PRINCIPLES OF UNDERWRITING

CHAPTER 1
PRINCIPLES OF UNDERWRITING 

Underwriting is the process of :

1. assessing and classifying the degree of the risk represented by a proposed insured or group with respect to a specific product, and
2. making a decision concerning the acceptance of the risk 

The people and entities involves in the creation and operation of an insurance policy.

The term producer to refer to any persons or entity that:

1. sells insurance, including agents, brokers, financial advisors, and banks
2. is involved in insurance sales made through direct marketing or the Internet 

The terms underwriter refers to an insurance company home office or regional office employee who performs the risk assessment and selection process.

The applicant is the person or entity who submits an application for the individual insurance and seeks to purchase the insurance cover.

The Insured  (Assured) is the person  whose  life or health is covered by an individual insurance policy. During in underwriting process, the insured is often  referred to as the proposed insured.

The policy-owner is the person or entity that owns an individual insurance policy.

When one person purchase an individual insurance policy on the life of another person, he policy is knows as a third-party policy.

In group insurance, the policy-holder is the employer or other organization that decides what kind of coverage to purchase for the group. The Individuals covered by a group insurance policy are referred to as the group insureds

The policy's beneficiary - the person or party the policy-owner named to receive the policy benefit.

Risk Pooling and the Law of Large Numbers

Insurance companies are able to provide protection against the financial consequences of loss because of the concept of the risk pooling. Which risk pooling,  individuals who face the uncertainty o a particular loss transfer that risk to an insurance company. 

In consideration, each owner of a policy pays a premium.

The Insurer invests those premiums to provide a common fund from which the insurer can pay benefits when the covered losses occur. 

Because not all individuals or groups that apply for insurance coverage present the same degree of risk to an insurer, insurance companies develop premium rate schedules for each insurance product.

An individual or group who represents a greater risk of loss is charged an appropriately higher premium rate for coverage.

To develop premium rate schedule an insurer must predict probable rate of loss. And no one can predict the losses that a specific person will experience.

An Important concept that helps assure us of the accuracy for our predictions about the probability of an event occurring id the law of large numbers.

The law of large numbers states that, typically, the more times we observes a particular event, the more likely it is that our observes results will  approximatel the true probability that the event will occur. 

Insurance company rely on the law of large numbers when they make predictions about the covered losses that a given group of insureds is likely to experience during a given time period.

Using these statistical records, insurance companies have calculated mortality and morbidity rates.

• Mortality, which is a particular importance to life underwriters, is the incidence of death among a specified group of people. A mortality rate is the rate at which death accurs among a specified group of people during a specified period, typically one year. Insurer compile such mortality rates and develop mortality table that indicate with great accuracy the number of people in a large group (100.000 people or more) who are likely to die at each age
• Morbidity, which is of particular importance to heath insurers, is the incidence of sickness and injury among a specified group of people. A morbidity rate is the rate at which sickness and injury accur among a specified group of people during a specified period. Morbidity tables indicate the number of people in a large group who are likely to get sick or be injury at each age.

By using accurate mortality and morbidity tables, life and health actuaries can predict the probable loss rates for given groups of insureds. 

An Actuary is a technical expert in insurance, annuities and financial instruments who applies mathematical knowledge to industry and company statistics to calculate various financial value.

Actuaries employed by insurers to predicted loss rate to establish premium rates for various classes of insureds or groups that will be adequate to pay.

Underwriters bear the responsibility of classifying risks appropriately to ensure that an insurer's claim experience is as close as possible to predicted loss rate used to establish premium rate.

Goal of Underwriting

Tujuan underwriting adalah mengaksep pertanggungan yang memenuhi syarat  sebanyak-banyaknya, dengan selalu menjaga agar perusahaan tetap sehat secara financial. Untuk mencapai tujuan tersebut, seorang underwriter harus berlatih atau praktek mengenai sound underwriting, bagaimana menghasilkan mortality dan morbidity gain serta menyetujui pengajuan sesuai dengan kebijakan yang berlaku.

