Unit 3

Underwriting:

Philosophy of underwriting

Insurance underwriters are professionals who evaluate and analyze the risks involved in insuring
people and assets. Insurance underwriters establish pricing for accepted insurable risks. The term
underwriting means receiving remuneration for the willingness to pay a potential risk.
Underwriters use specialized software and actuarial data to determine the likelihood and
magnitude of a risk.

 Reviews specific information to determine what the actual risk is

 Determines what kind of policy coverage or what perils the insurance company agrees to

insure and under what conditions

 May restrict or alter coverage by endorsement

 Looks for proactive solutions that may reduce or eliminate the risk of future insurance
claims

 May negotiate with your agent or broker to find ways to insure you when the issue isn't
so clear-cut or there are insurance issues.

Underwriters are trained insurance professionals who understand risks and how to prevent them.
They have specialized knowledge in risk assessment and use this knowledge to determine
whether they will insure something or someone, and at what cost the insurance underwriter is the
insurance company's appointed risk taker, the one who decides to take on the financial
responsibility to the insured if he believes in the risk. He or she reviews all the information your
agent provides and decides if the company is willing to take a gamble on you.

A lot of underwriting is automated, so in cases where the situation doesn't have a special
circumstance, the underwriting may be programmed into computer programs, similar to the kind
of quoting systems you might see when you get an online insurance quote.

Kinds of underwriting

An insurance company may issue policies for many different types of insurance. However, most
underwriters perform their responsibilities as specialists. An underwriter may underwrite just
property policies, just casualty policies, just personal property policies, just professional liability
policies, and so on.

Securities underwriting:

Securities underwriting refers to the process by which investment banks raise investment capital
from investors on behalf of corporations and governments that are issuing securities (both equity
and debt capital). The services of an underwriter are typically used during a public offering.

Bank Underwriting:

It is the detailed credit analysis preceding the granting of a loan, based on credit information
furnished by the borrower; such underwriting falls into several areas:

(a) Consumer loan underwriting includes the verification of such items as employment history,
salary and financial statements; publicly available information, such as the borrower's credit
history, which is detailed in a credit report; and the lender's evaluation of the borrower's credit
needs and ability to pay. Examples include mortgage underwriting.

(b) Commercial (or business) underwriting consists of the evaluation of financial information
provided by small businesses including analysis of the business balance sheet including tangible
net worth, the ratio of debt to worth (leverage) and available liquidity (current ratio). Analysis of
the income statement typically includes revenue trends, gross margin, profitability, and debt
service coverage (see Debt Service Coverage Ratio).

Insurance underwriting:

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.
Each insurance company has its own set of underwriting guidelines to help the underwriter
determine whether or not the company should accept the risk.

Other forms of underwriting

Real estate underwriting

In evaluation of a real estate loan, in addition to assessing the borrower, the property itself is
scrutinized. Underwriters use the debt service coverage ratio to figure out whether the property is
capable of redeeming its own value or not.

Forensic underwriting
Forensic underwriting is the "after-the-fact" process used by lenders to determine what went
wrong with a mortgage. Forensic underwriting refers to a borrower's ability to work out a
modification scenario with their current lien holder, not to qualify them for a new loan or a
refinance. This is typically done by an underwriter staffed with a team of people who are
experienced in every aspect of the real estate field.

Sponsorship underwriting

Underwriting may also refer to financial sponsorship of a venture, and is also used as a term
within public broadcasting (both public television and radio) to describe funding given by a
company or organization for the operations of the service, in exchange for a mention of their
product or service within the station's programming.

Requisites of good underwriting

You don't need a specific bachelor’s degree to become an underwriter, but courses in
mathematics, business, economics, and finance are beneficial in this field. A good underwriter is
also detail-oriented and has excellent skills in math, communication, problem-solving and
decision making.

Once hired, you typically train on the job while supervised by senior underwriters. As a trainee,
you learn about common risk factors and basic applications used in underwriting. As you
become more experienced, you can begin to work independently and take on more responsibility.

Your employer may require you to get certified as part of your training or to advance to a senior
underwriter position. Completing certification courses helps you stay current on insurance
policies, technologies, and state and federal insurance regulations.

