PROSES UNDERWRITING

 INSURANCE UNDERWRITING PROCESS

Material Facts

• A. Principles of utmost good faith (itikad baik)
• A contract is an agreement between two parties is legally binding. For a contract to be legally binding, certain elements must be present such as:
1. an offer
2. an acceptance of the offer
3. consideration
• With contracts in general, there is no duty on the contracting parties to provide information that has not been requested. The legal principle involved is known by a Latin term, caveat emptor, which translate as le be the buyer beware. 
• It would certainly not be fair or just: there will be things known particularly by a person wanting insurance that are not known by a potential insurer and which, if they were known, may effect its decision to accept the risk or on what terms.
• It is because of this that the principle of caveat emptor does not apply in an insurance contract. In its place is a duty of the utmost good faith (known in Latin as uberrima fides)
• Essentially, this duty means that a person wanting insurance ( a proposer) must provide all information known by them to the insurer, 
• B. What is a material facts?
• Facts that do not need to be disclosed
• C. Duty of disclosure (kewajiban mengungkapkan fakta)
• 1. Duration of the duty of disclosure
• a. At inception (awal)
• b. Mid-term (jangka menengah/pertengahan) adjustment
• c. Renewal (perpanjangan)
• d. Policy wording requirements (persyaratan)
• 2. Disclosure by an an agent or intermediary effecting insurance
• D. Consequences of non disclosure
• A breach of duty of disclosure may arise in two circumstances:
1. Misrepresentation : this is where a statement is substantially false, relates to the subject matter of the  proposal and has induced (menyebabkan) the insurer to enter the contract; or 
2. Non-disclosure : the proposer simply fails to tell the insurer something they know, and it is something that would have made the insurer either not have entered the contract or on different term
• If the non-disclosure or misrepresentation id fraudulent (also known as 'concealmnet')
• E. Physical and moral hazard
• The insurance industry commonly uses the words 'hazard' and 'peril' in particular ways, with specific meanings. The easiest way to define them is to view hazard in relation to peril:
• A perils can be defined as that which   gives rise to a loss
• A hazard can be defined as that which influences the operation of the perils
• F. Obtaining material facts
• 1. Brokers
• 2. Risk Surveys
• 3. Supplementary questionnaires
• 4. Meeting with clients
• 5. Call centers 
• 6. Internet

Underwriting Procedures

• A. Quotations
• 1. Quotation procedure
• The quotation will state (menyatakan) for how long it is valid, usually a set a number of days, e.g 30 days
• When the quotation is issued, cover is not effective
• Unless (kecuali) the insurer  has withdrawn (menarik) the quotation, if the proposer accepts the quotation within the specified  timescale (jangka waktu), the insurer is legally bound (terikat) to honour the quotation
• However (namun), if the circumstances upon which the quotation was based changed, the insurer is not bound to maintain (mempertahankan) the quotation.
• During the number of days stipulated (ditentukan), the proposer has the option to accept or decline the quotation
• When the period has expired and the proposer has not accepted the quotation, the quotation is no longer valid and the insurer is not bound to honour it.
• If no time is stipulated for the quotation to remain valid, the offer remains open for a reasonable time, as per the general rules for the interpretation of contracts.
• B. Proposal forms
• The proposal form has been the most common mechanism by which the underwriter receives information regarding the risk to be insured.
• Questions in the proposal form
• a. General questions
• Proposer's name
• Proposer's address
• Proposer's occupation
• Period of insurance
• b. Specific questions (determine whether or not to accept the risk)
• Proposer's age
• Description of the subject matter to be insured
• Business details
• Past insurance history
• Sum insured or limit of liability
• C. Premium calculation
• Premium = sum insured x rate
• The rate could be a rate percent or a rate per mille.
• Rate per cent is the price in pounds for each hundred pounds of insurance, e.g. rate of 1.5% means an insurer would charge 1.5 for every 100 insured
• Rate per mille is the price in pounds for each thousand pounds of insurance
• 1. Adjustable premiums
• In certain case, the exposure measure is unknown at the start of the period of insurance, and all that can be provided is an estimate of what the exposure measure might be. 
• 2. Flat Premiums
• In other cases, it is practice to charge a flat premium rather than apply a rate to a premium base, for example, motor insurance.
• D. Policies, cover notes and certificates of insurance
• 1. Policies
• The insured and the insurer need to be absolutely clear as to the terms and conditions agreed between them, and for this reason, a policy is issued.
• The policy contains all the details of :
• the item/exposure insured
• the operative perils
• period of cover
• exceptions (exclusion)
• conditions
• the premium and
• the other relevant information
• The policy is effectively evidence of the contract, and not the contract of insurance itself.
• The contract of insurance comes into effect once the insurer has accepted the insurance proposal, terms has been agreed and the premium has been paid or has been agreed to be paid.
• Therefore, the contract exists irrespective (terlepas dari) of the existence of an actual policy document.
• The policy is useful as proof in the event of dispute over the terms agreed, but the absence (tidak adanya) of the policy document does not invalidate (membatalkan) the contract
• 2. Cover Notes
• A cover note is essentially a document issued as evidence that insurance has been granted, pending the issue of a policy or endorsement
• The cover note will have the following characteristic:
• commencement date (and time in respect of motor insurance)
• a statement that the policy follows the normal terms and conditions of the insurer for that class of insurance
• risk-specific information that identifies the property or liability that is covered
• 3. Certificate of insurance
• For compulsory insurances, it is a legal requirement that a certificate is issued to prove a policy is in force. It is evidence that a contract insurance exist, and that policyholder/insured complies with the law. It is issued by the insurer in the name of the insured.
• a. Motor insurance (The Road Traffic Act 1988)
• registration of vehicle
• name of policyholder
• date of commencement (permulaan) of cover
• expiry date
• person/classes of person entitled to drive (pihak yang berhak mengemudi)
• limitation as to use
• confirmation that cover complies with UK statutory requirement
• b. Employers' liability insurance
• name of policyholder
• date of commencement of cover
• expiry date
• name of insurer
• authorized signature on behalf of insurer
• level of cover
• a statement by the insurer declaring that the policy satisfies the relevant legal requirement
• E. Contract certainty (kepastian)
• Contract certainty is achieved by the complete and final agreement of all between the insured and insurer by the time that they enter into the contract, with contract documentation provided promptly thereafter.
• F. Premium Payment (pembayaran)
• 1. Methods of collecting premiums
• a. a single upfront (dimuka) payment (by cash, cheque or credit card)
• b. Credit
• c. Installments
• 2. Non-payment of premium
• In the event of non-premium of the premium the policy is not renewed and cover is lapsed (berakhir)
• 3. Insurance Premium Tax (IPT)
• Information leaflet for application by telephone or internet
• Private car insurance proposal form

