UNDERWRITING PROCESS :

The underwriting process follows a series of stages, at the end of which the status of a risk is decided. It is only after the risk has been weighed and all possible alternatives evaluated that the final underwriting is done. When a proposal for insurance is received, the underwriter has four possible courses of action:

• Accept the risk at standard rates

• Charge extra premium depending on the risk factor

• Impose special conditions

• Reject the risk.

There are different types of hazard which can influence his decision to accept or reject a risk-

(i) Physical hazards

These are hazards that affect the physical characteristics of whatever is being insured. For example a building made of wood represents a higher level of physical hazard than one made of brick.

(ii) Moral hazards

These hazards refer to the defects that exist in a person’s character that may increase the frequency or the severity of loss. Such a character may tend to increase the loss for the company.

(iii) Financial hazards

If the value of the risk is beyond the capacity of the insurer he may reject the risk, or share the same.

The underwriter can accept a proposal, reject it or accept it with certain modifications. Some of the modifications that can be made are:

• Hazard incidence can be reduced: For loss prevention and minimisation, underwriters can recommend certain changes that will safeguard against physical hazards. For example, installing sprinkler systems and better fire-fighting equipment in offices will reduce damages in case of fire.

• Changing rating plans and policy terms: Sometimes a proposal that seems unacceptable at one rate may become a desirable business under another rating plan or with Special Conditions such as ‘compulsory excess’.

• Facultative reinsurance can be used: When the business is not covered by the insurer’s reinsurance treaty or the amount of insurance needed exceeds the net treaty capacity, the underwriter can transfer that excess to a facultative reinsurer