III IC-45 key terms

The process of evaluating an insurance application to decide whether to accept the risk, on what terms, and at what price. It balances the insurer's need for profit against the goal of writing enough business.

Choosing which applicants to insure and which to decline or modify. The underwriter separates acceptable risks from those that are too hazardous, unprofitable, or outside the company's appetite.

The tendency for people with higher-than-average risk to seek or keep insurance more eagerly than low-risk people. If not controlled through underwriting and pricing, it raises claim costs for the whole pool.

The risk that an insured behaves less carefully, or exaggerates a loss, because insurance will pay. Underwriters look for warning signs and use deductibles, conditions, and claims monitoring to limit it.

The amount and type of risk an insurer is willing to accept in pursuit of its goals. It is set by senior management and guides underwriters on which classes, limits, and exposures fit the company.

Written rules that tell underwriters how to handle applications: what to accept, decline, modify, or refer. They translate company strategy and appetite into consistent day-to-day decisions.

The limits within which a given underwriter may bind or decline business without higher approval. It usually caps premium size, coverage limits, and risk complexity, and it is granted in writing.

The power to commit the insurer to a risk, often given to agents or junior underwriters for defined classes and limits. Acting beyond that power may not bind the insurer.

Passing an application to a more senior underwriter or specialist when it falls outside the first underwriter's authority or guidelines. Referral protects the insurer from decisions beyond delegated limits.

The amount the insured pays for coverage. Underwriters set it to reflect expected losses, expenses, profit margin, and the cost of capital, adjusted by rating factors and discounts.

The price per unit of exposure, such as an amount per $1,000 of insured value or per payroll dollar. Multiplying the rate by the exposure units produces the manual premium.

The unit of measurement used to price a policy, such as sales, payroll, square footage, or vehicle count. Choosing the right basis is essential so that premium tracks the actual exposure.

The possibility of loss to which an insured or insurer is subject, and the measure used to quantify it. Underwriters assess both the likelihood of loss and the maximum amount that could be lost.

Incurred losses divided by earned premium over a period, usually shown as a percentage. It shows how much of each premium dollar goes to claims and is a core measure of underwriting performance.

The loss ratio plus the expense ratio. A result below 100% indicates an underwriting profit; above 100% indicates an underwriting loss before investment income is considered.

Underwriting expenses divided by written premium, expressed as a percentage. It captures acquisition costs, commissions, and administrative overhead and feeds into the combined ratio.

The largest loss an underwriter reasonably expects from a single event, assuming protective features work as intended. It guides the setting of limits and the purchase of reinsurance.

A property insurance requirement that the insured carry coverage equal to a stated percentage of value, often 80%. If underinsured at the time of loss, the claim is reduced proportionally.

The value used to measure property for insurance, such as replacement cost or actual cash value. Underwriters check that declared values are accurate to avoid underinsurance and coinsurance penalties.

The cost to repair or rebuild property with new materials of like kind and quality, without deduction for depreciation. It usually produces higher values and premiums than actual cash value.

Replacement cost minus depreciation. It reflects what the damaged property was worth just before the loss and generally results in a smaller claim payment than replacement cost coverage.

The amount of each loss the insured must bear before the insurer pays. Higher deductibles lower premium and reduce small claims, and they also blunt moral hazard.

The maximum amount the insurer will pay under a policy or coverage part. Underwriters match limits to exposure and to the insurer's capacity and reinsurance arrangements.

Insurance bought by an insurer to transfer part of its risk to another company. It protects against large single losses and accumulations, and it frees capacity to write more business.

A reinsurance agreement that automatically covers all business falling within its defined terms for the period. It differs from facultative cover, which is negotiated risk by risk.

Reinsurance arranged individually for a specific risk, with the reinsurer free to accept or decline it. It is used for unusual, large, or substandard risks that fall outside treaty terms.

The form and information a prospective insured submits to request coverage. It is the starting point of underwriting and forms the basis of the contract, so accuracy matters.

Information that would influence an insurer's decision to accept a risk or set its terms. Applicants must disclose such facts honestly; concealment or misrepresentation can void coverage.

The principle that both parties to an insurance contract must deal honestly and disclose relevant information. It underpins the insured's duty to reveal material facts to the underwriter.

A false or misleading statement made in an application or claim. If it concerns a material fact, the insurer may rescind the policy or deny the claim.

An independent assessment of a risk, such as a property survey or a motor vehicle inspection. Underwriters use it to verify application details and to identify hazards not disclosed by the applicant.

Measures that reduce the frequency or severity of losses, such as sprinklers, alarms, training, or maintenance. Underwriters may require them as a condition of coverage or offer credits for them.

The portion of risk an insurer keeps for its own account after reinsurance. It is set so that retained exposure stays within the company's capital and appetite.

A temporary document confirming that insurance is in place before the formal policy is issued. It gives immediate protection and is often used when binding authority is exercised.

The written contract of insurance setting out the coverage, conditions, exclusions, limits, and premium. Underwriters must ensure its terms match the risk they intended to accept.

A provision that removes specified perils, property, or circumstances from coverage. Exclusions define the boundary of the risk the insurer has agreed to carry.

A written amendment that changes the terms of an existing policy, such as adding coverage, altering limits, or updating values. It becomes part of the contract when issued.

A risk that is more hazardous than average and therefore not acceptable at standard rates or terms. It may be declined, surcharged, restricted, or placed with a specialist market.