Underwriting of life insurance

Life Insurance Underwriting is the process of accepting the proposal of the customer based on
the guidelines formulated by the insurance company. The insurance companies codify a set of
procedures which must be followed before accepting any new business. When a new proposal
comes to the insurance company its underwriting department scrutinizes the proposal whether or
not it fulfills the criteria laid down by the company. If they find any lacunae, they ask the agent
to get it corrected. It is not that one can get whatever cover one wants. The issue of policy
depends on income of the insured and whether he has the capacity to pay the premium over the
years. Once the underwriters are satisfied that all the conditions have been fulfilled they go ahead
to accept the premium and issue the policy. Underwriting can be defined as the decision making
process during which the company decides whether to insure or not and if yes at what rate.
Underwriting of non-life insurance
For a general insurance company, underwriting business is the basic core activity. All other
activities, in fact, emanate from this core activity only. Not much attention was being paid to this
core activity in the nationalized set-up under tariff era. Underwriting was reduced to referring to
the pages of tariff. There was no application of mind. Any innovation was out of question. The
customer has to tailor his needs according to the available products rather than it being other
way. In an environment like this the underwriting skill and expertise development saw a decline.
Then came the liberalization of insurance sector and gradual withdrawal of tariff with the
ultimate aim of ushering in a fully tariff free regime. Suddenly underwriting became all
important. The environment became very competitive. Profit and solvency concern forced
insurance companies to relook at their underwriting operation under IRDA regulation on ―File
& Use‖ system. This meant amongst other, all insurance company must have - An underwriting
policy duly approved by the board
- The pricing has to be actuarially evaluated and if it is subsidized, this has to be spelt out.
- The concept of appointed actuary in general insurance company has come.
- Nominated underwriters & issues connected with that.
- Marketing & underwriting delinked.
Then there are regulations to protect policy holders interests and certification of outstanding
claims provisioning by Appointed Actuary. These regulations have their own bearing on
underwriting and pricing, which cannot be ignored now. There is now talk of risk perception
based effective underwriting. Risk management and related issues are increasingly becoming
crucial and important which is the way it should always be.
Pursuit of premium for obvious reasons is the goal of all general insurance companies. But this
premium underwritten must be quality premium and must generate profit. The excellence and the
quality of underwriting will determine the long term survival of general insurance companies.
This realization is now coming. Then there are whole lot of other issues (e.g. marketing, claims
settlement, investment operation, etc.) which are dependent upon the underwriting operation of
the company. The underwriting issues therefore cannot be seen in isolation and there is a need to
Re look at things in the present day context. Let‘s now examine what does underwriting entail,
how is the underwriting philosophy /policy of a company is formulated and how this policy is
monitored for effective implementation. But before that let us discuss the corporate goal of a
general insurance company because policies in other areas of operation must fit in and help
achieve the corporate goal.
In today‘s world most of the organizations have vision and mission statements. Insurance
companies are no exception. These statements provide the broad frame work within which the
corporate goals / objectives of the insurance companies are set. The corporate objectives provide
the business direction for medium and long term goals. This involves understanding as to where
the organization stands now, its core capabilities, strength and weakness and the environment
(business, social and economic, regulatory / legal etc,) in which it operates. Bases on these
understandings, the road map to achieve the goal is set. Corporate objectives cover whole range
of the organizations activities including the underwriting goal. The underwriting policy of the
company must therefore be capable of delivering the required results and accordingly must be
subject to continue review for its effectiveness. Underwriting basically refers to the process of
evaluating a proposal that comes for insurance. Based on the evaluation done a decision is to be
taken as to the acceptance of proposal or otherwise If it is to be accepted, at what price and on
what terms, conditions and coverage‘s. This process ends with the issue of policy documents.
For a routine kind of simple proposal, the entire procedure is very simple. Generally insurance
companies have internal guide rates and standard policy documents, for these routine risks which
are typically High frequency, low severity risk and do not require much of an underwriting
expertise & skill.
For simple risk, the evaluation is done through the information contained in the proposal form.
For big and complex, industrial risk, the evaluation is done through risk inspection carried out by
specialist trained engineers of the insurance company. Individual risk peculiarities will vary and
the report of the risk engineer comprehensively examines the physical hazard aspects in relation
to the perils covered. Depending upon the class of business, additional questions may be asked
through a questionnaire. For medical insurance, medical checkup and diagnostic test may be
insisted upon. Moral hazard aspects are difficult to assess. But for big corporate clients, it is
worthwhile to examine their corporate governance, risk management philosophy, safety and
investigation mechanism and above all the quality, skill and experience of manpower in handling
and minimizing loss. All said, insurance companies are always exposed to ―adverse
selection.‖ Whether it is proposal form, questionnaire or risk inspective, the idea is to get all
relevant information for an informed underwriting. Insurance companies have to be on their
guard for adverse selection and moral hazard aspect.
After having decided to accept the proposal after due evaluation, the next step is to decide about
the pricing and this involves matching of risk to price (via experience and modeling) as also
limiting of potential loss exposure through some mechanism. Insurance is an intangible product
and pricing intangible product is difficult for it cannot be based on deterministic model
traditionally used for tangible goods / products. The uncertainty about frequency and severity of
claims makes the pricing task of insurance product very difficult. We have to make use of
stochastic models which are based on theory of probability. Based on the past data (experience),
these model help us in making prediction about the likely number of claims that are expected to
be reported as also about the average claims size. The expected claims cost is worked out by
multiplying the two. The claims cost must also take into account the provision for IBNR &
IBNER claims. Inflation must also be factored in pricing. For any policy issued today, the claims
if it arises will be on some future date. Claims cost is the most dominant cost and most difficult
to determine. The other costs are the management cost and cost of business acquisition which are
to be factored in the pricing along with a reasonable margin of profit.
The pricing will also depend on the terms, conditions, special warranties, scope of coverage, etc.
Higher deductible, reduced coverage, etc. would obviously attract lesser premium. Pricing
should also be sensitive to the business, regulatory, economic and social environment. Balancing
has to be done to make the price competitive on the one hand and actuarially adequate
(alignment of risk with price) i.e. economic price on the other hand. Reducing claim cost and
other costs of operation is therefore such a big issue. Price adequacy is a regulatory concern also.
Modern day computers have enabled storage and analysis of huge volume of data. Since
actuarial modeling is based on past claim data and simulation, the insurance company, must have
a system of capturing good quality relevant data. Repetitive underwriting decision can then
become a rule in the under writing manual or better still the system supported e-risk analysis and
pricing There is no other way except leveraging IT.
After having fixed the price, the next issue is to examine the acceptance in relation to the
underwriting capacity and also if so warranted how to increase this capacity and the cost of the
some. Underwriting capacity refers to the maximum premium that an insurance company can go
for against the specified level of capital because of regulatory requirements and also dictated by
prudence therefore; generating volume of business is linked to underwriting capacity of the
company which in turn is linked to the capital and free reserve of the company. This means that
if you want to increase the underwriting capacity you have to bring more of capital and more of
free reserve. The other option is to hire the capital through reinsurance arrangement. Depending
upon the underwriting capacity, business plan, size and volatility of portfolio, etc, a decision is to
be taken as to how much exposure to retain on a big single risk or on an aggregate exposure from
a group of risk. This retention is kept on companies own account and the balance is reinsured
through a well thought out comprehensive reinsurance programmed. Reinsurance incidentally
narrows down the range of variability of the insurers result. The capacity of underwriting being
limited, profit has to be generated from this limited volume of business. The skill and judgment
of underwriter therefore becomes very important to make use of the available capacity to
maximize profit.

