Underwriting, Rating, and Risk Assessment
What this domain tests
How insurers select risks, classify and rate them, compute premiums, and transfer risk through reinsurance.
Core rules
- Risk selection. Underwriters assess occupancy, construction, protection, housekeeping, claims history and moral hazard. They may decline, accept at standard rates, or impose terms.
- Classification and rating. Risks are grouped by expected loss cost. Manual premium = rate x exposure base (e.g., per PHP 1,000 of sum insured). Pure premium = expected losses divided by exposure; loadings cover expenses, contingency and profit.
- Experience rating. Past loss experience adjusts manual premium; credibility weighting blends the risk's own experience with class data.
- Reinsurance basics. Facultative is case-by-case; treaty is automatic. Proportional treaties (quota share, surplus) share premium and losses by ratio; non-proportional treaties (excess of loss, stop loss) respond above a retention.
- Retention and capacity. Reinsurance protects the insurer's capital and increases capacity but does not transfer the policyholder's contract.
Worked example
An insurer writes a PHP 10 million property risk and cedes 40% under a quota-share treaty. Gross premium is PHP 500,000; ceded premium is PHP 200,000 and the insurer retains PHP 300,000. A PHP 1 million loss is shared 40/60: reinsurer PHP 400,000, insurer PHP 600,000. If a ceding commission of 25% applies, the reinsurer returns PHP 50,000 to the insurer, reducing the net cost.
Traps
Do not confuse quota share with surplus share; do not treat reinsurance as direct cover for the insured; do not ignore deductibles and aggregates; and do not use manual rates for a risk with credible adverse experience without checking experience rating. Watch claims-made versus occurrence triggers.