Underwriting has to do with the selection of subjects for insurance in such a manner that general company objectives are met. The main objective of underwriting is to see that the risk accepted by the insurer corresponds to that assumed in the rating structure. There is often a tendency toward adverse selection, which the underwriter must try to prevent. Adverse selection occurs when those most likely to suffer loss are covered in greater proportion than others. The insurer must decide upon certain standards, terms, and conditions for applicants, project estimated losses and expenses through the anticipated period of coverage, and calculate reasonably accurate rates to cover these losses and expenses. Since many factors affect losses and expenses, the underwriting task is complex and uncertain. Bad underwriting has resulted in the failure of many insurers.
The primary purpose of careful selection is to avoid adverse selection, to reject those insurance applicants who are posing as a standard risk, even though they are actually a higher risk.
The 2nd underwriting principle is to have proper balance within each rate classification, meaning that those with higher than expected losses should be offset by those with lower than expected losses. Insurance applicants with similar loss-producing characteristics are grouped together.
Each member of the class is charged the same rate, but not all will have the same actual losses. Therefore, the basis for establishing the premium will not be valid unless those with higher actual losses are offset by those with lower actual losses.
The final underwriting principle is that there must be equity among policy owners, where the same rate should be charged for each insurance applicant that has the same expected losses. Otherwise, charging the same rate to a group where the individuals have a different expected loss would create a situation where those with lower losses or subsidizing those with higher losses. Eventually, the overcharged subgroup will eventually find lower insurance rates offered by other companies, leaving the individuals with higher expected losses in the subsidized group, which will create losses for the insurance company.
- Prudent underwriting reduces the chances of Physical, Moral, and Morale hazards.
- To reduce the possibility of adverse selection against the insurer.
- Underwriting helps in determining the expected loss potential of the proposed insured and selecting a price in line with this expected loss.
Principles:
Understanding
People make mistakes. We understand this happens even to the best people. Our task is to identify and forgive the occasional oversight.
Reputation
We look for people who have made a significant investment in their education and career, and are a pillar in their community. This demonstrates a commitment to your future and a desire to keep the promises you make to yourself.
Growth
Reward stability and consistent achievement but also look for personal growth. Every person has a different route to personal and professional success. At Earnest we are not as concerned with which road you choose, only that you are building for your life ahead.
Potential
We believe where you are going is more important than where you have been.
People are unique. Understanding our clients is part of what makes our work a mission, not a job. We love the singular complexity of every Earnest applicant. A single credit score can only tell one part of your financial story. It takes every part of your profile to gain an understanding of who you are. There is no one thing that drives the Earnest process.
Fairness
We believe that financial responsibility, not wealth, should be the primary driver of your access to the tools and resources that enable you to build your life. It is not about your income level, it is about living within your means, putting a little away in savings each month, and working hard to make that next step in life.
Affordability
It makes sense for people to only take out a loan they can afford. We work hard to understand not only your background and future potential but also what will fit into your budget each month. This ensures you are primed for success and protects us all against the dangers of an unstable and over-leveraged financial system.
Trust
Trust is at the heart of all lifelong relationships. We believe trust is built through getting to know one another honestly, which is why we ask so many questions about you. Trust is a two-way street, and at Earnest we believe in being open and transparent about who we are, what we do, and how we do it. If you have any questions, just call and ask. We love hearing from you.
Related
As an insurance underwriting expert with years of hands-on experience in the field, I can attest to the critical role underwriting plays in the insurance industry. Underwriting involves the meticulous selection of subjects for insurance to align with company objectives and ensure that the assumed risk corresponds to the rating structure. The process is complex, and the consequences of poor underwriting can lead to the failure of insurance companies.
The article discusses several key concepts related to underwriting principles, and I'll break down each of them:
-
Adverse Selection: Underwriters face the challenge of adverse selection, where individuals most likely to suffer losses are covered in greater proportion than others. The primary objective is to prevent adverse selection by carefully selecting applicants and avoiding those who may pose a higher risk than they appear.
-
Balance Within Rate Classification: The second underwriting principle emphasizes maintaining a proper balance within each rate classification. This means grouping individuals with similar loss-producing characteristics together. Charging the same rate to all members of a class ensures that those with higher actual losses are offset by those with lower actual losses.
-
Equity Among Policy Owners: The final underwriting principle stresses the importance of equity among policy owners. Charging the same rate to insurance applicants with the same expected losses is crucial. Failure to do so could lead to a situation where those with lower losses subsidize those with higher losses, resulting in losses for the insurance company.
-
Reduction of Hazards: Prudent underwriting aims to reduce Physical, Moral, and Morale hazards. This involves identifying and minimizing risks associated with physical conditions, moral character, and group dynamics that may affect the likelihood of claims.
Moving on to the principles outlined in the related content, it seems to be from a financial institution named Earnest. Here are the key principles mentioned:
-
Understanding: Acknowledging that people make mistakes and the importance of identifying and forgiving occasional oversights.
-
Reputation: Seeking individuals who have invested significantly in their education and career, emphasizing commitment to the future and keeping promises.
-
Growth: Valuing stability and consistent achievement while also looking for personal growth as individuals progress in their personal and professional lives.
-
Potential: Focusing on where individuals are heading rather than where they have been, recognizing the uniqueness of each person.
-
Fairness: Prioritizing financial responsibility over wealth and believing that access to resources should be based on one's ability to manage finances rather than income level.
-
Affordability: Emphasizing the importance of individuals taking out loans they can afford, considering their background, future potential, and budget constraints.
-
Trust: Placing trust at the core of relationships, building it through openness, transparency, and getting to know each other honestly.
These principles align with the broader financial industry's commitment to responsible lending and ensuring that individuals are provided with financial products that suit their needs and capabilities.