The other underwriting objective could be:

- Leadership of a selective business class e.g. health insurance
- Underwriting profitability
- Brand leader
- Company of choice for businessman / common man
- Aggressive underwriting for volume
- Developing balanced portfolio by spreading the risk geographically and class wise.

There is therefore a need to have an underwriting policy which should define the underwriting
objective of the company, the underwriting structure and authority approach to key underwriting
issues, portfolio goals ( volume and mix), marketing strategy, R & D, response time for proposal
acceptance, etc. This involves a proper understanding of organizational strengths and weakness,
the challenges ahead, the changing business and regulatory environment, etc. The strategy to
overcome the weakness and the preparedness to meet the future challenges should form part of
the underwriting policy. The underwriting capacity and reinsurance support arranged should be
factored while formulating underwriting policy. The training of underwriting people is also an
area which is to be addressed through this policy. As part of this policy underwriting manuals
and guide rates should be developed to provide underwriting direction and decision. The
underwriting authority should be clearly defined. The underwriting goal and the road map to
achieve the same should be clear to one and all in the organization. The underwriting policy
helps in translating goals into strategies which in turn will be reflected in the business that the
underwriter accepts.
The underwriting challenges that the insurance company will face in near future may include
- Terrorism cover
- Environmental and pollution issues
- High tech/ high value project
- Coverage‘s for intellectual property right
- Cyber security / liability
- Insurance as a comprehensive solution under one umbrella.
- Credit risk
- Performance guarantee
- Contingent business interruption
- Long term insurance cover e.g. latent defect insurance (high rise building)
Insurers have to make use of the advances being made in science and technology to better
analyze the risk and have better pricing capability. For example in health sector the advances
made in genetics and the ability to make prediction about disease based on genetic testing can
be a powerful tool for life and health insurance underwriting. The company which will first
develop the underwriting capability of future generation risk will be the company that will rule.
R & D, innovation and futuristic view of things are important. Insurance companies should
understand and realize, if they are not able to meet the new demands of market, some non-
insurance player may step in. Globalization and its impact on insurance, liberalization of
insurance sector, the proposed changes in Insurance Act of 1938, intensified competition,
electronic commerce, emergence of new risk, local factors affecting the insurance market, the
financial meltdown and recession, etc. are the factors which will deeply affect the insurance
business and will bring challenges of new kind before the underwriting community. Are we
prepared to face the new challenges? The insurance companies must gear themselves to be the
true underwriter of the future risk.
Pricing and Premium Setting

Learning Outcomes

A. Insurance pricing – basic elements

B. Surplus and bonus

A. Insurance pricing – Basic elements

1. Premium

In ordinary language, the term premium denotes the price that is paid by an insured for
purchasing an insurance policy. It is normally expressed as a rate of premium per thousand
rupees of sum assured. These premium rates are available in the form of tables of rates that are
available with insurance companies.

Diagram 1: Premium

The rates that are printed in these tables are known as “Office Premiums”. They are typically
level annual premiums which need to be paid every year. They are in most cases the same
throughout the term and are expressed as an annual rate.

Example

If the premium for a twenty year endowment policy for a given age is Rs. 4,800, it means that
Rs. 4,800 has to be paid each year for twenty years.

However it is possible to have some policies in which the premiums are payable only in the first
few years. Companies also have single premium contracts in which only one premium is payable
at the beginning of the contract. These policies are usually investment oriented.

2. Rebates

Life insurance companies may also offer certain types of rebates on the premium that is payable.
Two such rebates are:

• For sum assured

• For mode of premium

a) Rebate for sum assured

The rebate for sum assured is offered to those who buy policies with higher amounts of sum
assured. It is offered as a way of passing on to the customer, the gains that the insurer may make
when servicing higher value policies. The reason for this is simple. Whether an insurer services a
policy for Rs.50,000 or Rs.5,00,000, the amount of effort required for both, and consequently,
the cost of processing these policies remain the same. But higher sum assured policies yield more
premium and so more profits.

b) Rebate for mode of premium

Similarly a rebate may be offered for the mode of premium. Life insurance companies may
allow premiums to be paid on annual, half yearly, quarterly or monthly basis. More frequent the
mode, more the cost of service. Yearly and half yearly modes involve collection and accounting
only once a year while quarterly and monthly modes would mean the process is more frequent.
Half-yearly or yearly premiums thus enable a saving in administrative costs as compared to
quarterly or monthly modes. Moreover, in the yearly mode, the insurer can utilise this amount
during the entire year and earn interest on it. Insurers would hence encourage payment via yearly
and half yearly modes by allowing a rebate on these. They may also charge a little extra for
monthly mode of payments, to cover additional administrative expenses involved.

3. Extra charges

The tabular premium is charged for a group of insured individuals who are not subject to any
significant factors that would pose an extra risk. Such individual lives are known as standard
lives and the rates charged are known as ordinary rates.
If a person proposing for insurance suffers from certain health problems like heart ailments or
diabetes, which can pose a hazard to his life, such a life is considered to be sub-standard, in
relation to other standard lives, the insurer may decide to impose an extra premium by way of a
health extra. Similarly an occupational extra may be imposed on those engaged in a hazardous
occupation, like a circus acrobat. These extras would result in the premium being more than the
tabular premium.

