Underwriting by the Insurer
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Underwriting can be viewed as the process of determining whether to accept a risk and, if so, what amount of insurance the insurer will provide and at what rate.
A binder is a legally enforceable agreement that provides temporary coverage until a policy can be issued.
The loss ratio is calculated by dividing incurred losses by earned premiums. (expressed as a percentage)
The expense ratio is calculated by dividing incurred expenses by written premiums. (expressed as a percentage)
Calculated by adding the loss ratio and expense ratio together. (expressed as a percentage)
Payment for coverage.
Price of insurance for each unit of exposure.
All insureds with similar characteristics are charged the same rates. Most commonly used with high-volume insurance coverages, such as auto and homeowners insurance.
Individual rating is used when every insured is unique and could not readily be placed into a class with other similar insureds.
- The components of an insurance rate include:
- loss costs
- a margin for profits and contingencies
Data collected on losses that have occurred in the past and use them, along with other factors, to predict the losses that can be expected in the future.
Include commissions to its producers, employee salaries, office expenses, taxes, and other costs of doing business.
Profits & Contingencies
This allowance, when added to the expected loss costs and expected expenses, produces the final rate. If an insurer's actual results are as predicted or better, the insurer will earn a profit. If actual results are a worse than predicted during a given time period, the insurer may still break even on its underwriting operations.
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