Page 357 - IC38 GENERAL INSURANCE

They create a pool that is sufficiently large, while also creating sub pools within
it and locating individual risks within one or the other sub pool. The sub pools
are created by dividing the risks into different categories, depending on the
degree of risk that is present.

Example

In the field of property insurance, the chances of a wooden structure catching
fire are more than stone structures; hence, a higher premium is required to
insure the wooden structure.

The same concept applies to health insurance also. An individual suffering from
high blood pressure or Diabetes has higher chances of suffering a heart attack

Consider the risk of high medical costs of treatment for a disease. The risk
would be different for a person who suffers from high BP and Diabetes
compared to a person who is in good health.

This process of classifying risks and deciding into which category they fall is
important for rate making.

1. Basics of Underwriting

Definition

Underwriting is the process of determining whether a risk offered for
insurance is acceptable, and if so, at what rate, terms and conditions the
insurance cover will be accepted.

Underwriting, in a technical sense, comprises the following steps:

i. Assessment and evaluation of hazard and risk in terms of frequency and
severity of loss

ii. Formulation of policy coverage and terms and conditions
iii. Fixing of rates of premium

The underwriter firstly decides on whether or not to accept the risk.

The next step would be to decide the rates, terms and conditions under which
the risk is to be accepted.

Underwriting skills are acquired through a continuous learning process involving
adequate training, field exposure and deep insights. To be a fire insurance
underwriter one needs to have a good knowledge of the likely causes of fire,
impact of fire on various physical goods and property, the process involved in an
industry, geography, climatic conditions etc.

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