Again, an insurer may offer certain extra benefits under a policy, which are available on payment
of an extra premium.
Example

A life insurer may offer a double accident benefit or DAB (where double the sum assured is
payable as a claim if death is a result of accident). For this it may charge an extra premium of
one rupee per thousand sum assured.

Similarly a benefit known as Permanent Disability Benefit (PDB) may be availed by paying an
extra per thousand sum assured.

4. Determining the premium

Let us now examine how life insurers arrive at the rates that are presented in the premium tables.
This task is performed by an actuary. The process of setting the premium in case of traditional
life insurance policies like term insurance, whole life and endowment considers following
elements:

• Mortality
• Interest
• Expenses of management
• Reserves
• Bonus loading

Diagram 2: Components of Premium

The first two elements constitute the net premium while the other elements are loaded onto the
net premium to yield the gross or office premium
a) Mortality and Interest

Mortality is the first element in premiums. It is determined by using a “Mortality Table”, which
gives us an estimate of the rate of mortality for different ages.

Example

If the mortality rate for age 35 is 0.0035 it implies that out of every 1000 people who are alive as
on age 35, 3.5 (or 35 out of 10,000) are expected to die between age 35 and 36.
The table may be used to calculate mortality cost for different ages. For example the rate of
0.0035 for age 35 implies a cost of insurance of 0.0035 x
1000 (sum assured) = Rs. 3.50 per thousand sum assured.

The above cost may be also called the “Risk Premium”. For higher ages the risk premium would
be higher.

By summing up the individual risk premiums for different ages we can get the cost of claims that
are expected to be payable for an entire period or term, say from age 35 to 55.The total cost of
these claims would give us the future liabilities under a policy, in other words it tells us how
much money is needed by us to pay claims that may arise in future.

To arrive at “Net Premium” the first step is to estimate the present value of future claim costs.
The reason for estimating present value is that we are trying to find out how much we need at
hand today to meet claims that may arise in the future. This process of estimating present value
brings us to the next element in premium determination, namely “Interest”.

Interest is simply the discount rate we assume for arriving at the present value of future claim
payments that have to be made.

Example

If we need to have Rs. 5 per thousand to meet the cost of insurance after five years and if we
assume a rate of interest of 6%, the present value of Rs. 5 payable after five years would be 5 x
1/ (1.06)5 = 3.74.

If instead of 6% we were to assume 10%, the present value would be only 3.10. In other words
the higher the rate of interest assumed, the lower the present value.

From our study of mortality and interest there are two major conclusions we can derive

• Higher the mortality rate in the mortality table, higher the premiums would be
• Higher the interest rate assumed, lower the premium
Actuaries tend to be prudent and a little conservative and would typically assume mortality rates
that are higher than what they expect to be the actual experience. They would also assume a
lower interest rate than what they expect to earn from their investments.

Net premium

The discounted present value of all future claim liabilities gives the “Net Single Premium”. From
the net single premium, we can get the “Net Level Annual Premium”. It is the net single
premium which is levelled out so as to be payable over the premium paying term.

Gross premium

Diagram 3: Guiding Principles for determining Amount of Loading

Gross premium is the net premium plus an amount called loading. There are three considerations
or guiding principles that needs to be borne in mind when determining the amount of loading:

i. Adequacy

The total loading from all policies must be sufficient to cover the company’s total operating
expenses. It should also provide a margin of safety and finally it should contribute to the profits
or surplus of the company.

ii. Equity

Expenses and safety margins etc. should be equitably apportioned among various kinds of
policies, depending on type of plan, age and term etc. The idea is that each class of policy should
pay for its own costs, so that to the extent possible, one class of policy does not subsidise the
other.

iii. Competitiveness

The resulting gross premiums should enable the company to improve its competitive position. If
the loading is too high, it would make the policies very costly and people would not buy.

b) Expenses and reserves

Life insurers have to incur various types of operating expenses including:

• Agents training and recruitment,

• Commissions of agents,
• Staff salaries,
• Office accommodation,
• Office stationery,
• Electricity charges,
• Other miscellaneous etc.

All these have to be paid from premiums that are collected by insurers. These expenses are
loaded to the net premium.

A life insurer incurs two types of expenses:

i. The first, known as “New Business Expenses”, are incurred at the beginning stage of the
contract
ii. The second type of expenses, known as “Renewal Expenses,” is incurred during subsequent
years.

Initial or new business expenses can be substantial. Life insurers are also required by law to hold
certain margins as reserves to ensure they can meet their obligations, even when their actual
experience is worse than assumed. The initial expenses along with the margins required to be
maintained as reserves are typically higher than the initial premiums received.

The company thus faces a strain, known as new business strain. The initial outflow is only
recovered from subsequent annual premiums. An implication is that life insurers cannot afford to
have large number of their policies cancelled or lapsing in initial years, before the expenses are
recouped. Another implication of new business strain is that life insurance companies would
need a gestation period of some years before they can make profits.

Expenses are also determined in different ways, depending on the type of expense.

i. For instance, commissions and incentives for agency managers / development officers are
typically decided as a percentage of the premiums earned.
ii. On the other hand, expenses like medical examiners’ fees and policy stamps vary depending
on the amount of sum assured or face value of the policy and are considered in relation to the
sum assured.
iii. A third category of expenses is overheads like salaries and rents which generally vary with
the amount of activities that in turn depend on the number of policies being serviced. The larger
the volume of business in terms of number of policies, higher the overhead expenses.

Based on the above classification, the typical loading to a net premium would have three parts

i. A percentage of premiums

ii. A constant amount for each ‘1000 sum assured’ (or face amount) which is added to net
premium
iii. A constant amount per policy

Lapses and contingencies

The net premium and loading for expenses is designed to cover the estimated cost of benefits and
expense charges that the life insurer expects to incur during the term of the policy. The insurer
also constantly faces the risk that actual experience may be different from the assumptions made
at the stage of designing the contract.