Sound Underwriting 

Underwiting dianggap baik jika setiap risiko yang diajukan dievaluasi secara akurat, diklasifikasi dengan benar, dan kemudian disetujui dengan premi yang sesuai atau dengan kondisi yang relevan atau pertanggungan tersebut di tolak.

Dengan kata lain underwriting yang sehat dapat menghasilkan keputusan untuk:

• Menerbitkan polis asuransi sesuai pengajuan atau SPPA
• Menerbitkan polis asuransi dengan modifikasi tarif premi
• Menerbitkan polis asuransi dengan luas jaminan atau nilai pertanggungan
• Menolak untuk menerbitkan polis atau penundaan

Sound underwriting membantu perusahaan asuransi tetap kompetitive dan kuat secara finansial.

Jika standar underwriting perusahaan terlalu kaku atau premi kurang kompetitive dengan perusahaan lain, marketing (Produser) cenderung tidak akan mengajukan dan perusahaan akan kehilangan potensial  income.

Jika underwriter tidak melatih sound underwriting dengan banyak menolak risiko risiko yang menurut nya high risk atau membebankan premi yang rendah untuk risiko high risk tersebut, perusahaan kemungkinan tidak akan memiliki keuangan yang cukup untuk membayar klaim yang terjadi.

Bahkan keuangan perusahaan menjadi terganggu atau insolvent.

Dengan demikian fungsi underwriting sangat penting untuk kelangsungan solvabilitas dan profitabilitas perusahaan.

Underwriting is considered to be sound if each proposed risk is evaluated accurately, classified properly, and either approved for coverage at an appropriate premium or with relevant conditions or denied coverage.

In other word, sound underwriting can result in a decision to:

1. issue the insurance as applied for
2. issue the insurance with a modification in the premium rate,
3. issue the insurance with modification in the extent or amount of coverage, or
4. decline to issue the insurance or postpone making a decision

Mortality and Morbidity Gain

Jika standar underwriting ditetapkan dengan benar dan underwriter mempraktekkan sound underwriting yang baik, perusahaan akan mendapatkan mortality dan morbidity gain.

• Mortality gain adalah jumlah uang yang diperolah perusahaan asuransi jiwa ketika mortality experience lebih baik dari expected mortality. Mortality experience  adalah jumlah kematian yang benar-benar terjadi pada kelompok tertanggung tertentu, sedangkan expected mortality adalah jumlah kematian yang diprediksi akan terjadi pada sekelompok orang pada usia tertentu menurut mortality table. Dengan kata lain, jika lebih kecil tertanggung yang meninggal daripada yang diprediksi oleh aktuaris pada saat aktuaris menetapkan premium rate, hasilmya adalah mortality gain.
• A mortality gain is the amount of money a life insurance company earns when mortality experience is better than expected mortality. Mortality experience is the number of deaths that actually accur in a given group of insured, whereas expected mortality is the number of deaths predicted to occur in a group of people at a given age according to a mortality table. In other word, if fewer insured die than the actuaries predicted when they set the premium rates, the result is a mortality gain.
• Morbidity gain adalah jumlah uang yang diperoleh perusahaan asuransi kesehatan ketika morbidity experience lebih baik dari expected morbidity. Morbidity expeience adalah jumlah orang yang sakit atau cedera yang benar-benar terjadi pada kelompok tertanggung tertentu dikalikan dengan biaya rata-rata perkejadian, sedangkan expected morbidity adalah jumlah orang yang sakit atau cidera yang diprediksi terjadi pada kelompok umur tertentu menurut morbidity table dikalikan biaya rata-rata perkejadian lebih rendah dari prediksi aktuaris pada saat menetapkan tarif premi , hasilnya adalah morbidity gain.
• A morbidity gain is the amount of money a health insurance company earns when morbidity experience is better than expected morbidity. Morbidity experience is the number of sicknesses and injuries that actually occur in a given group of insured multiplied by the average cost per event, whereas expected morbidity is the number of sicknesses and injuries predicted to occur in a group of people at a given age according to a morbidity table multiplied by the estimated average cost per event is lower than the actuaries predicted when they set the premium rate, the result is a morbidity gain.

