INSURANCE PREMIUM

MEANING OF UNDERWRITING

This is the process by which insurers assess the proposed risk presented for insurance protections towards the acceptance of the risk or its rejection if it does not meet certain conditions. It is also to determine what should be charged as premium along with other terms and conditions which the contract should be effected.

The underwriters of insurance companies are those who have the task of accepting or rejecting risks presented by the insured. The role of underwriter in an insurance company cannot be over-emphasized.

It is important for an underwriter to be conversant with the assessment of risk he is called upon to manage. His assessment will involve consideration of the physical and moral hazards attached to the risk.

In taking his decision, he must consider the competitive nature of insurance business by showing reasonableness in his judgment so that the new insurance business could be attracted aswell as ensuring that his company realizes underwriting profit.

Basically, from the underwriter’s assessment of the presented risk, a risk that adjudges to be normal will attract basic premium rate. Where a risk departs from normal by the features presented, it is the responsibility of the underwriter to decide whether the degree of risk could be mitigated by the payment of an extra premium.

 

METHODS OF UNDERWRITING

Hazard is described as anything that either causes or increases the likelihood of a loss. Hazards are either physical or moral. The physical hazard is the definite appearance of the risk with features that influence the occurrence of the loss. These forms of hazard are obtainable from the summary report of the proposed risk carried out by the insurer, the experience of the insurer through the completed proposal form in compliance with the principle of utmost good faith.

The moral hazard is the unfortunate outcome of features directly influenced by the people handling the risk which will be responsible for occurrence or the severity ofloss. This deals with attitude and conduct of insured in relation to the risk. The assessment of moral hazard in insurance involves the following considerations:

A) Those dealing with the conduct of the insured: These are:

1. Submission of false or exaggerated claims.
2. Misrepresentation of material facts.
3. Carelessness.
4. Arrogant or awkward insured.

 

B) Those that have to do with conduct of employee, such as:

1. Low wages level.
2. Act of sabotage.
3. Vandalism.
4. Willful fire raising.

 

C) Acts relating to the society, such are

1. Riot.
2. Vandalism.
3. Willful fire raising.

Also, for underwriter to consider whether to reject or to accept a risk, the following are to be considered under each class of insurance:

 

FIRE INSURANCE

1. The scope of the risk covered.
2. The use, method of use and the trade processes involved in the insured premises.
3. The construction of the premises.
4. Protective factor such as fire extinguisher, sprinklers, automatic fire alarm.
5. The loss and claim experience of the insured.

 

THEFT/ BURGLARY INSURANCE

1. Integrity and moral stability of the insured.
2. Nature of property.
3. Theft protection available.
4. Whether the premises will always be occupied or not.
5. Mode of construction of the premises.

 

MOTOR INSURANCE

1. Type of vehicle.
2. Use to which the vehicle is put.
3. Details of vehicle i.e. registration number, mode, engine capacity.
4. Area of use of the vehicle.
5. Age of the insured or the regular driver of the vehicle.
6. Cover required.
7. Claims / losses history.

 

LIFE ASSURANCE / PERSONAL ACCIDENT INSURANCE

1. Age of the life assured.
2. Occupation.
3. Health condition.
4. Insurance history.
5. Type of insurance and terms.
6. Mode of premium payment.

 

TERMS AND CONDITIONS

The terms and conditions of an insurance contract can take any of the following forms:

1) Excess and Franchise: It is applied by underwriters in reducing small losses that occur frequently or in cautioning the insured to be more careful in the handling of the subject matter of insurance. The excess and franchise may be voluntary or compulsory. The voluntary ones are imposed to seek for premium reduction while the compulsory excess and franchise is to make sure that the insured handles the subject matter of insurance with care.

 

2) Warranties: This is the undertaking made by the insured in respect of an insurance policy that something shall not be done or the existence of certain fact or not. It is imposed by the underwriter to ensure that the insured complies with the requirements that would make the risk acceptable. For example, waste removal warranty in fire insurance.

 

3) Under-insurance (Average): This is when the sum insured is less than the actual value of the subject matter of insurance. It is a situation where the amount paid by the insured to the common fund is less than what ought to have been paid. The use of average is employed by the underwriter whereby the insured is made responsible for part of the loss when it occurred.

