Insurance underwriting process IF3 Study text: 2011-12 ‘This edition s baced on the 2011-12 examination syllabus which wil be exemined from t September 2011 ‘unt 34 December 2012, LIS PES Proléed fee wit your sly tet excimer ic access to. teri a aut of oni services ta lp improve slonlat, the C's eas chances of exam success ast tc ose one study 00, | These typical inci: a soy panne, 2 | deniers ot ck exam adi sedge check (mute ch an his fowrstep To plore the benef for youre ot £. Soto meses | 2.Use your CH PIN® as yous Taga name 3.Use your sutname as your passwotd (into | 4. Click Login ase and ort any hyphens or apastophs | sewcan ty 0 | we his stdy tot Updates to. as | An oni upcating saree is cable forthe Award in Insurance (FT) anda erica in fasurance os, Sludons shouc theretove. check te folowing website seguarty fr any updste ots study tx B09(O The Chartered insurance institute 2011 ' Allrights reserved. Material published inthis study text is copyright and may net be reproduced in whole or i in partineluding photocopying or recording, for any purpose without the written permission ofthe copyright holder. Such written permission must also be obtained before any pat of this publications stored in retrieval system af any nature. This study text Is supplied for study by the original purchaser af the book only ‘and must not be sol, lent, hired or given to anyone else. Every attempt has been mace to ensure the accuracy ofthis study text, however no list can be accepted for any oss incured in any way vhetsoever by eny person relying solely on the information contained within it. The study text has been produced solely forthe purpose of exam preparation and shauld not be taken as definitive ofthe legal position. Specific advice should always be obtained before undertaking any Investments. ISBN: 978085713 1027 This evised and updated ecition printed in 2011 Previous ealtion printed in 2009 (ISBN: 978 1 85369 878 1) First edition 2004 (SBN: 185369 421 5) i The authors [Nell A RoffB. Juris (U.P.£), FSA, ACI, graduated in faw atthe University of Port Elizabeth, before opting fora career in insurance, joining a large general insurer in South Afrca, and then moving to-an accounts ‘executive position in one of South Atica’s largest incurance brokers, He was elected a Fellow ofthe Insurance Institute of South Arica in 1997, and after moving to the UK in 1998, was elected an Associate ofthe Chartered Insurance Institue in 2001. He now manages an uninsured loss recovery section at Lyons Davidson Solicitors in Bristol Reviewers The Cl would Ike to thank the following reviewers fr their assistance: ike Cronin ACI for ceviewing and updating this edition ofthe study text Acknowledgement ‘The cl would keto thank. te folowing reviewers of previous editions of tis study text “ Nathan Breve Tony Pearson Andy Piling Acknowledgement ‘The Cli thanks the Financial Services Authority for its kind permission to draw on material that is available from the Financial Services Authority website: vwew.(sa.gov.uk and to include extracts where appropriate Where extracts appear, they do so without amendment. The FSA holds the copytight fr all such material. Use of FSA materiat does not indicate any endorsement by the FSA ofthis publication, or the material or views contained within i? Wile every effort has been made to trace the owners of copyrigit material, we ragrt that this may nat have bbeen possible in every instance and welcome any information that would enable us todo so, Unless otherwise stated, she authors have drawn material attributed to other sources from lectures, conferences, or private communiration. Typesetting, page make-up ond editaial services Ci Leeting Solutions. Printed and collated in Great & This paper has been manufactured using raw materials harvested from certified sources or controlled wood sources. Eatsinsurance underwriting process IF3 Study text: 2071-12 This edition is based on the 2011-12 examination syllabus which will be examined from 1 Septembe: 2011 until 31 December 2012, (ESGIEes Provided tee wih your stu text enrolments azeess t Revsinfcta, th C's esy-1o-u88 online study suppor io, ‘tenga sue of oni service to help ingrove your chance of exam success ‘These typical incude a study planner, a node check (mola cece ts) facty covering each chptet, Clnions of hey teams, mock eam and hints a0 tps To oxplore the bonofts for yourself follow this four-step procdss: { 41.0 to werusevsionmata.com 2. Use your Gl IN* as yourlogin name 3. Use your sumame as your password (lin aver case and omit any hyphens ex apostrophes) 4. ick ‘Log You can ind your CPi onthe ‘study material acknowedgment itor ed ith hs study tect TRE i ‘ee wt sane sro vas forte Aardin