Risk Management and Underwriting
Risk management is the systematic identification, analysis, evaluation, treatment and monitoring of risk. Candidates must know the treatment options: avoid, reduce, retain, transfer and share. Insurance is a transfer mechanism; retention may be deliberate (deductibles) or involuntary (uninsured losses). Understand the difference between risk control (reducing frequency/severity) and risk financing (funding retained losses).
Underwriting is the process of selecting and pricing risks. It assesses hazard (physical, moral, morale), exposure and claims history. Know the sources of underwriting information: proposal forms, surveys, medical reports, claims experience, credit checks and third-party data. Understand rating factors, premium calculation, loadings and discounts, and the role of reinsurance in enabling the insurer to accept larger risks. Distinguish facultative (case-by-case) from treaty (portfolio-wide) reinsurance, and proportional (quota share, surplus) from non-proportional (excess of loss) arrangements.
Traps: confusing risk avoidance with risk reduction; assuming reinsurance transfers the insured's contract (it does not - the insured's contract remains with the original insurer); and forgetting that moral hazard concerns intent while morale hazard concerns attitude. Also remember that underwriting must comply with anti-discrimination and fair-treatment rules.
Worked rule of thumb: For a new commercial risk, ask: what perils? what values? what hazards (physical, moral, morale)? what claims history? Then set terms - excess, limit, premium loading - and consider reinsurance capacity.