One source of risk is that of lapses and withdrawals. A lapse means that the policyholder
discontinues payment of premiums. In case of withdrawals, the policyholder surrenders the
policy and receives an amount from the policy’s acquired cash value.

Lapses can pose a serious problem because they typically happen within the first three years with
highest incidence being typically in the very first year of the contract. Life insurers incorporate a
loading in anticipation of leakages that may arise as a result.

Life insurers must also be prepared for the eventuality that the assumptions on basis of which
they set their premiums differs from actual experience. Such a contingency can arise from two
reasons.

i. Firstly the assumptions themselves may have been inappropriate. For example the life insurer
may use a mortality table that does not reflect the current mortality or has not adequately
factored for inflation
ii. Secondly there are random fluctuations that may belie the assumptions. There are three ways
in which the above kind of risks can be addressed.

i. They can be passed on to the customer, for instance, in the case of investment-linked products
like ULIP’s, the risk of lower returns has to be borne by the customer.
ii. A second way is to reinsure the policy with a reinsurer. In this case the mortality risk is borne
by the reinsurer.
iii. The third and more commonly used way is to incorporate a loading margin in the premium,
which could help to absorb the divergence between expected and actual experience.

c) With Profit policies and Bonus loading

Let us listen to what the actuary Brian Corby had to say about how With Profit policies emerged.

“Some two hundred years ago, at the beginning of life insurance, the major uncertainty was the
rate of mortality. The solution adopted was to charge excessive premiums. Of course they did not
know that they were excessive in advance so that solvency was assumed, and then, when
sufficient experience was accumulated to assess what the premiums should have been, to return
the excess or some of it to policyholders by way of bonus additions. This was the origin of the
traditional with profit policies we issue today…”

Participation in profits also ushered an element called “Bonus Loading” into premiums. The
idea was to provide a margin for profits within the premium, such that it served as an added
cushion against unforeseen contingencies and also paid for the policy’s share of surplus
distributed (as bonus).The bonus loading feature is one reason why life insurers have been
confident about their long term solvency and capital adequacy.

In sum we can say that:

Gross premium = Net premium + Loading for expenses + Loading for contingencies +
Bonus loading

If we assume that the above loadings together comprise a total of K percent of gross premium
(GP), we can find out the gross premium, given the net premium (NP) as

GP = NP + K (GP)

For instance if the net single premium for an endowment policy is Rs. 380 and the loading factor,
K is 50% then the gross premium would be Rs. 760.

Types of rating

Judgment Rating is used when the factors that determine potential losses are varied and
cannot easily be quantified.[5] There are no statistics regarding quantity of future losses
and probability. This means an underwriter rates each exposure individually.

The second rate making method is class rating, or manual rating. This rating means that
exposures with similar characteristics are placed in the same underwriting class, and
each is charged the same rate. The advantage of class rating lies with its easy application
and ability to quickly be obtained.[6]

The third rate making method is merit rating. This rating means a plan which class rates,
or manual rates are adjusted upward or downward based on individual loss experience.
Merit rating is based on the assumption of loss experience will differ substantially from
other loss experiences.

Tariff/ rate making in general insurance

The process of establishing rates used in insurance or other risk transfer mechanisms. This
process involves a number of considerations including marketing goals, competition and legal
restrictions to the extent that they affect the estimate on of future costs associated with the
transfer of risk (i e. ., claims, claim settlement expenses, operational and administration
expenses, and the cost of capital)

Considerations

Exposure units – determine an appropriate exposure unit/basis; should vary with hazard and be
practical and verifiable

Data – historical experience (premiums, losses, expenses) is usually the starting point of
ratemaking; external data may supplement historical experience; is historical experience
predictive of future?

Organization of data – calendar year, accident year, report year, policy year; choice depends on
data availability, clarity, simplicity, and nature of insurance coverage

Homogeneity – ratemaking improved by subdividing experience into groups exhibiting similar

characteristics; if heterogeneous – consider segregating into homogeneous groupings

Credibility – measure of a predictive value that one attaches to a particular body of data; it is
increased by making groupings more homogeneous or increasing the size of the group analyzed;
a grouping should be large enough to be statistically reliable; balance between homogeneity and
volume of data; what should be complement of credibility

Loss development – claims may not be mature (i.e., closed) so need to develop to ultimate;
emergence patterns, settlement patterns, development patterns

Trends – past and prospective trends in claim costs, claim frequencies, exposures, expenses, and
premiums

Catastrophes – include an allowance of catastrophes in rates

Policy provisions – occurrence vs. claims‐made, salvage and subrogation, coinsurance, coverage
limits, aggregate limits, deductibles, minimum premiums, coordination of benefits, second injury
funds, etc

Mix of business – distributional changes in deductibles, coverage limitations, types of risks that
could affect frequency and severity

Reinsurance – effects of reinsurance arrangements

Operational changes – changes in underwriting process, claim handling, case reserving,

marketing practices

Other influences – judicial environment, regulatory and legislative changes, social

considerations, guaranty funds, economic variables, residual markets, pools & associations
Classification plans

Individual risk rating if an individual’s risk sufficiently credible, premium could be modified to
reflect individual experience; experience mods; consider impact to overall experience.

Risk – rate should include a charge for the risk of random variation from expected costs; reflect
in contingency provision

Investment and other income – consider investment returns, duration, past vs. future

Actuarial judgment – reasonableness, standards of practice

Claim Management:

Claim settlement in General Insurance

(1) An insured or the claimant shall give notice to the insurer of any loss arising under contract
of insurance at the earliest or within such extended time as may be allowed by the insurer.