insurance (IT) nal eral in surance uns ‘Students shoud therefor, check te folowing ste regularly far ny uptes to this study txt© The Chartered Insurance nstitute 2011 All rights reserved. Matertal published inthis study texts copyright and may not be repreduced in whole ot In part including photocopying or recording, for any purpose without the writen permission of the copyright holder. Such writen permission must also be obtained before any part of this publication s stored in 2 retrieval system of ay nature. This study text is supplied for study by the original purchaser ofthe book only ‘and must not be sold, ent, hired or glven to anyone else. Every attempt has been made to ensure the accuracy ofthis study text, however no liability can be accepted for any loss incurred in any way whatsoever by any pecson relying solely on the information conteined within it, The study test has been produced solely forthe purpose of exam preparation and should not be taken as definitive ofthe legal position. Speci advice should always be obtained before undertaking any investments, ISBN: 978 085713 1027 This revised and updated edition printed in 2011 Previous edition printed in 2009 (ISBN: 978 1 85369 878 1) First edlfon 2006 SBN: 1 85369 421 5) The authors Nei A Roff, 2. jris (U.P.E.),FIISA, ACI, graduated in lave atthe University of Port Elizabeth, before opting fora career in insurance, joining alage general insurer in South Afiee, and then moving to an accounts ‘executive postionin one of South Atica’slargesi Insurance brokers, He was elected a Fellow of the Insurance Institute of South Arica in 1997, and after moving to the UK in 1998, was elected an Associate ofthe Chartered insurance institute in 2001. He naw manages an uninsured loss recovery section at Lyons Davidson Solicitors in Bristol Reviewers ‘The Cll would like thank the following reviewers for their assistance: Mike Cronin, ACI for reviewing and updating this edition ofthe study tet, Acknowledgement ‘The Cl would tke to thank the following reviewers of previous editions ofthis study teat: 7 Nathan Brew Tony Pearson Andy Piling Acknowledgement ‘The Cl thanks the Financial Services Authority for ts kind permission to drasv on material that is available from the Financial Services Authority website: ww fsa.gov.uk and to include extracts where appropriate. ‘Where extracts anpear, they do so without amendment. The FSA holds te copyright fora such material Use of FSA material does not indicate any endorsement by the FSA ofthis publication, or the material or views contained within it” While every effort has been made to tace the owners of copyright material, we regret that this may not have ‘been possible in every instance and welcome any information that would enable us to do so, Unless otherwise state, the authors have drawn matatalattdbuted to other sources fem lectures, conferences, a private communications. ‘Typesetting, page makeup and editoriat services Cll Learning Solutions. Printed and collated in Great Britain. This paper has been manufactured using raw materials harvested from cerlied sources or controlled wood sources,The Certificate in Insurance Welcome to the Cis Certificate in Insurance which isa core qualifcstion fr insurance staff working aecoss allsectors of the industry. Ithas been developed by practitioners to provide a grounding n basic insurance principles including the regulatory environment, key insurance disciplines and populer products It supports ‘ale specific learning which wil assist individuals and thee empiayers to develop relevant competences. The Cerificate is modular ia structure, each unit has 2 credit value and the accumulation ofthe stipulated number of credits leads to the award ofthe Certificate and entitles the hole to apply to use the designation ‘Cost C™ (CHI membership and Continuing Professional Development requirements apply). Successfel «candidates also satisfy the entry requirements ofthe nex! qualification to the tramevork of Ct qualifications, ‘the Dipfoma in nsurance, anc wil gan eecagnition for their accumulated cro, To achieve the Certificate candidates must achieve a misimum ot 40 eres, Candidates are required to take (OF1) insurance, legal and regulatory — worth 15 credits, the balenee may come from any combination of the avalable units which ae also worth 25 cedits ead (1F2) General insurance business (1F3) Insurance underwriting process (0F#) insurance claims handling process (0F3) Motorinsurance products (F6) Household insurance products (0F?) Healthcare insurance products (08) Packaged commercia ineurances For further details. please Soe the Cercicate in insurance handbook (exyxc.c0.