 

4) First loss insurance: This is mostly used in theft and burglary insurance policy where a total loss is extremely rare. For example, it is rare for all goods contained in a store to be stolen.

In the first loss basis policy insurance, the expected amount to be lost at a particular time would be determined by the insured which will represent the maximum amount to be covered by the policy. In the event of loss, the insurer will provide compensation based on the maximum amount and not or the actual value of the subject matter of the insurance. In a situation where the loss is above the expected amount to be lost under theft insurance policy, the insured bears the excess. The premium payable under an insurance policy arranged on first loss basis is usually between 80% and 90% of the actual premium that would have been paid on the actual value of the subject matter of insurance.

 

5) Sum insured: This is the maximum liability of the insurer to the insured in the event of loss and the amount in which the insurer premium computation is based. The total sum insured will not be payable unless the insured sustains a total loss.

 

PREMIUM LOADING

MEANING OF PREMIUM

Premium is the consideration given by the insured in return for the insurer’s undertaking to compensate or indemnity the insured in the manner agreed on the happening of a specified event.

Rating or pricing involves the determination of appropriate premium to be paid by the policy holder. Section 50 (1) of Insurance Act 2003 makes the receipt of insurance premium a condition precedent to a valid insurance contract. It states that “there shall be no cover in respect of insurance risk unless the first premium is paid. Section 50 (2) of same Act stipulates that premium collected by an insurance broker in respect of an insurance contract business transaction through them is deemed to be premium paid to the insurer involved in transaction.

 

FACTORS AFFECTING PREMIUM LOADING

Insurance companies use different factors when determining the premium for a specific type of insurance policy. These factors are:

1. Claims history of the insured.
2. Past experience of similar risk.
3. Credit score.
4. Age.
5. Coverage.
6. Driving history (for automobile insurance).

 

However, the need for realism in rating an insurance business leads to introduction of the equation necessary to achieve a balanced account:

P = L + C + E + M

Where

P = Premium

L = Losses

C = Commission

E = Expenses

M = Margin of profit

The following effects are also to be considered in premium calculation:

1. If the rate of premium is too low, the insurer will sustain underwriting loss.
2. If the rate of premium is too high, the insurance may lose insurance business.

The most important thing is that the fund should be sufficient to cover claim, insurer’s expenses and a reasonable profit.

 

OTHER FACTORS THAT AFFECT PREMIUM LOADING

1. Long-term agreement: Insurance contracts with long term agreement term enjoy premium discounts. This is the agreement made between the insurer and the insured at the inception of the policy that the renewal of the contract continues at least for a certain number years, usually five years. The insured receives from the insurer premium reduction where premium discount is granted through the application of certain percentage on the annual premium payable.
2. Short-period premium: This form of premium is applicable to any class of insurance that runs for less than 12 months, in which the premium calculation will be on pro-rata basis. It is common with motor insurance policies where additional vehicles are to be added to the existing policy. The policy holder may also want to delete old vehicles from the existing policy. It is also applicable to other property insurance such as fire and burglary where additional properties are added to the existing policies.

 

RETURN OF PREMIUM

RETURN OF TOTAL PREMIUM

A total premium is returned to the insured if:

1. The insurer acted “ultra vires” i.e. if they are purported to issue a class of policy for which they were not authorized in their memorandum of association. An example is an insurance company that is not registered for the underwriting of liability insurance business but decided to offer such class of insurance to the public. If such cover is purchased from the insurer, the insurer will be considered to be ultra vires, that is, acted beyond the scope of his licences.
2. There was no consensus-act-idem i.e. the parties were under a misapprehension or misunderstanding regarding the details of the contract.
3. The nature of the contract is illegal.
4. The condition on which the insurance contract was underwritten has been breached. In case of any willful or fraudulent breach of the contract by the insured, such insured will not be entitled to return of premium legally.

 

THE RETURN OF PARTIAL PREMIUM

Partial premium will be returned to the insured by insurer in the following conditions:

1. If the cancellation of the contract is at the instance of the insurer which is made possible through cancellation clause in the policy. The return of premium is usually on pro-rata basis.
2. If there has been double insurance. This would apply if the insured has affected more than one policy on a particular subject matter of insurance.
3. Where the insurer is financially distressed and slated for liquidation.
4. Where the cancellation of the policy was mutually agreed by the two parties.