On receipt of such a communication, a general insurer shall respond immediately and give clear
indication to the insured on the procedures that he should follow. In cases where a surveyor has
to be appointed for assessing a loss/ claim, it shall be so done within 72 hours of the receipt of
intimation from the insured.

(2) Where the insured is unable to furnish all the particulars required by the surveyor or where
the surveyor does not receive the full cooperation of the insured, the insurer or the surveyor as
the case may be, shall inform in writing the insured about the delay that may result in the
assessment of the claim.

The surveyor shall be subjected to the code of conduct laid down by the Authority while
assessing the loss, and shall communicate his findings to the insurer within 30 days of his
appointment with a copy of the report being furnished to the insured, if he so desires. Where, in
special circumstances of the case, either due to its special and complicated nature, the surveyor
shall under intimation to the insured, seek an extension from the insurer for submission of his
report.

In no case shall a surveyor take more than six months from the date of his appointment to furnish
his report.

(3) If an insurer, on the receipt of a survey report, finds that it is incomplete in any respect, he
shall require the surveyor under intimation to the insured, to furnish an additional report on
certain specific issues as may be required by the insurer. Such a request may be made by the
insurer within 15 days of the receipt of the original survey report.

Provided that the facility of calling for an additional report by the insurer shall not be resorted to
more than once in the case of a claim.

(4) The surveyor on receipt of this communication shall furnish an additional report within three
weeks of the date of receipt of communication from the insurer.

(5) On receipt of the survey report or the additional survey report, as the case may be, an insurer
shall within a period of 30 days offer a settlement of the claim to the insured. If the insurer, for
any reasons to be recorded in writing and communicated to the insured, decides to reject a claim
under the policy, it shall do so within a period of 30 days from the receipt of the survey report or
the additional survey report, as the case may be.

(6) Upon acceptance of an offer of settlement as stated in sub-regulation (5) by the insured, the
payment of the amount due shall be made within 7 days from the date of acceptance of the offer
by the insured. In the cases of delay in the payment, the insurer shall be liable to pay interest at a
rate which is 2% above the bank rate prevalent at the beginning of the financial year in which the
claim is reviewed by it.

General guidelines for settlement of claims

There are some guidelines that must be followed while settling the claims. These guidelines are
general in nature, and are not compiled to be the same always. Therefore, the claim settling
authority uses discretion and records reasons.

Appointment of surveyor

The Insurance Act states that surveyor should survey claims above Rs. 20,000. The surveyor’s
appointment should be based on the following points:

· The surveyor should have a valid license.

· The surveyor selected should consider the type of loss and nature of the claims.

· Depending on the situation, if technical expertise is required, a consultant having technical

expertise assists the surveyor.

· One surveyor can be used for various jobs, if the surveyor’s competence is good for both.

Appointment of investigator
Depending on circumstances, it is necessary to appoint an investigator for verifying the claim
version of loss. The appointing letter of the investigator o mentions all the reference terms to
perform.

Guidelines for Settlement of Claims by IRDA

1. Proposal for insurance

The proposals for insurance are:

· In all cases to claim insurance, a proposal for grant of cover should be submitted with proof (a
written document). But a written proposal form is not required for marine insurance markets.

· Depending on the circumstances of the claim, forms and documents in the grant of cover can be
made available in the languages recognized by the constitution of India.

· The prospect is to fill the form of proposal, under the guidance of the provisions of section 45
of the Insurance Act.

· If a proposal form is not used, the insurer has to record the information obtained, orally or in
writing, and confirmation is to be done by the insurer within 15 days. If any information is not
recorded, the burden of the missing information lies on the insurer, in case he claims that the
insured is suppressing information or is providing misleading information.

· The insurer is to educate the proposer, concerning the facilities available, like appointing
nominee or any facility based on the terms of act or conditions of policy.

· The insurer has to process the proposal quickly and efficiently. All the decisions and
confirmations should not exceed 15 days from the receipt of proposal.

Fire Insurance claims

 Despite taking many precautions, the probability of fire damage is always there. To minimise
the loss caused by a sudden fire outbreak, insurance experts recommend Fire Insurance, for both
small and large enterprises!
A fire explosion entails physical and mental trauma and the aftermath can be difficult to deal
with. Hence, it is important to tackle the situation with calmness. If you own fire insurance and
in the position of having to claim your fire insurance policy, the below easy steps will help you
ensure a fast claim settlement.

1. Make Use of any Available Financial or Resources Advance

 In case of a fire occurrence, you may have been forced to vacate the space and seek temporary
shelter. If you don’t have enough money in hand to buy the essentials, you can intimate the
insurer to extend some financial help in advance. However, the amount released as an advance
payment will be adjusted with the total claim later, only if the insurer has such provision.

2. Estimate the Losses

 It is essential to estimate the total loss to get reimbursed fully. Try keeping a track of the losses
incurred after the incident. While doing so just ensure that

 Not to dispose of the burnt items

 Not to repair the damaged infrastructures
 Keep the evidence of damaged or lost items

3. Approach the Insurance Provider and File a Claim

It is advisable to inform the insurance provider as soon as a fire incident occurs. You can either
call on their toll-free number or write them informing about the loss and request them to access
the loss. You may need to submit a proof of loss claim indicating the loss or damage items. The
claim request should contain the below information

 Date of loss
 Type of loss or damage
 Any related injuries
 Condition of the home or office
 Description of damaged contents
 Location of damage
 Others involved
 Police FIR copy in case Police is involved

4. Estimation of Loss by the Surveyor

 A surveyor will be appointed by the insurance company to estimate the actual loss or damage in
the spot of the incident. The claim estimation will be done basis on the report made by the
surveyor. Help in the investigation to get reimbursed fully. Also, keep the original reports of the
investigation or related documents for future reference.

