Insurance underwriting is all about risk management for a profitable insurance portfolio. Essential terms of the insurance contract

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

Insurance underwriting is primarily a service provided by financial institutions such as banks and insurance companies. They guarantee the receipt of payments in the event of certain financial losses. There are several types of underwriting depending on the industry. Companies that perform such functions are called underwriters.

Basic concepts

It can be said that this term is directly the very essence of the area under consideration. In this regard, the development of an adequate criterion for assessing the effectiveness of underwriting in insurance is the first step towards increasing the profit and market value of the organization. Today, there is a significant increase in interest in the industry in question in general and its theoretical foundations in particular.

One of the issues of interest is underwriting, which is a key business process of any insurance organization. After all, the main function of any relevant institutionis effective customer risk management.

Let's tell in simple words that this is underwriting. According to the definition of the term, which is given in the dictionary, this concept is understood as the process by which the company determines whether it is worth accepting the offer of the insured to draw up a contract, and if so, under what conditions. True, such a definition is considered too general and does not say anything about what stages the underwriting itself consists of.

It is worth using the following definition of this term: activities aimed at assessing risks, determining adequate tariffs and conditions along with the formation of a profitable insurance portfolio.

Functions

Insurance underwriting is a service whose main purpose is:

• Risk assessment. These are characterized by certain parameters: a quantitative criterion (the probability of damage, its mathematical expectation, and so on) and a qualitative one (analysis of the fire safety system along with the presence of an alarm, the level of training and experience of the pilots).
• Determination of normal insurance rates. They are calculated in an actuarial way, and the task of the underwriter is to select adequate reduction and increase factors to the base value, depending on the specifics of a particular agreement. What else does the insurance risk assessment system imply?
• Define conditions. One of the tools in the framework of managing the organization's profitability and tariffs are suchcriteria such as breadth of coverage, exclusion from insured events and so on.
• Formation of a profitable portfolio. This is understood as the sum of all gross premiums that were received during the underwriting year for a certain type of insurance or for all its types, minus the costs of attracting customers (agency and brokerage fees) and not doing business.

Let's talk about underwriting in life insurance below.

Why is it needed?

Each type of insurance has its own unique underwriting features. Without an understanding of the risks and what is being taken for protection (of the object), as well as a description of the factors that increase the likelihood of an undesirable event and the expected amount of compensation, it is impossible to correctly assess the risk.

And in the event that the degree of danger cannot be expressed in monetary terms, then a profitable portfolio cannot be formed either, and if this succeeds, then only due to chance. Typically, underwriting is carried out by checking risk against a number of parameters depending on the specific type of service.

For example, with CASCO for land transport, these can be:

• The circle of people who are allowed to drive a car, along with their age and driving experience.
• Desired franchise size.
• The presence of an anti-theft system, car storage conditions at night and so on.

What are the basic principles of insurance underwriting?

Underwriting organization

His process is the mostspecific to the business of the company. Effective organization of underwriting usually requires specialized knowledge, and in addition, a lot of experience. The entire insurance procedure can be represented as consisting of separate components: marketing, development of insurance services, sales, support of contracts, settlement of losses. In practice, these processes are repeated and mixed. In a broad sense, underwriting includes the following operations:

• Analysis, which in turn includes the study and collection of information about the objects of insurance and their inherent risks.
• Classification and selection, as well as hazard assessment.
• Making a decision on insurance of selected risks or a complete refusal to provide the service.
• Determination of an adequate tariff for objects accepted for insurance.
• Coordination of the amount and calculation of the premium.
• Determine the terms of risk coverage.
• Conclusion of an insurance agreement.
• Perform development of mitigation measures.
• Control over the condition of insured objects and factors that contribute to or hinder the occurrence of danger.
• Risk Mitigation.

All these operations are closely related and interdependent.

Why is it so important

Insurance of he alth, life and property of citizens is currently gaining more and more popularity in Russia. In this regard, it will not be superfluous to consider the essential terms of the insurance contract.

