Underwriting, Rating and Risk Selection
Domain 2 tests how risk is assessed and priced: the information an underwriter needs, how loadings and discounts are applied, how the sum insured is fixed, and when to decline or counter-offer. Expect calculation items where a basic rate is quoted per mille or per cent and modifiers must be applied in the right order.
Core rules
- Fire and property rates are usually quoted per mille (per 1,000 of sum insured); liability and marine cargo rates are often quoted as a percentage.
- The sum insured is set on reinstatement value, not market value, where the policy is written on that basis - otherwise the average clause bites.
- Rating loadings (occupancy, construction, process hazard, claims experience) are applied to the basic premium, not to the sum insured.
- Discounts such as a no-claim bonus normally attach to the own-damage section only, not to third-party liability, which is tariff-driven.
- Moral hazard indicators - poor maintenance, evasive answers, over-insurance - justify referral, higher excess or declinature.
- Every declinature or counter-offer should be recorded with the reason, because it must be defensible on review.
Worked example
A fire risk of sum insured 50,00,000 is rated at 0.60 per mille: 50,00,000 x 0.60 / 1,000 = 3,000 basic premium. The occupancy is hazardous (+25%) and claims experience is adverse (+10%), both applied to the basic premium: 3,000 x 1.35 = 4,050. Reasoning: loadings are multiplicative on the basic premium, so they are combined into one factor rather than added to the sum insured or to each other sequentially.
Traps
- Applying a no-claim bonus to a liability premium.
- Mixing per mille with per cent, producing a premium out by a factor of ten.
- Setting the sum insured on market value while the policy is written on reinstatement terms.