5. It's not Over until You Say So

The insurance company might be in hurry to close your case, especially if there is a mass
disaster. The reason is longer your claim is open, the greater the chance for you to find
something that was overlooked earlier. In such a stressful situation, the probability is there that
you may forget something important to list down in your initial claim. That’s why it is
recommended to take your time before finally closing your claim.

Documents Required for Filing Fire Insurance Claim

 In order to claim fire insurance in India, the below documents need to be furnished:

 Duly authorized copy of the insurance policy along with the schedule and endorsements
 Duly filled claim form
 Newspaper clip on the incident, if there is any
 Photographs
 Previous claim experience

Additional Documents

 Initial committee report, which was compose for investigating the cause of the fire
 Report of fire brigade (if necessary)
 FIR/Letter of Intimation to the police station duly approved
 Forensic reports
 Final Investigation Report

Motor Insurance Claim

A claim under a motor insurance policy could be

For personal injury or property damage related to someone else. This person is called a third
party in this context) or

For damage to your own, insured, vehicle. This is called an own damage claim and you are
eligible for this if you are holding what is known as a package or a comprehensive policy.

Third Party Claim

In a third party claim, where your vehicle is involved, it is important to ensure that the accident is
reported immediately to the police as well as to the insurance company.

On the other hand, if you are a victim, that is, if somebody else’s vehicle was involved, you must
obtain the insurance details of that vehicle and make an intimation to the insurer of that vehicle.
Own Damage Claim

In the event of an own damage claim, that is, where your own vehicle is damaged due to an
accident, you must immediately inform insurance company and police, wherever required, to
enable them to depute a surveyor to assess the loss.

Do not attempt to move the vehicle from the accident spot without the permission of police and
the insurance company.

Once you receive permission for removal of the vehicle and for repairs, you can do so.

If your policy provides for cashless service, which means you do not have to pay out of your
pocket for covered damages, the insurance company will pay the workshop directly.

In either of these situations, you must intimate the insurance company immediately.

Theft Claim

If your vehicle is stolen, you must inform the police and the insurance company immediately. In
addition you must keep the transport department also informed.

As soon as you receive the policy document, read about the procedures and documentation
requirements for claims rather than wait for a claim to arise.

If you have to make a claim, ensure that you collect all the required documents and submit them
along with the requisite claim form duly filled in, to the insurance company.

There may be certain specific documentation requirements for specific types of claims. For
instance in respect of a theft claim, there is a special requirement that you should surrender the
vehicle keys to the insurance company.

Marine Insurance Claim

Eligibility Criteria

Let us look at the sections of people who are eligible for marine insurance. They include
manufacturers, buying agents, buyers, import/export merchants, sellers, banks, contractors or any
one who is into the business of movement of goods.

Claim Process

After purchasing the marine insurance, in case there arises a situation when you need to make a
claim under the policy, you can follow the below mentioned steps:
  In case of loss or damage to the cargo or the ship, you need to immediately inform the
insurance provider
 A surveyor will assess the damage or loss mentioned
 All the proofs and witnesses need to be submitted along with the duly filled in claim form
 For a missing package, the insured must lodge file a monetary claim with the insurance
provider and get an acknowledgement for it
 If the provider finds the case fit, it would approve the claim, else it would reject it
 In case you are not satisfied with the case, you can approach the court of law

Documents Required for Claim Process

To make the claims under marine insurance and be able to reap the benefits, the correct
documents should be submitted. In case of any lapse, there is a chance of the risk being rejected.
Some of the documents are:

 Duly filled in claim form

 Original insurance certificate with the policy number
 Copy of Billing Lading
 Survey report or missing certificate
 Original invoice, packing list, shipping specification
 Copies of correspondence exchanged

Exclusions

Marine insurance has various kinds of coverage for the benefit of all. However, the policy does
not cover certain situations, also called exclusions. Some of these cases are:

 Wilful, planned or intentional misconduct

 Strike, rioting, war
 Poor packaging quality of the cargo
 Delays
 General leakage or wear and tear of the cargo
 Financial distress or insolvency of the shipping line
 Removal of wreck
Claim on consignment by road/rail personal accident (no clear details available about road
accident consignment)

Claims Procedure for consignment by rail

Compensation claims for loss, damage, etc. to consignments in transit are dealt with
by CONCOR in accordance with the provision of the Indian railways Act 1989.

CONCOR assumes responsibility for the loss, destruction, damage or deterioration, or non-

delivery of any consignment in transit, arising from any cause except the following, namely :-

 a) Act of god;
 b) Act of war;
 c) Act of public enemies;
 d) Arrest, restraint or seizure under legal process;
 e) Orders or restrictions imposed by the Central Government or a State Government or by
an officer or authority subordinate to the Central Government or a State Government
authorized by it in this behalf;
 f) Act or omission or negligence of the consignor or the consignee or the endorsee or the
agent or servant of the consignor or the consignee or the endorsee;
 g) Natural deterioration or wastage in bulk or weight due to inherent defect, quality or
vice of the goods;
 h) Latent defects;
 i) Fire, explosion or any unforeseen risk :

According to the rules notified under the said Act, every person entrusting any cargo
to CONCOR for carriage by rail or road shall execute a Forwarding note in such form as may be
specified and the consignor shall be responsible for the correctness of the particulars furnished
by him in the forwarding note. The consignor shall indemnify the CONCOR administration
against any damage suffered by it by reason of the incorrectness or incompleteness of the
particulars in the forwarding note. Further, the liability of CONCOR for general goods shall not
exceed an amount calculated on the basis of invoice value subject to a maximum rate of Rs 50/-
per kg unless the consignor had declared the value of the consignment at the time of booking,
and paid in addition to freight charges, a percentage charge which varies from 0.25% to 1% of
the value depending on the distance for which the consignment is booked.