Every citizen should take care of the well-being of his family, andbosses and managers are simply obliged to take care of the property of their company. Life, property and he alth insurance helps to protect the family, along with the enterprise, from unplanned expenses resulting from unforeseen circumstances. Services are provided through the conclusion of an agreement between the client and the company. Such agreements are divided into two types: personal insurance and property insurance.

Life insurance

What are the essential terms of insurance contracts? The service provides for the protection of the property interests of all insured citizens related to their life and death. This option is usually associated with the long-term interests of policyholders and insured persons due to the fact that life is considered as a long-term condition, and, accordingly, the onset of death is seen as distant and unpredictable. The benefits of life insurance include:

• Payment on risky events is not taxed. Income taxes on payments "on survival" are charged only on the difference between the amount of compensation and contributions minus the size of the refinancing rate.
• The client can apply to the tax authorities with a special application and return the tax deduction in the amount of contributions paid (but not more than the transferred personal income tax) under a voluntary life insurance agreement for a period of five years or longer. What else does such insurance give a person?
• Payment in case of death is not included in the inheritance. It is received only by the one who is indicated. This is caring for the most vulnerable members of the family. So you can protect, for example, grandchildren or children from the firstmarriage.
• The policy has a special status. The fact is that they are not property, therefore, they cannot be levied by third parties. They cannot be arrested, confiscated or, for example, divided in a divorce.

The following are the basic principles of social insurance.

He alth insurance

A properly organized underwriting process is a significant factor in the effectiveness of he alth protection operations. It reduces risk selection for the company, allowing for a favorable selection of possible pitfalls for insurers. The source of underwriting information for he alth insurance is the questionnaire in the application, along with the medical reports of the attending physicians, special certificates, and so on. This is what a he alth insurance policy gives a person:

• First of all, it is a guarantee of the safety of financial resources, since after the purchase of the service, any costs for medical care under the program will be borne by the company.
• Choosing a program with the necessary volume of medical services in the most optimal medical institutions for the client.
• Guarantee that a citizen will receive qualified medical assistance in a timely manner within the framework of the insurance program he has chosen.
• Availability of round-the-clock free consultations from specialists in the contact center on emerging issues, including the organization of the required medical care in medical institutions.
• Providing ongoing quality control of servicesalong with advocacy before the hospital facility.

Next, consider the issue of protecting the property of citizens.

Property insurance

According to Article No. 929 of the Civil Code, such an agreement provides for the obligations of specialized organizations to policyholders or other beneficiaries for a conditional premium, upon the occurrence of an appropriate case, to pay for losses that are associated with the loss or damage to the insured property, in the amount determined by the document. Property insurance rules must be strictly followed.

Under a property insurance agreement, companies have the right to protect the following interests:

• Risks of death, loss, damage or shortage of specific property.
• The risk of loss from entrepreneurial activity, which arises as a result of a violation by the counterparties of the entrepreneur of their obligations or due to changes in the conditions of activity due to circumstances beyond his control. This category of risks also includes failure to receive the expected income.
• Risks of liability for obligations arising from damage to life or property.

Next, we will talk about CASCO AND OSAGO.

Auto insurance

The popularity of car insurance is connected with the increase in the number of cars on the roads in our country. This, in turn, quickly affects the increase in the number of accidents, which can not only affect the he alth of car owners, but additionally hit the wallets. In connection withthis is why it is so important to apply to a reliable organization for CASCO registration. By purchasing such a policy from a reliable service provider, citizens acquire protection on favorable terms. In the event of an accident, auto insurance compensates for the costs of car repairs and treatment of victims. It is necessary only after the occurrence of the corresponding case to contact the company.

Compulsory car insurance policy is absolutely necessary for every car owner. A similar condition for automotive operation is prescribed in the current legislation. The OSAGO policy compensates for the damage that the driver inadvertently causes to another participant in the process of road traffic.

