CPCU 520: Insurance Operations 2nd Edition/Chapter 4: The Underwriting Function

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  1. Policyholder's surplus
    Under statutory accounting principles (SAP), an insurer's total admitted assets minus its total liabilities.
  2. Capacity
    The amount of business an insurer is able to write, usually based on a comparison of the insurer's written premiums to its policyholders' surplus.
  3. Underwriting authority
    The scope of decisions that an underwriter can make without receiving approval from someone at a higher level.
  4. Line underwriter
    Underwriter who is primarily responsible for implementing the steps in the underwriting process.
  5. Staff underwriter
    Underwriter who is usually located in the home office and who assists underwriting management with making and implementing underwriting policy.
  6. Manuscript policy
    An insurance policy that is specifically drafted according to terms negotiated between a specific insured (or groups of insureds) and an insurer.
  7. Underwriting policy (Underwriting philosophy)
    A guide to individual and aggregagte policy selection that supports an insurer's mission statement.
  8. Trending
    A statistical technique for analyzing environmental changes and projecting such changes into the future.
  9. Loss development
    The increase or decrease of incurred losses over time.
  10. Treaty reinsurance
    A reinsurance agreement that covers an entire class or portfolio of loss exposurers and provides that the primary insurer's individual loss exposures that fall within the treaty are automatically reinsured.
  11. Underwriting audit
    A review of underwriting files to ensure that individual underwriters are adhering to underwriting guidelines.
  12. Premium-to-surplus ratio
    A capacity ratio that indicates an insurer's financial strength by relating net written premiums to policyholder's surplus. (considered too high when it exceeds 3:1, or 300%)4.14
  13. Statutory accounting principles (SAP)
    The accounting principles and practices that are prescribed or permitted by an insurer's domicilary state and that insurers must follow.
  14. Return on equity (ROE)
    A profitability ratio expressed as a percentage by dividing the net income by its net worth (book value). Depending on the context, net worth is sometimes called shareholder's equity, owner's equity, or policyholder's surplus. (4.15)
  15. Market conduct examination
    An analysis of an insurer's practices in four operational areas: sales and advertising, underwriting, ratemaking, and claim handling.
  16. Predictive modeling
    A process in which historical data based on behaviors and events are blended with multiple variables and used to construct models of anticipated future outcomes.
  17. Application
    A legal document that provides information obtained directly from an applicant requesting insurance and that an insurer can use for underwriting and claim handling purposes.
  18. Underwriter
    An insurer employee who evaluates applicants for insurance, selects those that are acceptable to the insurer, prices coverage, and determines policy terms and conditions.
  19. Underwriting submission
    Underwriting information for an initial application, or a substantive midterm or renewal change.
  20. Loss exposure
    Any condition or situation that presents a possibility of loss, whether or not an actual loss occurs.
  21. Hazard
    A condition that increases the frequency or severity of a loss.
  22. Information efficiency
    The balance that underwriters must maintain between the hazards presented by the account and the information needed to underwrite it.
  23. Premium audit
    Methodical examination of a policyholder's operations, records, and books of account to determine the actual exposure units and premium for insurance coverages already provided.
  24. Underwriting profit
    Income an insurer earns from premiums paid by policyholders minus incurred losses and underwriting expenses.
  25. Counteroffer
    A proposal an offeree makes to an offeror that varies in some material way from the original ofer, resulting in rejection of the original offer, and constituting a new offer.
  26. Rating plan
    A set of directions that specify criteria of the exposure base, the exposure unit, and rate per exposure unit to determine premiums for a particular line of insurance.
  27. Schedule rating
    A rating plan that awards debits and credits based on specific categories, such as the care and condition of the premises or the training and selection of employees, to modify the final premium to reflect factors that the class rate does not include.
  28. Experience rating
    A rating plan that adjusts the premium for the current policy period to recognize the loss experience of the insured organization during the past policy periods.
  29. Retrospective rating
    A ratemaking technique that adjusts the insuredÂ’s premium for the current policy period based on the insured's loss experience during the current period; paid losses or incurred losses may be used to determine loss experience.
  30. Facultative reinsurance
    Reinsurance of individual loss exposures in which the primary insurer chooses which loss exposures to submit to the reinsurer, and the reinsurer can accept or reject any loss exposures submitted.
  31. Account underwriting
    A method of underwriting in which all of the business from a particular applicant is evaluated as a whole.
  32. Mix of business
    The distribution of individual policies that compose the book of business of a producer, territory, state, or region among the various lines and classifications.
  33. Loss costs
    The portion of the rate that covers projected claim payments and loss adjusting expenses.
  34. Binder
    A temporary written or oral agreement to provide insurance coverage until a formal written policy is issued.
  35. Certificate of insurance
    A brief description of insurance coverage prepared by an insurer or its agent and commonly used by policyholders to provide evidence of insurance,
  36. Combined ratio
    A profitability ratio that indicates whether an insurer has made an underwriting loss or gain.
  37. Expert systems, or knowledge-based systems
    Computer software programs that supplement the underwriting decision-making process. THese systems ask for the information necessary to make an underwriting decision, ensuring that no information is overlooked.
  38. Production underwriting
    Performing underwriting functions in an insurer's office as well as travelling to visit and maintain rapport with agents and sometimes clients.
  39. Hit ratio
    The ratio of polices written to those that have been quoted to applicants for insurance.
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CPCU 520: Insurance Operations 2nd Edition/Chapter 4: The Underwriting Function
Chapter 4
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