Page 44 - Insurance Times December 2020

the policyholders. So those insurable risks have to be
understood and differentiated in the interest of impartiality
and equity. The simple fact is that practically no two risks
may be equal in all respect. There are physical hazards
involved and several objectives are inherent - such as
variations in construction, occupancy, neighbourhood
exposures, protective measures available and management
attitudes relating to each risk to be underwritten.

The underwriter therefore, has to excel in risk classification
so that each insured pays the premium in proportion to the
likely hood that a covered loss might strike it. Every insured
has to share in the risk burden based on its risk load and
that has to be properly assessed by an underwriter, who detrimental to the underwriter's understanding the real risk
needs to keep reviewing the risk so that any betterment in exposure, as received from the insured being provided in the
it to be rewarded and any increase in the risk exposure must Proposal Form while that is accepted by the insurer.
be charged higher in proportion to the increase in the risk Underwriting depends on obtaining the correct/factual
profile. The insurers assumes the risk that they takes on, by information submitted by the Proposer while filling the
charging appropriate premium and settings the mandatory Proposal Form and evaluating the information that is elicited
& voluntary excesses / deductibles, and deciding on the from that and finally applying his/her experience &
terms of coverage, conditions, exclusions and other knowledge to evaluate the proposed risk in its risk context
restrictions in terms of warranty / limitations. If an insurer and then deciding his action - whether to apply discount or
charges lesser than what is a proper risk-based premium loading on the prescribed tariff/guideline rate.
across risks, it could become insolvent when large numbers
of claims, whether owing to frequency &/or with higher Underwriting involves examining material disclosures in the
magnitude/severity occur. proposal forms, and other supplementary underside
documents such as additional questionnaires, Inspection
This is not only against the interests of the insurers, but Reports, Valuation Reports, the market exposure/knowledge
against the interests of the policyholders who will need lying with the Insurer including data on similar risks and so
indemnity in the imminent. On the other hand, if an insurer on. Using analytics and other digital and technological tools
charges too much, it will lose business to its competitors. are also becoming a requirement in this current era to arrive
Charging a premium too low or too high is against the at the proper underwriting decisions.
principles of insurance and it also violates the Regulatory
Benchmarks set by IRDAI. The right balance in underwriting Adverse selection to be always averted:
and pricing is sensitive, and the Actuary and Chief The most common risk of Indian General Insurance
Underwriter of the insurer have to ensure that proper underwriting is adverse selection. If the two groups of
principles and practices are inserted in the insurer's day-to- dissimilar risk exposures were charged the same rate,
day activities under the supervision of their Board Members. problems would arise. Basically the rates should always
reflect average loss costs. If we cover more number of perils
Risk appraisal, assortment & selection: (i.e. causes of losses) or more hazardous items - the rate

Risk appraisal obviously is the starting point of the should obviously increase. The insured even knowing that
underwriter; using the acumen of the underwriter he/she they represent higher risk but always want to enjoy lower
must examine the insurance proposal from its insurability rates.
standard and subsequently assigning the risks to be accepted
to the relevant & appropriate class to decide whether to This phenomenon of selecting an insurer that charges lower
be accepted with the discount or loading depending on its rates for a specific risk exposure is known as 'Adverse
positive or negative aspects that prevails in reality. Selection' because the insured know they represent higher
risk, but want to enjoy lower rates. Adverse selection occurs
This process is obvious to avoid adverse selection. Adverse when insurance is purchased more often by people/
selection occurs when wrong information of the risk, in organizations with higher than average expected losses than

The Insurance Times, December 2020