Insuring a car under the CASCO line is the right decision for those citizens who especially value their safety. Unlike OSAGO, this insurance can protect the car from theft and other types of damage. Modern companies offer their customers stable protection of vehicles under CASCO along with the restoration of glass, body parts and headlights without the obligatory presentation of a certificate from the traffic police. In addition, when deciding to insure a car in this way, people can count on covering the costs associated with its evacuation from the accident site. The execution of this insurance, as a rule, involves payments even when the accident occurs through the fault of the driver.

The essence of this activity

What is the essence of insurance? It lies in the fact that these are, first of all, bilateral economic relations, assuming that the insured pays the necessary contributionand secures for itself, subject to the occurrence of an appropriate case, which is stipulated by law or contract, the amount of payments from the company.

Next, let's figure out what the work of the insurance company is based on.

Profitable insurance portfolio

Such a portfolio is the sum of all concluded contracts between the company and its clients. Its effectiveness is assessed by the parameters of profitability, by the level and type of risks, and at the same time by profitability. The insurance portfolio does not act as a separate document or a list of such. In fact, we are talking about the base of all insured persons of a particular organization who have purchased policies and therefore have the right to demand compensation from it in the event of appropriate events. A personal account is created for each client, on which all the information collected before and after the conclusion of the contract is recorded. Based on such information, the level of risk under the concluded agreement and the amount of mandatory payments are calculated.

What does the formation of a profitable insurance portfolio imply? The more contracts in terms of the volume of cash contributions the insurer was able to conclude, the greater will be the stability of the portfolio. This rule works for all companies, regardless of the specifics of the insured objects. True, the more agreements are included in the portfolio, the more difficult it is to assess the level of risks and profitability. For some companies, the volume of concluded documents can reach several hundred thousand, and sometimes even millions. To speed up the evaluation processprofitability, special methods and techniques for assessing risks and profitability are used:

• Homogeneous objects are treated as one. For example, when two or more citizens insure their houses, which are located on the same street, in case of fire or flood. Such objects should be considered as one, since in the event of a natural disaster, it is very likely that all of them will suffer.
• The cost of the policy, however, as well as the amount of payments, must be calculated based on the physical condition of the insurance objects.
• Take into account statistical data for a certain region, country and area of activity of the insured object.

All policies are classified according to the degree of possibility of occurrence of risks and the amount of payments. It is customary to divide the danger into specific, high, moderate and low. Accordingly, after the first assessment of the insurance object and the drawing up of the contract, it is classified as a certain risk category, and only then the assessment of the entire portfolio is carried out. Next, we will discuss its types.

Types of insurance portfolios

All of them are classified by area of activity, for example, home insurance or auto insurance, as well as by the degree of risk. The following types are distinguished:

• The classic portfolio includes those types of objects that have been used for a long time. This includes contracts for voluntary and compulsory property insurance. At the same time, the risk is medium, and the profitability is small, however, stable. To use this type of service, a company must havea significant margin of financial strength.
• Specialized portfolio. This is a type when those areas of activity with objects, the use of which is distinguished by a narrowly specialized purpose, act as an object. For example, space insurance, protection of currency and exchange risk. The risks for such objects are specific, and the profitability is high. Legal entities that have the necessary authorized capital and have a state license to conduct this type of activity have the right to engage in the varieties under consideration.
• Combined portfolio combines elements of a specialized and classic type of insurance. This approach makes it possible to reduce the risk, but the yield can also decrease.

Besides the options listed above, there is another special type, namely a balanced portfolio. Its peculiarity is that all objects are homogeneous in terms of profitability, and in terms of risk, even the price of each policy included in the portfolio is the same.

The goal of insurance underwriting is to prevent bankruptcy.

Bankruptcy of insurance organizations

This activity requires entrepreneurs to be more vigilant in developing and implementing a business strategy. Considering that this is not just one of the most profitable, but also the most risky types of activity, many, without calculating their strength, go bankrupt. Often the cause of bankruptcy is an attempt by an entrepreneurengage in dumping in the vast insurance market. But insurers can be calm, because in accordance with the current legislation, after the ruin, the portfolio is transferred to another company or it is transferred to the temporary management of the state.

We considered that this is underwriting in insurance.