October 24, 2012
ABCDE Underwriting
Training Outline
Course:
Audience:
Time:
Introduction to Insurance Underwriting
ABCDE staff
9:00am – 12:00
Speaker
Joel Kress, ARe
Underwriting Manager - Government Entities Mutual (GEM).
Introduction
Scope and Purpose
Tell a story. Facts are for the Internet. But, people remember more through stories.
Resources are propriety. The Internet is public domain. My brain is public domain.
What is Insurance?
Merriam-Webster: “Coverage by contract whereby one party undertakes to indemnify or guarantee
another against loss by a specified contingency or peril”
Contract – a binding agreement between two or more persons or parties,
signed by both parties (non ambiguous)
unsigned by one party (contract of adhesion)
Indemnify - to make compensation to for incurred hurt, loss, or damage
Specified Contingency – Something happening in the future causing loss
Peril - exposure to the risk of being injured, destroyed, or lost
What is Risk?
From the OED: “(Exposure to) the possibility of loss, injury, or other adverse or unwelcome
circumstance; a chance or situation involving such a possibility"
Backyard Barbeque definition: A bad day.
1.
What is underwriting?
a. Insurance company underwriting
Interesting Tidbit – etymology of “underwriting” – Lloyd’s of London
Most Generally – Assigning premium appropriately to the amount of risk borne
More Specifically – Wikipedia: Insurance underwriters evaluate the risk and exposures of
potential clients. They decide how much coverage the client should receive, how much they
should pay for it, or whether even to accept the risk and insure them. Underwriting involves
measuring risk exposure and determining the premium that needs to be charged to insure that
risk. The function of the underwriter is to protect the company's book of business from risks
that they feel will make a loss and issue insurance policies at a premium that is commensurate
with the exposure presented by a risk.
Truth – profit
Implications – most thrilling math-geeky, inexplicitly of insurance (for the layman), cost
of capital, overcharging, law of large numbers
Insurance Goals:

Earn a profit

Meet customer needs

Comply with Legal Requirements

Fulfill a Duty to Society
The Underwriting Process:
1. Evaluating the Loss Exposure
2. Determining Alternatives
3. Selecting Underwriting Alternatives
4. Determining Appropriate Premium
5. Implementing Underwriting Decision
6. Monitoring the Loss Exposure
Example:
I got this building
Self-Insure vs. Insure
Insure w/ Deductible&Excl
$100 for $100k of Coverage
Charge $100 for 5 years
Overall, is this profitable?
Exposure: The potential for Risk
Conditions that Increase Severity and Frequency of Loss:
1.
2.
3.
4.
Physical Hazards
Moral Hazards
Attitudinal (Morale) Hazards
Legal Hazards
tangible conditions
fraud
wrecklessness
litigiousness
b. Differences for pool underwriting
Insurance Goals:

Earn a profit

Meet customer needs

Comply with Legal Requirements

Fulfill a Duty to Society
Pooling Goals:

Fulfill a Duty to Society

Meet customer needs

Comply with Legal Requirements

Earn a profit
So, how does change in priorities make Pooling different than Insurance?
members needs comes first
community rating
all comers accepted
mutual business model
little/no regulation
2.
Types of Insurance
a. Liability
Covers losses resulting from bodily injury to others or damage to the property of others for
which the insured is legally liable to which coverage applies.
i. General Liability
Definition: Liability Losses not specified by other sub-lines of coverage.
Tail: Primary 10 years. Reinsurance 20-30 years.
Exposure: Premises Operations, Personal Advertising Injury, Premises Medical
Payments, Contractual Liability, Products and Completed Operations.
Typical Claims: Slip and falls
Atypical Claims: Abducted by aliens: “We generally think that alien abduction
only happens on the X-Files. But some people take it very seriously because
there’s a market for alien abduction insurance. Goodfellow Rebecca Ingrams
Pearson (GRIP), a London-based insurance brokerage, specializes in strange
types of insurance - anything from immaculate conception insurance to alien
abduction insurance. In fact, the company even paid a claim once. GRIP paid out
one million pounds to a man in Britain who claimed to have been abducted.
True, the man was a business partner with the managing director of GRIP, but
the claim was still paid.”
Reinsurance Claims: 1996 product liability lawsuit against Sta-Rite, the
manufacturer of a defective pool drain cover. The case involved a three-year-old
girl who was disemboweled by the suction power of the pool drain pump when
she sat on an open pool drain whose protective cover had been removed by
other children at the pool, after the swim club had failed to install the cover
properly. Despite 12 prior suits with similar claims, Sta-Rite continued to make
and sell drain covers lacking warnings. Sta-Rite protested that an additional
warning would have made no difference because the pool owners already knew
the importance of keeping the cover secured. Jury Award: $25MM.
Hazards/Perils:

