Underwriting in insurance is, first of all, services that are provided by financial institutions such as banks and insurance companies. They guarantee receipt of payments in the event of any financial losses. Depending on the industry, several types of underwriting vary. Companies that perform these functions are called underwriters.
Basic concepts
We can say that this term is directly the very essence of the area under consideration. In this regard, the development of an adequate criterion for assessing the effectiveness of underwriting in insurance is the first step towards increasing profits and the market value of the organization. To date, there has been a significant increase in interest in the industry in general and its theoretical foundations in particular.
One of the issues of interest is underwriting, which is the key business process of any insurance organization. After all, the main function of any relevant institution is the effective management of customer risks.
In simple terms, this is underwriting. According to the definition of the term, which is given in the dictionary, this concept refers to the process by which the company determines whether it is worth accepting the policyholder’s proposal to draw up the contract, and if so, on what conditions. True, such a definition is considered too general and does not say anything about what stages the underwriting itself consists of.
It is worth using the following definition of this term: activities aimed at assessing risks, determining adequate tariffs and conditions along with the formation of an insurance profitable portfolio.
Functions
Underwriting in insurance is a service whose main purpose is:
- Risk assessment. These are characterized by certain parameters: a quantitative criterion (the probability of damage, its mathematical expectation, and so on) and qualitative (analysis of the fire safety system along with the presence of an alarm, level of training and pilot experience).
- Determination of normal insurance rates. They are calculated in an actuarial way, and the underwriter’s task is to select adequate reducing and increasing coefficients to the base value, depending on the specifics of a particular agreement. What else does the insurance risk assessment system imply?
- Definition of conditions. One of the tools in the framework of managing the organization’s profitability and tariffs is such criteria as the breadth of coverage, exclusion from insurance events, and so on.
- Formation of a profitable portfolio. By such is meant the sum of all gross premiums that were received during the underwriting year for a certain type of insurance or for all its types minus the costs of attracting clients (agent and brokerage fees) and ignorance.
We will talk about underwriting in life insurance below.
Why is it needed?
Each type of insurance has its own unique underwriting features. Without an understanding of the risks and what is taken for protection (of the object), as well as a description of the factors that increase the likelihood of an undesirable event and the expected amount of compensation, it is impossible to correctly assess the risk.
And in the event that it is impossible to express the degree of danger in monetary terms, then it will not be possible to form a profitable portfolio either, and if this succeeds, it is only due to chance. Underwriting is usually carried out by checking risk on a number of parameters depending on a specific type of service.
For example, with CASCO ground transport, these may be:
- The circle of persons who are allowed to operate the machine, along with their age and driving experience.
- Desired franchise sizes.
- The presence of anti-theft system, storage conditions of the car at night and so on.
What are the basic principles of underwriting in insurance?
Underwriting organization
Its process is the most specific in the company's activities. Effective organization of underwriting requires, as a rule, specialized knowledge, and in addition, a lot of experience. The entire insurance procedure can be presented consisting of individual components: marketing, development of insurance services, sales, support of contracts, settlement of losses. In practice, these processes are repeated and mixed. In a broad sense, the following operations are included in underwriting:
- Analysis, including, in turn, the study and collection of information about insurance objects and their inherent risks.
- Classification and selection, as well as hazard assessment.
- Making decisions on insurance of selected risks or a complete denial of service.
- Determination of an adequate tariff for insurance facilities.
- Coordination of the amount and calculation of the premium.
- Determination of risk coverage conditions.
- Concluding an insurance agreement.
- Carrying out the development of measures to reduce risks.
- Control over the state of the insured objects and factors that contribute to or prevent the occurrence of danger.
- Risk mitigation measures.
All these operations are closely interconnected and interdependent.
Why so important
Health, life and property insurance of citizens is currently gaining popularity in Russia. In this regard, it will not be superfluous to consider the essential terms of the insurance contract.
Every citizen must take care of the welfare of his family, and bosses and managers are simply obliged to keep happy for the property of their company. Life insurance, property and health insurance helps to protect the family along with the company from unplanned expenses arising from unforeseen circumstances. Services are provided through a contract between the client and the company. Such agreements are divided into two types: personal insurance and property.
Life insurance
What are the essential terms of insurance contracts? The service provides for the protection of the property interests of all insured citizens related to their life and death. This option is usually associated with the long-term interests of insurers and insured persons due to the fact that life is considered as a long-term condition, and, accordingly, the onset of death seems distant and unpredictable. The advantages of life insurance include:
- Risk event payments are tax-free. Survival income taxes are levied only on the difference between the amount of compensation and contributions minus the size of the refinancing rate.
- The client can apply to the tax authorities with a special statement and return the tax deduction in the amount of contributions paid (but not more than the listed personal income tax) under a voluntary life insurance contract for a period of five years or longer. What else does such insurance give to a person?
- Payment in case of death is not included in the inheritance. It is received only by the one whom they indicate. This is a concern for the most vulnerable members of the family. So you can protect, for example, grandchildren or children from their first marriage.
- The special status of the policy. The fact is that these are not property, therefore, they cannot be levied by third parties. They cannot be arrested, confiscated, or, for example, separated by divorce.
Below are the basic principles of social insurance.
Health insurance
A properly organized underwriting process is a significant factor in the effectiveness of operations in the framework of protecting health. It lowers risk selection for the company, making it possible to conduct a selection of possible pitfalls favorable to insurers. The source of underwriting information for health insurance is a questionnaire in a statement along with medical reports of attending physicians, special certificates and so on. Here is what a health insurance policy gives a person:
- First of all, this is a guarantee of the safety of financial resources, since after the purchase of a service, any expenses for medical assistance under the program will be borne by the company.
- Choosing a program with the necessary amount of medical services in the most optimal medical institutions for the client.