In order to avoid a time bar on settlement of claims the claims should be preferred within six
months of the date of booking.

All claims should be addressed to the Head of the Region (CGM/RGM) where the destination
station/depot lies.
To assist us in dealing with claim case promptly, claimants are requested to furnish the following
details in their claim letter in the format which can be downloaded:

FORMAT FOR CLAIM LETTER

 Copy of Inland Way Bill which shall be prime facie evidence of weight and no. of
packages.
 Booking station
 Destination station
 Factory stuffing/Terminal stuffing
 Terminal destuffing/factory destuffing.
 Commodity-description & weight
 Details of loss/shortage/ damage
 Shortage certificate/open delivery/ assessment delivery certificate issued by CONCOR at
the time of delivery.
 Amount claimed (indicating the basis on which this has been arrived at, such as original
trade invoice, beejuk, bill,etc.

Exoneration from responsibility under section 102 of IR Act 1989:

CONCOR administration shall not be responsible for the loss, destruction, damage, deterioration
or non-delivery of any consignment in following circumstances:

 When such loss, destruction, damage, deterioration or non-delivery is due to false

declaration.
 Where fraud is practiced by consignor/consignee/agent.
 In case of improper loading/ unloading by consignor/ consignee/ agent.
 Riot, civil commotion, strike, lock-out, stoppage or restraint of labour from whatever
cause arising whether partial or general
 Any direct/indirect or consequential loss or damage or for loss of particular market

Claim on Mediclaim

FOR CASHLESS FACILITY – AVAILABLE ONLY FOR POLICIES SERVICED BY A TPA:

a. Check if the hospital falls under the networked hospitals or not, as cashless is available only
for networked hospitals.
b. For planned hospitalisations, intimations to be sent to the TPAs in advance with details of:

i. Name and address of the hospital, 

ii. Name and address of the hospital, 
iii. Name and address of the hospital, 
iv. Name and address of the hospital, 
v. Name and address of the hospital,

c. In case of an emergency hospitalisation, intimation to be sent to the TPA immediately on

admission.

d. On admission, a Pre-Authorisation Request for cashless is to be sent to the TPA by the

hospital – duly signed by the insured and Hospital Authorities giving the details of admission,
illness, proposed line of treatment and the estimated expenses.

e. Please furnish clarifications if any required by TPA.

f. On discharge from Hospital, please pay the difference of amount disallowed under the policy
or limited by the sum insured.

g. Pre and post hospitalisation expenses can be claimed separately after treatment. All documents
in original to be submitted within 7 days to TPA, after completion of Post Hospitalisation
treatment.

FOR REIMBURSEMENT CLAIMS: -

a. Written intimation about hospitalisation to be sent to TPA / our office (if non TPA)
immediately, and within 24 hours of hospitalisation in the case of emergency hospitalisation.

b. Before leaving the hospital, Discharge Summary, Copy of investigation report and other
relevant documents may be obtained from the hospital authorities. All the documents in original
to be submitted to TPA / Office within 7 days from date of discharge.

c. Documents include claim form issued by insurer, discharge summary of hospital, doctor's
certificates and prescriptions, final hospital bills, laboratory and other investigation reports and
bills, pharmacy bills and all related documents.

d. Pre and post hospitalisation expenses can be claimed separately after treatment. All documents
in original to be submitted within 7 days after completion of Post Hospitalisation treatment.

Claim on theft /burglary insurance

What is burglary?
Due to lack of clarity on its definition, insurers have their own varying interpretations of
burglary. Most of the insurers define burglary as:

 A theft of any property from the insured premises following a felonious entry by forcible
means. Or

 A theft from within the premises by a person who must break out of the insured premises
through forcible and violent means.

 Use of violent means could be against the property as well as any person.

 There must also be visible marks to identify that force has been used while entering or
making an exit from the premises.

 If the theft takes place while the insured premises were left unlocked or using duplicate
keys, you would not be able to obtain the insurance claim.

An insurance against burglary covers your housing, as well as business premises. It broadly
covers damages caused to the premises and intrinsic value of the property lost in such incidents.
An insurance policy against burglary pays the actual damage incurred on the insured assets,
subject to the total sum insured. The premium charged on such policies varies on the basis of a
number of factors, such as nature of stocks, presence/absence of security measures, previous
claims experience, situation of risk, etc.

How to claim insurance?

In case of a burglary, you must make a police complaint first and report the details of the
accident to your insurance company at the earliest. The company provides you a claim form,
where you have to fill in all the details and submit it along with all the relevant documents. You
have to deposit this form within 14 days from the date of incident. After this, the insurance
company might conduct an inspection of the premises and send its surveyor to do so. Remember
that a clarity on the information you provide would ensure the fast settlement of your claim.

 What is not covered?

 Items such as precious stones/metals, watches, share certificates, money, title deeds,
property held in trust, record books, etc, are not accorded any protection, unless
specifically insured.

 The items kept in a safe must be declared for them to be covered in an insurance policy.

 Any loss if occurred due to the use of duplicate keys, unless obtained by use of force or
threat, is not covered.

 Things stolen by family members, employees, housemaids, etc, are not covered under the
policy.
 Most policies do not cover any loss and/or damage arising out of wars, strikes, riots, civil
unrest, terrorist activities, natural calamities, etc.

 Stocks or items whose value frequently fluctuates can be insured on a declaration basis.