Tort liability
a wrongful act

Contractual liability
o Assault and Battery
o Unlawful detention
o Defamation
o Invasion of Privacy
o Copyright violations
failure to exercise care of prudent person

Statutory Liability
without fault such as WC
ii. Automobile Liability
Definition: liability with a car/bus/train/etc. Often mandatory, or at least some basic
limits. When not required, then underinsured/uninsured coverage.
Tail: Primary 3-5 years. Reinsurance 7-8 years.
Exposure: PERSONAL - Age, Year of Auto, Auto Use, Driving Record, Territory,
Gender/Marital Status, Occupation, Personal Characteristics, Physical Condition of
Driver, Safety Equipment. COMMERCIAL – Vehicle weight/type, vehicle use, radius of
vehicle operation, industry classification (truckers vs. buses).
Typical Claims: fender bender
Atypical Claims: A man claimed that while going to work at 7 am one morning, he
drove out of his drive way, straight into a bus. He claimed that the bus was five
minutes early than its scheduled time.
Reinsurance Claims: a bus full of kids
Hazards/Perils: Driving (the most dangerous thing we do)
iii. Professional Liability / School Board Liability
Definition: liability associated with professional work, less serious as doctors, lawyers,
etc.etc. Defense costs are usually significant.
Claims Made vs. Occurrence
Tail: Primary 10 years. Reinsurance 20 years.
Exposure: Criminal Acts, Torts (wrongful act by one to another), Contracts, Statutory
Typical Claims: special education needs, employment practices claims,
retaliation, discrimination
Atypical Claims:
Reinsurance Claims: district wide policy failure, possibly motivated tax slashers
Hazards/Perils: Four Elements to bring Negligence Suit (legal duty owed, failure to
conform to standard of care, casual connection exists between act and injury), Bodily
Injury/Physical Damage (not so common).
b. Workers’ Compensation
Definition: statutory liability which protects employers for injuries sustained in the
course of duty. 49+1 different systems. With modern medical technology, this is not as
it was intended (historical review).
Tail: Primary 20 years. Reinsurance 50 years.
Exposure: accidents at work – ON PREMISES (housekeeping, maintenance, type of
equipment), OFF PREMISES (duration of travel (field trips, conferences), mode of
transportation (AK planes), hazards at remote job sites (sporting facilities).
Typical Claims: Lifting, stains, slips and falls,
Atypical Claims: An Illinois appellate court affirmed an award of benefits to a 21year-old who suffered a displaced fracture through the right femoral neck when,
in chivalrous action to aid a female coworker, he attempted to dislodge a bag of
Fritos® chips that had become stuck in a vending machine on the employer's
premises by giving the machine a "shoulder block."
Reinsurance Claims: 9/11. 11% of all WC in 2011 countrywide.
Hazards/Perils: unsafe acts, unsafe conditions,
c. Property
Definition: losses associated with property damage. Subset of APD and EB
Tail: Primary 1-3 years. Reinsurance 5-7 years.
Exposure: Weather and nature.
Typical Claims: freezing pipes, water damage, wind damage, etc.
Atypical Claims: dead trees due to frost
Reinsurance Claims: Hurricane Katrine, Ike, 1926 Miami hurricane
$81B vs $157B
Hazards/Perils: Fire, lightning, Explosion, Windstorm, Hurricanes, Tornadoes, Hail,
Vandalism, Malicious Mischief, Water Damage, Flood (river, tidal, wind, ice,
accidental, pipes), Earthquake (ie Virginia 2011, NH Oct 2012), Collapse (ice,
snow),
Effects of global warming. Erratic, unprecedented weather.
d. Unemployment
Definition: statutory coverage for unemployed workers through no fault of their own.
Initial laws were set up to (1) provide temporary and partial wage replacement to
involuntarily unemployed workers who were recently employed; and (2) to help
stabilize the economy during recessions.
Tail: Statutory, but may move with the economy
Exposure: In general there are three major factors used by each States: (1) the amount
of recent employment and earnings; (2) demonstrated ability and willingness to seek
and accept suitable employment; and (3) certain disqualifications related to a claimant's
most recent job separation or job offer refusal.
Typical Claims:
Atypical Claims:
Reinsurance Claims:
Hazards/Perils:
e. Other –
Crime Insurance – Employee Dishonesty, Robbery, Theft, Burglary
Cyber Liability (Electronic Data Processing Coverage)
Equipment Breakdown (used to be Boiler & Machinery)
Clash Coverage
Umbrella Insurance
3.
Rating Theory Overview
to develop a rate structure that enables the insurer to compete effectively while earning
a reasonable profit
a. Basic rates
the price per unit of insurance
Exposure – represents a measurable physical characteristic of the risk that is a dimensional
translation of the expected value of the true exposure.
Proxy Exposure – payroll, total insured value (TIV), mileage, Average Daily Attendance (ADA)…
Rates should do the following:

