Insurance Underwriting Practice - Assignment Example

 Insurance Underwriting Practice Question 1 Three options on how Business and General (B&G) Insurance Company is going to deal with the market environment and the challenges it is likely to face in overcoming each challenge B&G Company should consider reviewing the three main elements for setting premiums. These are incorporate risk premium, expenses, profit and return on capital employed (ROCE). Risk premium being the expected ultimate cost in claims of the risk being accepted, including an allowance for the degree of uncertainty attaching to the claims cost, the company has to review this factor to resonate with the fierce market competition and poor economic conditions which off course is also going to a big challenge. B&G is losing long standing business due to the fact that their competitors are offering ill-advised premiums which in normal circumstances are unsustainable. To this effect, the underwriters at B&G have to ensure their risk premium is adequate enough to cover the total claims costs. The underwriters should considers such as subject matter; exposure/size; scope of cover, rating factors; historical claims experience; large and catastrophe claims and the future. In order for B&G to ensure that the operational and other expenses are minimized, the underwriters have to ensure that such expenses are met in the premium. The biggest challenge in the strategy is the market filled with rivals offering cheap premiums with low operational expenses. Due to the poor economic conditions, the underwriters at B&G have to ensure that the profit and return on capital employed (ROCE) is either designed to produce: a) an underwriting profit where claims plus expenses are less than the premium; or b) a break even situation where the claims plus expenses are equal to the premium The biggest difficulty in this is that the market has fierce competition, with competitors offering ROCE designed to produce an underwriting loss where claims plus expenses are greater than the premium. Since B&G is operating in a market where there is plentiful capacity and insurers are competing aggressively with depressed prices, they are faced with difficult decisions. It should relook into its corporate objectives and underwriting strategy. For instance, they may: i. Pull out of the market - when prices fall below a level that the insurer considers to be prudent, it may opt to stop writing business (in that sector) altogether. ii. Reduce income - the insurer may opt to reduce its market share whilst prices are low. iii. Concentrate on retaining business at a profitable level - a rigorous risk selection process may be implemented to retain and attract only those risks where the insurer feels an adequate premium is charged and a profit can be made. iv. Lower prices to compete. a) Why Burning Cost Basis is attractive to Precision Automotive Engineers’ Company? Precision Automotive Engineers plc chose the Burning Cost basis since it translates the incurred losses into a rate against a measure of exposure appropriate to the risk. This means that if the risk increases at some point, the insurance company will compensate all the losses at the agreed fee until the following year when the Burn shall again be reviewed using a new exposure rate. This premium policy is attractive to the company because of its big employee base and high risks associated with the automotive industry. Their nature of business generates a large number of claims but the value of each claim doesn’t vary significantly from one to another. Had it not have been for this policy, the company would have been forced to insure each claim separately for the same employees thereby being forced to incur higher costs. b) Why Underwriters May Prefer to rate the risk according to its standard rates and terms of policy using Burning Cost basis? Underwriters prefer to rate the risk according its standard risk and terms of policy since the risks generate a significant number of claims and to ensure the risks are judged according to the claims it has generated. This method ensures that the underwriters do not feel the pinch of big losses (The Chartered Insurance Institute, 2008, pg. 7/10). Question 2 Factors that Industrial & General Insurance Ltd will consider when setting risk premiums by forecasting future claims. Frequency of loss To appreciate the frequency, the number of losses must be measured over a period of time (usually a year) and reviewed against a measurement of exposure. For fleet risks, underwriters measure the frequency of loss by calculating the 'accident frequency 'that is the number of losses divided by the number of vehicles. For other classes of business an underwriter may use wage roll, sum insured or turnover. Severity of loss The underwriter will review the value or severity of losses to assist in determining the likely value of future losses. This is no easy task as claim sizes vary considerably and for some classes of business, the severity of claim can be largely independent of risk characteristics. Trends As long as the data has been prepared in such a way that the results for different ‘periods' are comparable - in other words, the length of each period of insurance is consistent with the next and the risk itself has remained constant throughout - the underwriter will be able to spot and analyze trends in the data. Credit Scores I & G will consider an individual's credit score as a foundation for forecasting future claims to help them set premium risks. This will help them gauge an individual´s likelihood of claims against their insurance policy based on their credit score. The credit score will increase or decrease the cost of an individual’s insurance policy. Age Age is a factor that they will consider especially for automobile or homeowners insurance policies. Mature and youthful drivers' age is used to determine insurance rates. The age of a home is also used on a homeowner’s policy to determine how much it would cost to rebuild the home if it is damaged or destroyed. Question 3 What are the broad headings under which the working party are likely to carry outtheir deliberations and what items of expenditure normally fall under each heading? Some of the factors they will consider include: Competitors' behavior They will need to understand what effect competitors’ products, services and prices have on their retention and acquisition of business. Technical cost based pricing Prices derived from anticipated claims costs, expenses and profit. They will analyze whether such prices remain critical. They will also consider the influence of the competitive environment. The market conditions Where an insurer is operating in a market where there is plentiful capacity and insurers are competing aggressively, prices are depressed and the insurer is faced with difficult decisions. They may consider: Pulling out of the market - when prices fall below a level that the insurer considers to be prudent, it may opt to stop writing business (in that sector) altogether. Reduce income - the insurer may opt to reduce its market share whilst prices are low. Concentrate on retaining business at a profitable level - a rigorous risk selection process may be implemented to retain and attract only those risks where the insurer feels an adequate premium is charged and a profit can be made. Lower prices to compete B) Where do you think it most likely that savings could be made? The company is likely to make most profits in the design of the policy by ensuring their policies are either designed to produce: a) an underwriting profit where claims plus expenses are less than the premium; or b) a break even situation where the claims plus expenses are equal to the premium This will be achieved by ensuring the risk premiums are adequate enough to cover the total claim costs. They also have to ensure that both the fixed and variable expenses are catered for in their premiums. This will give the companya wide range of options when setting up premiums and settling claims. Work Cited The Chatered Insurance Institute (CII): Prtnciples and practices of risk pricing, pp 7-25, 2008 Read More