Underwriting and Policy Administration
This domain tests how insurers select risks, issue and change policies, and calculate premium. Expect questions on applications, representations, warranties, binders, endorsements, cancellations, nonrenewal, audits, certificates, reinsurance, and record keeping.
Core rules
- Underwriting evaluates the exposure against the insurer's appetite using the application, inspections, loss history, and other lawful sources.
- Applicants make representations, which are believed true to the best of their knowledge. A material misrepresentation can affect coverage. Warranties are stricter promises or conditions.
- A binder provides temporary evidence of coverage before the policy is issued. It is not the permanent contract and is subject to its terms.
- Endorsements amend the policy and must be in writing. Oral changes are unreliable and often unenforceable.
- Cancellation and nonrenewal are different actions with different notice and refund rules. A certificate of insurance summarizes coverage but does not create it.
- Premium may be adjusted by audit when exposure changes, such as payroll or sales. Reinsurance transfers part of the insurer's risk and does not change the insured's contract.
Worked example
A workers' compensation policy uses a rate of 2.50 per 100 of payroll. The insured estimated 500,000 but the audit shows 600,000. The additional premium is 100,000 divided by 100, times 2.50, or 2,500. The reasoning is that the final premium is based on actual exposure, so the audit reconciles the estimate with the true payroll.
Traps that cost marks
- Treating a binder as a permanent policy.
- Relying on oral endorsements.
- Confusing cancellation with nonrenewal.
- Assuming a certificate creates coverage.
- Forgetting that audits can increase or decrease premium.