevention.

Proximate cause is the dominant, effective cause of a loss; the underwriter must confirm the peril is insured and not excluded, and that no excluded peril is the proximate cause.

Risk classification groups insureds with similar expected loss characteristics so that each class pays a rate reflecting its own expected losses, avoiding cross-subsidy.

Rating variables must be actuarially justified, statistically credible, and compliant with anti-discrimination law; prohibited variables include race, religion, and (in many jurisdictions) certain genetic or disability information.

Experience rating modifies a manual premium by the insured's own past loss experience; it rewards good loss control and is credible only when the insured's exposure is large enough.

Schedule rating applies discretionary debits and credits for individual risk characteristics such as housekeeping, protection, and management quality, within filed maximum ranges.

Retrospective rating sets the final premium after the policy period based on actual losses, subject to a maximum and minimum; it transfers some loss cost risk back to the insured.

A loss ratio equals incurred losses divided by earned premium; a combined ratio equals loss ratio plus expense ratio, and a value above 100% indicates an underwriting loss.

The underwriting file should document the rationale for acceptance, rating modifications, and declination so decisions are defensible on audit and consistent across similar risks.

Authority limits define what an individual underwriter may bind; risks exceeding the limit must be referred to a senior underwriter or committee.

Hazard is a condition that increases the chance or severity of loss; physical hazards include poor wiring, moral hazard is dishonest intent, and morale hazard is carelessness or indifference.

Moral hazard indicators include a history of frequent claims, suspicious timing of coverage increases, and financial distress; such risks may be declined or written with higher deductibles.

Risk improvement recommendations (sprinklers, alarms, housekeeping, security) reduce expected loss frequency or severity and can justify premium credits.

Deductibles reduce small-loss frequency and moral hazard; the larger the deductible, the lower the premium, because the insurer retains less expected loss cost.

Policy limits and sublimits cap the insurer's exposure; an underwriter must confirm the requested limit is within capacity and consistent with the value at risk.

Exclusions narrow coverage for uninsurable or catastrophic perils (war, nuclear, intentional acts) or for perils better handled by another policy; exclusions must be clear and conspicuous.

Warranties and conditions precedent (such as maintaining protective safeguards) must be satisfied for coverage to apply; breaches can suspend or void coverage.

Renewal underwriting reviews updated loss runs, exposure changes, and claims trends; deterioration in loss ratio can trigger repricing, deductible changes, or non-renewal.

Utmost good faith and fair dealing impose duties on both parties: the applicant discloses material facts, and the insurer discloses policy terms clearly and handles claims fairly.

Regulatory constraints on underwriting include filed rates and forms, prohibited rating factors, restrictions on cancellation and non-renewal, and privacy rules governing use of personal data.

Underwriting against a protected characteristic or using an unfairly discriminatory rating factor can constitute an unfair trade practice and expose the insurer to regulatory action.

The application is the foundation of the contract; inaccurate answers can support rescission for material misrepresentation, but only if the misstatement induced the insurer to issue the policy.

A binder provides temporary evidence of coverage before the policy is issued; the underwriter must confirm the risk falls within binding authority and that all conditions are met.

Capacity is the maximum exposure an insurer can retain; it is governed by surplus, reinsurance treaties, and regulatory solvency requirements.

Catastrophe exposure management uses accumulation modeling and geographic spread controls; a single event must not exhaust capacity through concentration of risks.

Documentation and audit trails support market conduct examinations and demonstrate that underwriting decisions followed filed rules and internal guidelines.