Underwriting and Risk Management
Underwriting process
Underwriting assesses and prices risk. It involves risk identification, evaluation, selection, and rating. Insurers use proposal forms, medical or financial evidence, and risk classification (standard, substandard, declined). Rating factors include age, occupation, claims history, location, and sum insured. Moral hazard (dishonesty) and physical hazard (tangible risk features) both affect pricing. Adverse selection arises when only high-risk buyers take cover.
Risk management
The risk management cycle is identify, analyse, evaluate, treat, monitor. Treatment options: avoid, reduce, transfer, retain. Insurance is a transfer mechanism; retention (excess) aligns incentives. Reinsurance transfers insurer risk (treaty or facultative) and protects solvency. Co-insurance spreads large risks across insurers.
Traps
Confusing moral hazard with morale hazard (carelessness); assuming a higher excess always lowers premium without affecting cover; mixing reinsurance with co-insurance; and forgetting that disclosure duties run to the insurer at underwriting.
Rule of thumb
Higher risk → higher premium, higher excess, exclusions, or decline. Underwriting is about matching price to expected loss, not simply refusing risk.