- A guarantee that a citizen will receive timely qualified medical assistance within the framework of his chosen insurance program.
- The availability of round-the-clock free consultations with specialists in the contact center on emerging issues, including the organization of the required medical care in medical institutions.
- Providing continuous quality control of services along with advocacy in front of a hospital facility.
Next, we consider the issue related to the protection of property of citizens.
Property insurance
According to article No. 929 of the Civil Code, such an agreement provides for the obligations of specialized organizations to policyholders or other beneficiaries for the stipulated premium, in the event of an appropriate case, to pay losses that are associated with the loss or damage of the insured property, in the amount determined by the document. Property insurance rules must be strictly followed.
Under a property insurance agreement, companies have the right to protect the following interests:
- Risks of death, loss, damage or shortage of specific property.
- Danger of loss from entrepreneurial activity, which arises as a result of violation by the counterparties of the entrepreneur of their obligations or due to a change in the conditions of activity due to circumstances beyond his control. This risk category also includes non-receipt of expected income.
- Risks of liability for obligations arising from damage to life or property.
Next, we will talk about hull and motor third party liability insurance.
Auto insurance
The popularity of car insurance is associated with an increase in the number of cars on the roads in our country. This, in turn, quickly affects the increase in the number of accidents that can strike not only the health of car owners, but also hit hard wallets. In this regard, it is so important to contact a reliable organization for the issuance of CASCO. Buying such a policy from a reliable service provider, citizens acquire protection on favorable terms. In the event of an accident, auto insurance will compensate for the cost of repairing the car and treating the injured. It is only necessary after the occurrence of an incident to contact the company.
Compulsory car insurance policy is required for absolutely every car owner. A similar condition for automobile operation is prescribed in current legislation. The CTP policy compensates for the damage that the driver inadvertently causes to another participant in the process of traffic.
Insuring a car through CASCO is the right decision for those citizens who especially value their safety. Unlike CTP, this insurance can protect the car from theft and other types of damage. Modern companies offer their customers stable protection of vehicles within the framework of CASCO, along with the restoration of windows, body parts and headlights without requiring a certificate from the traffic police. In addition, deciding to insure the car in this way, people can count on covering the costs associated with its evacuation from the accident site. Registration of this insurance, as a rule, involves payments even when an accident occurs due to the fault of the driver.
The essence of this activity
What is the essence of insurance? It lies in the fact that this is, first of all, bilateral economic relations, assuming that the policyholder pays the necessary contribution and provides himself, subject to the occurrence of an appropriate event, which is stipulated by law or contract, the amount of payments from the company.
Next, we will understand what the work of the insurance company is based on.
Profitable insurance portfolio
Such a portfolio is the sum of all contracts concluded between the company and its customers. Its effectiveness is evaluated by profitability parameters, by the level and type of risks, and at the same time by profitability. The insurance portfolio does not at all act as a separate document or a list of such. In fact, this is the basis of all the insured persons of a particular organization who have purchased policies and therefore have the right to demand compensation from it upon occurrence of relevant cases. A personal account is opened for each client, on which all the information collected before and after the conclusion of the contract is recorded. Based on such information, the risk level of the agreement and the amount of mandatory payments are calculated.
What does the formation of a profitable insurance portfolio imply? The more contracts on the volume of cash contributions the insurer was able to conclude, the greater the stability of the portfolio. This rule works for all companies, regardless of the specifics of the insured objects. True, the more agreements are included in the portfolio, the more difficult it is to assess the level of risks and profitability. For some companies, the volume of signed documents can reach several hundred thousand, and sometimes millions. In order to accelerate the process of evaluating profitability, special methods and techniques for assessing risks and profitability are used:
- Homogeneous objects are considered as one. For example, when two or more citizens insure their homes, which are located on the same street, in case of fire or flood. Such objects should be considered as one, since in the event of a natural disaster, it is very likely that they will all suffer.
- The cost of the policy, however, as well as the amount of payments, must be calculated on the basis of the physical condition of the objects of insurance.
- Take into account statistics for a specific region, country and field of activity of the insured object.
All policies are classified according to the degree of probability of occurrence of risks and the size of payments. It is customary to divide the danger into specific, high, moderate and low. Accordingly, after the first assessment of the insurance object and the preparation of the contract, it is assigned to a certain risk category, and only then the entire portfolio is evaluated. Next, we discuss its types.
Types of Insurance Portfolios
All of them are classified by area of activity, for example, home insurance or car insurance, as well as by degree of risk. The following types are distinguished:
- The classic portfolio includes those types of objects that have been used for a long time. This includes voluntary and compulsory property insurance contracts. In this case, the risk is moderate, and the profitability is small, however, stable. To use this type of service, a company must have a significant margin of financial strength.
- Specialized portfolio. This is such a kind when the sphere of activity with objects, the use of which differs in highly specialized specialized purposes, plays the role of an object. For example, space insurance, protection of currency and exchange risk. Risks for such facilities are specific, and returns are high. Legal entities that have the necessary authorized capital, who have a state license to conduct this type of activity are entitled to engage in the varieties under consideration.
- The combined portfolio combines the elements of a specialized and classic type of insurance. Such an approach makes it possible to lower the risk, but profitability may also decrease.
In addition to the options listed above, there is another special type, namely a balanced portfolio. Its feature is that all objects are homogeneous in terms of profitability, and even the price of each policy included in the portfolio is the same in terms of risk.
The task of underwriting in insurance is to prevent bankruptcy.
Bankruptcy of insurance organizations
Such activities require entrepreneurs to be more attentive as part of the development and implementation of a business strategy. Given that this is not just one of the most profitable, but also the most risky types of activities, many, without calculating their strength, go bankrupt. . , .
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