Persistency

Persistency adalah suatu sikap gigih yang terus menerus dan berkelanjutan yang dibutuhkan oleh seorang underwriter untuk mencapat suatu tujuan tertentu. Persistency juga  merupakan faktor penting untuk kesejahteraan finansial perusahaan asuransi.

Biaya yang ditanggung oleh perusahaan asuransi pada tahun pertama, biasanya lebih besar dari pada premi tahun pertama polis. Sehingga dalam menetapkan premi untuk produk tertentu, aktuari perusahaan akan melakukan antisipasi bahwa perusahaan harus mengganti biaya tersebut di tahun tahun berikutnya sejalan masuknya pembayaran premi. Namun jika perusahaan asuransi mengalami persistency yang buruk, maka perusahaan tidak dapat menutup biaya tahun pertama tersebut dan akan mengalami kerugian. 

Sebagian besar produk Individual insurance, persistensi tergantung pada pembayaran premi perpanjangan berkelanjutan. Karena pada umumnya , policyowner akan terus membayar renewal premium dan mempertahankan polis selama

1. renewal premium tetap competitive
2. policy-owner membutuhan insurance coverage
3. policy-owner memiliki kemampuan financial untuk membayar coverage

Persistency is the retention of an insurer's in-force business that occur when policies remain in force. Persistency is an important factor in an insurer's financial well being. The expenses that an insurer incurs in the first year after policy issue usually exceed the policy's first year premium. In establishing premium for a certain product, an insurer's actuarial staff anticipated that the insurer will make up those first-year expenses in subsequent years as premiums are paid. However, if an insurer experience poor persistency, then the insurer is unable to cover those first-year expenses and will experience a loss.

For most individual insurance products, persistency depends on the continued payment of renewal premiums. Generally, policy-owners will continue to pay renewal premiums and keep policies in force for as long as

1. renewal premium remain competitive
2. policy-owner have a need for the insurance coverage, and
3. policy-owner are financially able to pay for the coverage.

Untuk memelihara good persistency, underwriter harus menyetujui jumlah pertanggungan yang diinginkan pemohon dengan alasan yg tepat dan masuk akal sesuai dengan keuangan pemohon.

Contoh:

Pemohon yang membeli lebih dari yang mereka butuhkan atau mampu, cenderung membiarkan polis mereka berakhir. Sebagai contoh Asuransi Jiwa.

To maintain good persistency, underwriters must approve amounts of coverage that the applicants purchase for valid reason and that seem reasonable based on the applicant's finances. Applicants who buy more insurance than they need or can afford tend to let their policies lapse. Note, however, that in this era of inexpensive term insurance, persistency underwriting for individual life insurance is fast disappearing.

Risk Assessment

Each Insurance product is designed to provide specified coverage in exchange for a premium that enables the insurer to pay the benefits promised by the product. An insurer design the premium rate structure for each product so that the premiums charged to each insured person or group reflect the amount of risk that each represents in relation to other people or groups insured by the product. A person or group that represents a greater amount of risk is charged an appropriately higher premium for coverage.

Some of the factors that underwriters consider as they evaluate applications for individual insurance and for group insurance

Individual Underwriting

Risk Factors

A risk factor is any aspect of a proposed insured's present health, medical history, health habits (such as tobacco use), family history, financial condition, reputation, criminal record, occupation, or activities that increases the likelihood that the person will suffer a covered loss. 

Risk Factors as medical factor and nonmedical factors (financial factors and personal factors)

Another risk factor that underwriters must be aware of is moral hazard.

Moral hazard is a characteristic that exist when the reputation, financial position, or criminal record of an applicant or proposed insured indicates that the person may act dishonestly in the insurance transaction.

Anti-selection

In assessing the degree of risk represented by a proposed insured, an underwriter stays alert for signs of antiselection, which produces a high degree of risk Antiselection is the tendency of people who suspect ot know they are more likely than average to experience loss to apply for or renew insurance to a greater extent than do people who lack such knowledge of probable loss. 

