Underwriting, Claims Handling and Reinsurance
Underwriting
The process
Underwriting selects, classifies and prices risks: gather information (proposal form, medical evidence, survey report, claims history, financial data), assess the hazard, decide terms (accept, accept with loading/excess/warranty, or decline) and rate. It happens at inception and at every renewal, and continues during the policy through endorsements and mid-term adjustments.
Rating
Life business uses mortality tables and age-based rates; general business applies a rate per mille to the sum insured or limit, adjusted by loadings, discounts, excesses and no-claim discount. Experience rating reflects the insured’s own loss record. Distinguish physical hazard (tangible condition), moral hazard (dishonest intent) and morale hazard (carelessness); and adverse selection (bad risks seeking cover) from poor disclosure.
Traps
- Sum insured is not market value; under-declaration triggers average at claim time.
- A warranty must be complied with exactly; a representation need only be substantially true.
- Reinsurance changes the insurer’s net retention, never the insured’s contract.
- A loaded premium is not a decline; a declined risk may still be placed facultatively.
Worked example
Sum insured ₦20m at ₦2.50 per ₦1,000 = ₦50,000. Add a 20% loading for a poor record (₦10,000) = ₦60,000; less 10% no-claim discount (₦6,000) = ₦54,000, plus fees and stamp duty.
Rule of thumb
Premium = rate × sum insured ÷ 1,000, applying loadings before discounts, and quote the basis (rate per mille) so the examiner can see the method.
Claims Handling and Reinsurance
Claims handling
Standard stages: notification within the policy period, registration and acknowledgement, documentation (claim form, proof of loss, police or medical reports, invoices), investigation by staff or a licensed loss adjuster, reserving, then assessment and settlement or repudiation, followed by salvage disposal and subrogation recovery. The insured owes duties of mitigation, cooperation and truthful presentation; the insurer owes good faith and prompt settlement once liability is admitted. Distinguish subrogation (insurer steps into the insured’s shoes after payment), salvage (insurer takes the damaged property), contribution (between insurers) and ex gratia payment (no admission of liability).
Reinsurance
Proportional: quota share (a fixed percentage of every risk) and surplus (a share of amounts above a retention line). Non-proportional: excess of loss (per risk or per occurrence), aggregate excess of loss and stop loss. Facultative is risk by risk; treaty is automatic. Reinsurance protects the direct insurer, not the insured - there is no privity, so the insured cannot sue the reinsurer.
Traps
- Apportioning the loss but forgetting to apportion the premium and commission.
- Treating IBNR reserves as paid claims.
- Assuming delay in notification automatically voids the claim; the insurer must show prejudice.
Worked example
40% quota share. Premium ₦1m with 25% commission; loss ₦400,000. Reinsurer receives 40% × (₦1m − ₦250,000) = ₦300,000 and pays 40% × ₦400,000 = ₦160,000.