General Insurance Underwriting
General Insurance Underwriting
This is the single domain tested by IC-45. The paper examines how an underwriter decides which risks to accept, on what terms and at what price, and how that decision is documented, delegated and monitored. Expect questions on underwriting principles, information sources, hazard identification, rating, policy terms and conditions, class-specific underwriting, and the link between underwriting and reinsurance.
Core rules and concepts
- Underwriting protects the pool: risks with similar expected loss cost should pay similar premiums, and the total premium must cover claims, expenses and margin.
- Physical hazard is a tangible feature (combustible stock, unsprinklered warehouse). Moral hazard is dishonest intent (arson, exaggerated claims). Morale hazard is carelessness created by the knowledge of cover.
- Information sources, roughly in order of reliability: proposal form and declarations, past loss history, survey or inspection report, financial statements, and market or reinsurer data.
- Rating applies a base rate to an exposure base (sum insured, turnover, wage roll), then adjusts with loadings or discounts for hazard, claims experience and deductibles.
- Terms that shape the risk: exclusions remove cover, warranties are conditions precedent to liability, deductibles share small losses, conditions govern how claims are handled.
Worked example
A textile mill seeks ₹5 crore fire cover. Base rate 0.15% gives ₹75,000. The risk sits in a flood-prone zone (+25% = ₹18,750) and has produced ₹40 lakh of claims in three years (+15% = ₹11,250), so the quoted premium is ₹1,05,000. The underwriter justifies each loading because flood and loose cotton storage drive severity and frequency, adds a 5% deductible to suppress attritional claims, and imposes a cotton-storage warranty. She records the reasoning on file so the decision is defensible at audit and at renewal.
Traps that cost marks
- Confusing moral hazard with morale hazard; examiners test the distinction directly.
- Rating only physical hazards and ignoring claims history or management quality.
- Applying loadings without a documented rationale, or accepting beyond delegated authority.
- Treating a warranty as an ordinary condition, or assuming a deductible reduces severity rather than small-claim frequency.
- Ignoring treaty capacity and reinsurer appetite when accepting a large or accumulative risk.