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AU 60 Commercial Underwriting Principles
The Institutes AU 60 Course
32
Insurance
Professional
04/29/2014

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Term
Underwriting
Definition
The process of selecting insureds, pricing coverage, determining insurance policy terms and conditions, and then monitoring the decisions made
Term
Adverse selection
Definition
The tendency for people with the greatest probability of loss to be the ones most likely to purchase insurance
Term
Policyholder's surplus
Definition
Under statutory accounting principles (SAP)an insurer's total admitted assets minus total liabilities
Term
Capacity
Definition
The amount of business an insurer is able to write, generally based on a comparison of the insurer's written premiums to itss policyholder's surplus
Term
Underwriting guidelines
Definition
A written manual that communicates an insurer's underwriting policy and that specifies the attributes of an account that an insurer is willing to insure
Term
Line underwriter
Definition
Underwriter who is primarily responsible for implementing the steps in the underwriting process
Term
Staff underwriter
Definition
Underwriter who is usually located in the home office and who assists underwriting management with making and implementing underwriting policy
Term
Manuscript policy
Definition
An insurance policy that is specifically drafted according to terms negotiated between a specific insured and an insurer
Term
Underwriting policy
Definition
A guide to individual and aggregate policy slection that supports an insurer's mission statement
Term
Advisory organization
Definition
An independent organization that works with and on behalf of insurers that purcahse or subscribe to its services.
Term
Prospective loss costs
Definition
Loss data that are modified by loss development, trending and credibility processes but without considerations for profit and expenses
Term
Loss development
Definition
The increase or decrease of incurred losses over time
Term
Trending
Definition
A statistical technique for analyzing environmental changes and projecting changes into the future
Term
Treaty reinsurance
Definition
A reinsurance agreement that covers an entire class or portfolio of loss exposures and provides that the primary insurer's individual loss exposures that fall within the treaty are automatically reinsured
Term
Underwriting audit
Definition
A review of underwriting files to ensure that the individual underwriters are adhering to underwriting guidelines
Term
Premium-to-surplus ration or capacity ratio
Definition
A capacity ratio that indicates an Insurer's financial strength by relating net written premiums to policyholders' surplus
Term
Statutory Accounting Principles (SAP)
Definition
The accounting principles and practices that are prescribed or permitted by an insurer's domiciliary state and that insurers must follow
Term
Return on Equity (ROE)
Definition
A profitability ratio expressed as a percentage by dividing a company's net income by its net worth (book value). Depending on the context, net worth is sometimes called shareholders' equity, owners' equity, or policyholders' surplus.
Term
ROE SAP
Definition
Net income
____________________

Average policyholders' surplus
Term
ROE GAAP
Definition
Net income
__________

Average Owners' equity
Term
Market conduct examination
Definition
an analysis of an insurer's practices in four operational areas: sales and advertising, underwriting, ratemaking, and claim handling
Term
Predictive modeling
Definition
Process in which historical data based on behaviors and events are blended with multiple variables and used to construct models of anticipated future outcomes.
Term
Loss exposure
Definition
Any condition or situation that presents a possibility of loss, whether or not an actual loss occurs.
Term
Hazard
Definition
A condition that increases the frequency or severity of a loss
Term
Information efficiency
Definition
the balance between the hazards presented by the account and the information needed to underwrite it
Term
Underwriting Process
Definition
1. evaluate
2. develop alternatives
3. select alternative
4. premium
5. implement
6. monitor
Term
Estimated Loss Potentials (ELP)
Definition
multiplied by loss cost multipliers to develop rates when there are unique characteristics or inadequate statistical data
Term
Experience Rating
Definition
adjusts insured's premium for future period based on experience during current period
Term
Schedule Rating
Definition
awards debits & credits in specific categories to modify final premium to reflect factors not included in class rate
Term
Retrospective Rating
Definition
adjusts insured's current policy premium based on loss experience during current period
Term
Facultative Reinsurance
Definition
reinsurance of individual loss exposures
Term
Combined ratio
Definition
loss&loss adjustment expenses incurred/premiums earned + underwriting expenses incurred/premiums written. every premium dollar used to pay claims & cover op costs = 100%, underwriting loss when >100%, underwriting profit when <100%
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