CHAPTER 8: NEW BUSINESS PROCEDURES - Coggle Diagram
CHAPTER 8: NEW BUSINESS PROCEDURES
DEFINITION OF UNDERWRITING
To denote the principles and practices concerning the acceptance or rejection of the total amount of acceptance, the amount of retention for insurer's own account and treatment of the balance through reinsurance.
OBJECTIVES OF UNDERWRITING
1) Earning of a reasonable profit on the operations.
2) Production of a large volume of premium income sufficient to maintain and progressively enlarge an insurer's organizations.
IDENTIFICATION OF PHYSICAL HAZARD
Reinforced concrete building obviously represent better physical hazard than buildings constructed of bricks set in mud. Thatched roofs involve greater physical hazard than tile or metal roofs.
2) NATURE OF FLOORING Wooden floor collapse easily and add fuel to the fire. Heavy machinery or goods falling rough from the higher floors will cause damage to the property.
It is difficult for the upper floor because the water pressure decreases with the increase of the height. There is risk of water damage to property on the lower floors when water is used to extinguish a fire on the upper floors. The greater number of floors involves the risk of collapse of the upper floors with consequent heavy impact damage.
4) FLOOR AND WALLS OPENING
These openings assist the natural upward spread of fire by acting as fuels and allow water used to extinguish a fire to descend to lower floors. Openings in the wall whether windows or doors spread the fire from one part of building to another.
A building occupied as a residence or an office is a better risk than a retail shop. For example, a warehouse used for the storage of highly combustible goods is more hazardous than a grocery shop. There will be greater incidence of loss by fire if the is used as a factory using machinery run on power.
6) LIGHTING, HEATING AND POWER.
The wires may become old and installation worn-out that can cause fire by a short circuit. Leakage of fuel, gas or oil also increase the risk of fire.
The distance of fire brigade station or the source of water supply is one of the physical hazard that might occurred.
1) General housekeeping - for example machineries maintained in working order
2) Management - evidence of good or poor management
3) Employees - example of workforce happy and stable or otherwise, vandalism.
4) Fraud - deliberate destruction or taking a loss or exaggerating of claims amount.
RISK IMPROVEMENT AND LOSS CONTROL There are several factors that insurers has to take look.
a) The production of a well spread and a large volume of business.
-According to the theory of large numbers
Spread the business over as wide an area and to secure business from as a large number of classes.
b) The selection of the business
Careful scrutiny of business obtained by making proper assessment of the hazard.
Make decision on :
The probability of an outbreak of fire.
The probability of its spread in relation to the total value of risk.
Probability of a catastrophic loss.
TARIFF SYSTEM OF RATING
-Risk are classified into principal groups and rates are provided for each group based on loss experience. Fire risk is classified according to trades or processes.
TRADES WHICH ATTRACT THE HIGH RATE WILL HAVE THE FOLLOWING FACTORS.
Bulk storage in high stack.
Use of machinery power by gas, electricity, oil, petrol or other fuel.
Presence of flammable liquids or gases in substantial quantities,
Processes involving the application of heat.
The production of flammable waste or dust.'
Present of combustible materials such as plastic, cloth, paper or wood.
-In the same group, there will be differences un the circumstances of individual risk.
These differences are dealt with by charging extra premium.
Risk is weighing by its good and bad features.
For example, heavy exposure hazard, hazardous method of heating, floors openings and non-standard construction.
FIXING THE RETENTION
The determination of the limits to be retained. Retention refers to the amount which an insurer is prepared to retain for his own account on risk, the alternative term used are 'limit' and 'net holding'.
RETENTION ARE FIXED ON THE FOLLOWING BASIS.
The financial status of the insurers.
The experience in the class.
The premium income of he insurers.
-The amount of premium income in particular class of risk.
The reinsurance of the surplus. Direct insurance underwriting involves appraisal of insured risk before acceptance.
UNDERWRITING CONSIDERATION INVOLVES:
Age and financial position of ceding company.
Standard of management.
General underwriting policy
Total premium income
Area of operation.
Limits and their relationship to the total premium income.
Previous reinsurance arrangements.
Type of treaty is either quota share or surplus.