Insurance Policies

• A. Structure, form and content
• 1. Heading (Judul) 
• 2. Preamble (pembukaan)
• 3. Signature (tanda tangan)
• 4. Operative clause (Klausula yang berlaku)
• 5. Exceptions (pengecualian)
• 6. Conditions (Kondisi)
• A condition is essentially a contractual term that the insured agreed to comply with (setuju/patuh) during the period of cover
• Conditions are either implied or express
• Implied (tersirat) conditions are implied by common law and practice and do not need to appear in the policy
• Express (tersurat) conditions are always stated in the policy

• 7. Policy schedule 
• 8. Information and facilities
• B. Exceptions (or exclusion)

Most general insurance policies will contain two types of exception (or exclusion)

1. General exclusions
2. Specific exclusions

Some general exclusions are common to all general insurance policies, and are termed market exclusions

1. War and related perils

2. Radioactive contaminations and explosive nuclear assemblies

3. Terrorism

4. Pollution and/or contamination

5. eRisks

6. Marine policies

7. Contractual liability

8. Sonic bangs

• C. Conditions

• 1. Duties of the insured
• 2. Alteration
• 3. Action by the insured in the event of a claim
• 4. Fraud
• 5. Reasonable precautions (tindak pencegahan yang wajar)
• 6. Contribution
• 7. Subrogation
• 8. Average
• 9. Arbitration
• 10. Cancellation
• D. Excesses, deductibles and franchises
• 1. Excesses
• An excess is the first amount of each and every claim for which the insured responsible. Theoretically, the insured is really their own insurer for the value of the excess. Excesses appear (muncul) in most of general insurance.
• 2. Deductibles
• A deductible is, essentially (pada dasarnya), a very large excess. This is increasingly prevalent (lazim) with commercial insurance.
• 3. Franchises
• A franchise is a fixed amount or period that acts as threshold to determine whether claims are payable. One the amount or period is exceeded, the claim is payable in full: nothing id deducting. If it is not exceeded, however, nothing is payable.
• Franchises are not common, but are sometimes found in engineering business interruption insurances. Time franchises (e.g. seven days) are common sickness cover under personal accident and sickness insurance policies.
• E. Warranties, conditions and representations
• 1. Warranties
• In contrast to normal legal definition where a warranty is a minor contract term, in insurance terms a warranty goes to the heart of the contract, and it is vitally important that it is complied with. In insurance terms, a warranty is basically a promise made by the insured relating to facts or performance concerning the risk. It is an undertaking by (dilakukan) the insured that:
• something will or will not be done
• a certain fact exists or does not exist
• 2. Conditions
• Policy conditions are terms (persyaratan), which although they are not warranties, impose important obligations upon the insured. The effect of a breach of conditions is very serious and will vary depending on which of the following type of conditions group the condition falls under:
• conditions precedent to the contract
• conditions subsequent to the contract
• conditions precedent to liability (or to recovery)
• 3. Representations
• These are written or oral statements made during the negotiations for contract.
• 4. Summary and comparison
• 
  