Be stable

Be responsive

Provide for contingencies

Promote loss control

Be simple
Generalize Ratemaking process
1. Calculate amount needed to pay future claims (the actuary’s job)
2. Calculate amount needed to pay future expenses (manager’s job)
3. Add 1. plus 2. determine rates per ????
a. Example $1,200,000 / 1,000 schools = $1,200 per school
b. What is a better exposure base, or proxy to actual exposure?
b. Experience rating
Experience rating derives premium figures from historical loss experience, either of the insured
itself or a larger similar group.

Difference between experience rating and exposure rating purest form
o Reward insured with good loss experience, but how much do you penalize for bad
losses
o Size is accounted for
o Catastrophic losses need to be capped
c. Schedule rating

The “non-statistical” part does not mean “non-math”



Intended to adjust the base rates for characteristics not retrieved by rating methodology
Carrot or stick
Normalization
4. Individual Risk Evaluation Overview
i.
ii.
iii.
iv.
v.
vi.
Exposure and financial analysis
Loss analysis
Basic acceptability decisions
Basic rating evaluation
Rating adjustments for individual risks
Final underwriting decisions
Application data
from the actuary
litmus test
dump into formula
schedule rating, etc.
managerial approval
Additional Information (time pending)
Information Gathering- what to use to make a decisions, collected constantly
PROPERTY –
Construction – what’s it made of, how easily can it be ruined/destroyed/burned/shaken;
the Wearehouse vs. McMansion
Class 6 – Fire Resistive
Age
Class 5 – Modified Fire-Resistive
Height
Class 4 – Masonry Non-Combustible
Fire Divisions
Class 3 – Non-Combustible
Openings
Class 2 – Joisted Masonry
Building Codes
Class 1 – Frame
Occupancy – who is there doing what
Habitational
Office
Institutional
Mercantile
Service
Manufacturing
Protection
Public –
Protected (<1000 ft of hydrant)
Partially Protected (<5mi from fire dept)
Unprotected (all other)
Private –
Detection
Prevention
Suppression
External Loss Exposure
Not much can be done from loss control standpoint
All factors differ from building to building (even ones right next to one another)
Even multiple-occupancy building (separated with firewalls)
ie modern hotels/project housing.
Modernization of Data – CAT modelers thirst for data (more discussed in the next section)
First addresses of every property
Then it was latitude and longitude coordinates
Now it is GPS tracking
How far along is ABCDE’s 100,000
properties?
Valuation – Property is insured to amount of insurance which approximates the policyholder’s
insurable interest.
Review ABCDE’s valuation process.