What is Underwriting

1
What is Underwriting???

• Prepared for
• Illinois State University
• David S. Medvidofsky, CPCU, CIC, AAI
• February 7, 2005

2
Objectives

• Provide Historical Background of Underwriting as
  a Profession
• Explanation of Underwriting
• What it is
• Importance
• Competencies of Successful Underwriters
• Offer Direction to Further Any Interest

3
First, What is ILSTU?

• IM Shorthand for Id Like To Speak To U?
• Insurance Looks Safe, Try Underwriting?
• I Lost the Spread To an Undergraduate?

4
So What?

• Protection From Risk
• Protect individuals and business from financial
  ruin
• Safety Risk Management
• Economic Contributions to Society
• Financial Services 9 of GDP in 2001
• Financial Services 5.2 of US Workforce in
  2001
• Institutional Investors
• Source Insurance Information Institute, New
  Data Shows Wider Use of Financial Products and
  Services Helping to Drive U.S. Growth, March 8,
  2004

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• The Origins of Underwriting

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Origins of Underwriting

• As Early as 1688, Investors Met in Edward Lloyds
  Coffee House
• Captains and Merchants Would Sell Portions of
  Risk Before Leaving Port
• Investors Would Write Names on Policy Under Each
  Other Underwriters

7
Examples of Exposures

• Alien Insurance
• Crocodile Attack Insurance
• Celebrity Insurance
• Monster Risk
• Lottery Cover
• Yeti Attack

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• Underwriting Defined

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Underwriting Defined

• Underwriting The process of selecting
  policyholders by recognizing and evaluating
  hazards, establishing prices, and determining
  policy terms and conditions.

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Purpose of Underwriting

• Develop and Maintain a Profitable Book of Business

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Types of Underwriters
Underwriting
Line Underwriters
Staff Underwriters
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Underwriting Activities

• Line Underwriters Evaluate Individual Policies
  and Applicants and Are Usually Located in Branch
  or Regional Offices
• Duties
• Select insureds
• Classify risks
• Determine proper coverage
• Determine appropriate rate
• Service agents and/or policyholders

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Underwriting Activities

• Staff Underwriters Generally Located in Home
  Office. Responsible For Setting Corporate Policy
• Duties
• Formulate underwriting policy
• Evaluate experience
• Research and develop coverages and forms
• Review and revise rating plans
• Prepare underwriting guidelines and bulletins
• Conduct underwriting audits
• Participate in industry associations
• Conduct education and training

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Underwriting Authority

• Degree of Latitude to Make Approval Decisions
• Various Levels That Vary by Position, Grade
  Level, Experience

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Measuring Underwriting Results

• Loss and Expense Ratios
• Loss Ratio is of Losses to Premium Dollars
• For every 1 written, how much is paid out in
  losses?
• Expense Ratio is of Expenses to Premium Dollars
• For every 1 written, how much is paid out in
  expenses?
• Losses Expenses Make Up The Combined Ratio

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Combined Ratio Example

• Incurred Losses
• Losses paid to insureds
• Claims Expenses
• Cost for settling claims
• Commissions
• Commissions paid to agents
• Taxes
• Total taxes paid state and fed.
• Other Operating Expenses
• All other expenses
• Combined Ratio

• 62.1
• 3.1
• 18.7
• 2.7
• 12.5
• 99.1

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Measuring Underwriting Results

• Performance Standards
• Product Mix
• How much of each type?
• Quality
• Customer Satisfaction
• Hit Ratio
• Ratio of risks quoted to risks written
• Retention Ratio
• of risks that renew

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The Underwriting Process
Gather Information
Evaluate Information
Monitor Results
Select Alternative
Implement Decision
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Importance of Underwriting Function to the Company

• Underwriter Determines What Risks Company Will
  Write
• Losses highest portion of combined ratio
• Underwriting Has Strong Influence Over Customer
  Relationship
• Agents follow path of least resistance.

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• Underwriting Competencies

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What is a Competency?

• A competency is a desired skill, trait or
  behavior that leads to a desired, superior
  performance result.
• - The Whitten Group

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Underwriting Competencies Continuum
Technical Strength
Segmentor
Niche
Analytical/Critical Thinker
Process/Technology Proficiency
Customer Focused/Strong Interpersonals
Mass Marketer
Approach
Expense Reduction
Loss Mitigation
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Personality Traits

• Decisive They get paid to make business
  decisions (good underwriters make the unpopular
  decisions well)
• Analytical Theyre trained to gather info,
  analyze, and implement
• Judgmental Theyre critical thinkers that think
  in terms of cause and effect and contingencies

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• If Underwriting Interests You

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Steps To Take If Underwriting Interests You

• Review Competencies
• Is there alignment?
• Tools such as DiSC, Learning Styles Inventory,
  Myers-Briggs
• Talk To People in Business to Learn More About
  the Job
• Job Shadowing
• Insurance Coursework

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Steps To Take If Underwriting Interests You

• Insurance Information Institute
• (www.iii.org)
• Society of CPCU
• (www.cpcusociety.com)
• Ultimate Insurance Links
• (www.ultimateinsurancelinks.com)
• Property-Casualty Insurers of America
• (www.pciaa.net)
• Insurance Institute for Highway Safety
• (www.hwysafety.org)
• Society of Insurance Research
• (www.sirnet.org)
• Society of Insurance Trainers Educators
• (www.insurancetrainers.org)

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• Underwriter Training

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Underwriting Training

• Orientation To Understand Interdepartmental
  Dependencies
• Time in Field To Understand Customers
• Higher Level Course Work To Develop Technical
  Expertise (CPCU, CIC)

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Underwriting Training

• Pictorials To Learn Coverages and Concepts
• Job Shadowing to Learn Application of Concepts,
  Processes, Technology Aspects

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• Current Challenges

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Underwriting Challenges

• Broker Compensation
• Credit Scoring
• Terrorism

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Uh-Oh

• Pop Quiz

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The Origins of Underwriting Were In . . .

• A. Dunkin Donuts
• B. Garden of Eden

• C. Lloyds Coffee House
• D. ILSTU

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The Purpose of Underwriting Is To . . .

• A. Issue As Many Policies As Possible
• B. Maintain a Profitable Book of Business

• C. Make Life Difficult For Customers
• D. Get Rich, Die Young

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The First Step in The Underwriting Process Is To
. . .

• A. Sharpen Your Pencil
• B. Make Life Difficult For Customers

• C. Send Out a Cancellation
• D. Gather Information

36

• Questions???