• Extract from home insurance policy documents

Renewals and Cancellation

• A. Renewal
• 1. Days of grace
• 2. Motor insurance renewal procedures
• B. Cancellation

Insurance Products : Personal Insurances

• A. Motor insurance
• 1. Private motor insurance
• a. Road Traffic Act only
• b. Third party only
• c. Third party, fire and theft
• d. Comprehensive
• e. Optional extensions
• f. Exclusive
• 2. Motor cycle insurance
• 3. Commercial vehicles
• B. Health insurance
• 1. Personal accident benefits
• 2. Sickness cover
• 3. Medical expenses
• C. Household insurance
• 1. Buildings insurance
• 2. Contents insurance
• 3. Optional extensions
• a. All risks
• b. Money and credit cards
• c. Bicycles
• d. Freezer contents
• e. Caravans
• f. Small craft
• g. Sports equipment
• h. Personal accident, hospital cash benefit and creditor insurance
• i. Domestic animals
• j. Legal expenses
• D. Travel insurance
• E. Extended warranties

Insurance Products : Commercial Insurances

• A. Property insurance
• 1. Fire and special perils insurance
• a. Standard exclusions
• 2. All risks insurance
• 3. Theft insurance
• 4. Glass insurance
• 5. Money
• B. Pecuniary insurance
• 1. Business interruption insurance
• a. Optional extensions
• b. Increased cost of working
• 2. Legal expenses 
• C. Liability Insurance
• 1. Employers' liability insurance
• 2. Public liability insurance
• 3. Products liability insurance
• 4. Pollution liability
• 5. Professional indemnity insurance

Related Services

• Helplines
• Authorized repairers and suppliers
• Risk control and advice
• Uninsured loss recovery services

Underwriting Considerations

• A. Basic principles of underwriting
• B. Specific underwriting considerations
• 1. Motor insurance
• 2. Health insurance
• 3. Personal insurances
• a. Household insurance
• b. Travel insurance
• 4. Commercial property insurance
• a. Fire and special perils
• b. Theft insurance
• c. Glass insurance
• d. Money insurance
• 5. Pecuniary insurance
• a. Legal expenses insurance
• b. Business interruption insurance
• 6. Liability insurance
• 7. Extended warranties
• C. Fraud, prevention, detection and consequences
• D. Equally Act 2010
• E. Data Protection Act 1998
• Data Protection Act Factsheet

Establishing The Price : Rating

• A. Data required
• 1. Board level reporting
• 2. Reporting to underwriting managers
• 3. Operational data
• B. Importance of claims information
• C. Frequency and severity of claims
• 1. High frequency and low severity
• 2. Low frequency and high severity
• D. Claims loss ratios
• Claims ratio = (claim incurred / premium) x 100
• 1. Earned loss ratio (ELR)
• 2. Outstanding loss ratio (OLR)
• E. Account performance and monitoring
• 1. Policy year
• 2. Underwriting year
• 3. Calendar year
• 4. Accounting year

Establishing The Price : Pricing Factors

• A. Risk premium
• 1. Frequency
• 2. Severity
• 3. Large claims
• 4. Reinsurance cost
• 5. Claims run-off
• 6. IBNR (incurred but not reported) claims
• 7. Catastrophe claims
• 8. Latent claims
• 9. Claims inflation
• 10. Exposure
• B. Expenses
• 1. Fixed expenses
• 2. Variable expenses
• a. Underwriting
• b. Commission
• c. Claim handling
• C. Return on capital employed (ROCE)
• D. Investment income
• 1. Income only, or capital gains too?
• 2. Actual or expected rates of return?
• E. Premium taxes
• 1. Insurance Premium tax (IPT)
• 2. Financial Services Compensation Scheme (FSCS)
• 3. Motor Insurer's Bureau (MIB)

Managing Exposure

• A. Market cycle
• B. Risk accumulation
• 1. Single risks
• a. Property and business interruption risks
• b. Liability risks
• 2. Single events
• C. Reinsurance
• 1. Types of reinsurance
• a. Proportional reinsurance
• Quota Share
• Surplus
• b. Non-proportional reinsurance
•