Underwriting and Risk Assessment
Underwriting and Risk Assessment
This domain tests how insurers select, classify, price and control risks, and how they use terms, deductibles and reinsurance.
Core process
- Information: proposal form, medical examinations, financial evidence, inspection reports, claims history, credit and fraud checks.
- Classification: standard, substandard (loading, exclusions, higher excess) or declined.
- Rating: manual rates, experience rating, discounts for risk improvement, and tariff where applicable. Premium must reflect risk.
- Policy terms: warranties (conditions precedent), conditions, exclusions, deductibles and limits. A warranty must be complied with strictly.
- Accumulation control: identify probable maximum loss (PML) and avoid excessive concentration in one location or event.
- Reinsurance: facultative for individual risks; treaties such as quota share, surplus and excess of loss for portfolio protection.
Worked example
A factory has a sum insured of INR 5 crore. The underwriter applies a 15% sprinkler discount, a INR 2 lakh deductible and sets PML at INR 2 crore. The treaty has capacity of INR 3 crore; the balance is placed facultatively. The discount is justified by the sprinkler system, but the deductible and PML control the net retention. If the sprinkler is not maintained, the warranty is breached and the insurer may decline or reduce the claim.
Traps
- Accepting the sum insured without checking reinstatement value.
- Ignoring moral hazard and adverse selection.
- Missing non-disclosure of material facts.
- Confusing a warranty with a representation.
- Not checking accumulation across policies.
- Relying only on the agent's description.