The possibility of anti-selection makes the underwriter's role particularly important in the risk assessment process. 

Traditional Risk Classes

During the risk assessment process for individual life insurance, proposed insured are classified as falling within risk classes. A risk class is grouping of insured who represent a similar level of risk to an insurance company. 

Identify risk classes as :

• preferred classes designate proposed insureds whose anticipate mortality rates are lower than average and who represent the lowest degree of mortality risk. 
• standard classes designate proposed insureds whose anticipate mortality rates are average.
• substandard classes also called special classes or impaired risk classes, designate proposed insureds whose anticipate mortality rates are higher than average, but who are still considered to be insurable. Insurance companies typically establish these risk classes for proposed insureds who: 
• have permanent medical impairment or conditions
• are recovering from serious illness or accidents, or
• have occupations or avocations that significantly increase their degree of mortality risk.
• the declined class designate proposed insureds whose impairments and anticipated extra mortality risks are so great that the insurer cannot provide coverage at an affordable cost or whose mortality risk cannot be predicted because of recent or unusual medical conditions or other risk factors.

Group Underwriting

For most group applications, instead of evaluating the characteristics of each person in a proposed group, the underwriter evaluate the group on the basis of whether the group's characteristics (such as size, nature of business, composition in terms of age and sex, amount of turnover, geographical location, and past premium and claim information. 

Underwriting Philosophy and Underwriting Guidelines

• A company's underwriting philosophy and underwriting guidelines provide underwriter with guidance in their risk assessment process. 
• An underwriting philosophy, also known as underwriting objectives, is a set of objectives that guides all of an insurer's underwriting actions and that generally reflect the insurer's strategic business goals and includes its pricing assumption for products.
• An insurer's underwriting philosophy describes in general terms the types of risks that the company will and will not accept.
• In whatever manner an insurer's underwriting philosophy and underwriting guidelines evolve, the insurer must focus on approving and issuing coverage that is 

1. Equitable to the Insureds
2. Equitable to the Insurer
3. Deliverable by the Producer

Each of these elements is important in ensuring that coverage is provided fairly and objectively and that customers and producers are appropriately and ethically served by the insurance company.

QUESTIONS (EXPLAIN THE WORDS BELOW ACCORDING TO THE STUDENT NUMBER - in Indonesian Language)

1. Underwriting (Anindya & Aissah)
2. Producers (Anggi & Ananda)
3. Underwriter
4. Applicant (Anzel  & Annisa 
5. Insured (Arzety
6. Proposed Insured (Arini 
7. Third-party policy (Dava 
8. Policyowner (Dewita 
9. Group Prospect (Dinar
10. Group Insured (Azhar 
11. Beneficiary (Evelia 
12. Law of Large Numbers (Dian 
13. Mortality (Filicia
14. Mortality Rate (Farisa & Gita & Gibran
15. Mortality Table (Fransiska & Hanifah)
16. Morbidity Rate (Jihan & Junus)
17. Morbidity Table (Kevin & Hanzhola)
18. Actuary (Marta 
19. Mortality Gain (Monalisa 
20. Mortality Experience
21. Expected Mortality (Alan
22. Morbidity Gain (Naufal 
23. Morbidity Experience (Najwan
24. Expected Morbidity
25. Persistency (Zikril
26. Risk Assessment
27. Risk Factor (Nadifah Zahrah & Ni Made)
28. Moral Hazard (Rachel 
29. Financial Factor (Rifda
30. Personal Factor (Robby & Rangga
31. Anti-selection (Salsabila 
32. Preferred Class (Sawitri & Sitti)
33. Standard Class (Shaqila)
34. Sub Standard Class (Shintia & Syavira)
35. Declined Class
36. Risk Class (Yuila & Timoty)
37. Super Preferred Class
38. Underwriting philosophy
39. Underwriting Guidelines
40. Industry experience
41. Undeliverable
42. Rating