Study 8: Underwriting & Rating: Setting Insurance Rates

application

Simple Definition: A formal request for insurance coverage.

Key Takeaway: Submitted verbally, in writing, or online; the insurer uses it to evaluate the risk and decide whether to offer a policy.

applicant

Simple Definition: The person or business applying for insurance.

Key Takeaway: Completes forms and answers questions so the insurer can assess their risk level.

broker of record

Simple Definition: The designated broker managing a policy.

Key Takeaway: The specific broker currently authorized to service the policy and receive its commission.

disclosure

Simple Definition: Revealing all relevant facts.

Key Takeaway: The duty to share all material facts with the insurer when setting up a policy.

representation

Simple Definition: Statements made to convince an insurer to accept a risk.

Key Takeaway: If a material representation is false, it can void a policy ab initio (from the very beginning).

named insured

Simple Definition: The primary person or party listed on the policy.

Key Takeaway: Holds full policy rights and responsibilities, unlike other parties who may just be incidentally covered.

effective date

Simple Definition: The date coverage starts.

Key Takeaway: The exact calendar day a policy or endorsement goes into effect.

expiry date

Simple Definition: The date coverage ends.

Key Takeaway: The exact time and date when policy coverage terminates.

loss payee

Simple Definition: Someone other than the named insured eligible for claim payouts.

Key Takeaway: A third party legally entitled to receive insurance proceeds after a loss.

mortgagee

Simple Definition: A bank or lender holding a mortgage on real property.

Key Takeaway: A specialized type of loss payee that lent money to buy the property.

mortgage clause

Simple Definition: Policy language protecting the mortgage lender's rights.

Key Takeaway: Outlines specific rights and obligations between the insurer and the mortgagee.

rate

Simple Definition: The cost unit used to calculate total premium.

Key Takeaway: Reflects estimated loss costs, company operating expenses, and profit targets.

loss probability

Simple Definition: The statistical likelihood of a loss happening.

Key Takeaway: Measures how likely a risk will lead to a claim, factoring in all hazards and existing protections

pure premium

Simple Definition: The portion of premium strictly allocated to cover claims.

Key Takeaway: Covers anticipated losses only; leaves out operational expenses and profit.

loading

Simple Definition: An extra fee added to a rate for unmapped hazards.

Key Takeaway: Covers risks or hazards not included in the baseline rate for that category.

expense loading

Simple Definition: The portion of rate covering insurer administrative costs.

Key Takeaway: Added to pure premium to cover policy administration and production overhead.

acquisition cost

Simple Definition: Expenses involved in securing new business.

Key Takeaway: Includes sales commissions, field costs, and administrative processing fees.

exposure

Simple Definition: Physical conditions or hazards threatening a risk.

Key Takeaway: Refers to the internal or external physical factors that create vulnerability to damage.

frequency of loss

Simple Definition: How often losses occur over time.

Key Takeaway: Measures the repetition of claims; higher frequency leads to worse overall loss results.

severity of loss

Simple Definition: The average dollar size or cost of losses.

Key Takeaway: Measures how expensive claims are when they happen; larger claim amounts increase loss severity.

special hazards

Simple Definition: Non-standard hazards typical to specific businesses.

Key Takeaway: Specific risks (like paint shops or woodworking plants) that aren't covered in ordinary policies.

underwriting rules

Simple Definition: Internal guidelines for accepting or declining risk.

Key Takeaway: Standards set by individual insurers to assess whether a particular risk is insurable.

retention

Simple Definition: The portion of risk kept rather than transferred.

Key Takeaway: Refers either to what a primary insurer keeps instead of ceding to a reinsurer, or what a policyholder self-insures.

manual rating

Simple Definition: Standardized, book-based rate pricing.

Key Takeaway: Uses broad historical industry/company data instead of specific individual risk pricing.