}) There is no prescribed arder in wich units must be taken, but its strony cecemmended that (4) Insurance, legal and regulatory is sat frst as this provides the Foundation hnow!edge upan which the other uns build Allcettiicate exams ace two hours in duration the format (multiple choice questions and mini case study ‘muitipte choice questions) differs betrzen units with each daveloped to encure they are relevant to the ‘material being covered and are appropriate tothe level of learning being undestaken The exsins are based con the published syllabuses rihich are themselves important aids to preparation and evision. Wis essential that you familiarise yourself with this before commencing study (provided oveilead. ‘You ate also urged to sive careful thought to your chosen method of study, The Cit has develoged a potfatio. of study options an revision aids to support lesming forthe Certificate, Full details ef alot these can be found at wnaw.ci.co.sk within the section on the Certificate in insurance.porting successful study... isionity: (¢ offers an. untivaliéd ‘Suite. ‘of glExamination syllabus Sopa Ded stepance sftshringand last ene ° Naser at restions i ie 4. Undevtend the materi fate relating tothe instranee 5 undenoeting peaeaet Undorstané underveting procedures resting the ncuance 5 undoroing process 3. Understand insurance poilesin elation tothe insurance Py 4. Undestan renevatsandeanctation nation tothe insane 3 underartng process 5. Understand persona nserance ination the nsrance 3 underueting process 6 Understand commerca insurances in rlaionte heinsuronce 3 tndnerting process Understand the main ‘soppon type ncarancesevces aaa 8 Understand undenaiig considerations tlation othe 2 Insurance underiting process 9. Understand tho principle snd practices of prcng 30 10. Understand pricing factors within tho contest ofthe insurance 5 ‘onder process 1. Understand managing exposute within he context athe ‘ insurance undennting process inp ai ‘teh ssssment 7S mips quotas (COP) 2 hate alld for thi exastion. Tissot lb oeamind for 1 Septeber 2014 nt 3 Deceer 2612 + Conldte il be oxomies onthe bai of lic aw od practice ules eerie sated. * Contes shvidvefrtothe Cepios ete eves yj. forthe est eormtin on ‘hangs tow ae prea snaentey l aalad gl5 eaconie awe neuwig pete Examination syllabus Bs “ 7 sal 45 Guana teserteigees tates 32 ipetenenagettovinentearn 81 pugtetpcatencemonyatet tet 80 Spt comme idiots 19 Nun teate atu tte set Site bebe one 2012 etsExamination syllabus 92 Selanne sine ngety 54 Grlsmtes 10, Undesient veins aan E tee ean i ss oe Retorence wate nant ert et ned Periodicals ination gues Exam technique/study skis ubised june 201. aaaInsc unesing pes FanonUsing this study text ‘Welcome tothe IF: Insurance undervniting process study tex which i designed 10 support you in your study forthe Ci Certificate in insurance. This study txt breaks doxin the IF3 examination syllabus into concise sections with each chapter conlaining defined learaing outcomes. The syllabus learing outcomes coveredin each chapter ae sted on the chapter ttle pages. Making the most of your course Contained within the study text are"How it works’, ‘Activities’, Thinks and in-toxt ‘Questions’ These are alldesignedto help your understanding ofthe material. The ‘Questions’ wil test your ability to apply the ‘material you have jst read while ‘How It Works’ and ‘Activities are designed to illustrate how insurance ‘works in practice and to help you think araund the subject (you can make your own notes ifyou wis “Answers tothe ‘Questions’ can be found atthe end of each chapter. ‘At the end of every chapter there i also a sot of setest questions which you shuuld use to check your oowledige and understanding of what you have just studied. Compare your answers with those given at the backot the back, Alls of Key terms" hich introduce the mala ideas covered inthe chapter appears atthe beginning of each chopterA summary of "Key points is also provided atthe end of each chapter as a quick mernory jogger. By refering back tothe learning outcomes after you have completed your study ofeach chapter and attemping the end of chapter self test questions, you willbe able to assess your progress and identify any 21638 that you may need torevisit General siudy techniques ‘You willed to putin time an effort i you are to master the contents ofthe course and apply itto Liferen situations. This should nat worry you, but you should cecognise that your learning and examination preparation needs tobe thorough, + Drawing up a plan can help you to study regularly and systematically. Make a timetable covering when you wil study 96d forhow long, and try to adhere to il. Try to make up for any last Lime as you go along. + is better to have frequent short learning sessions than pesladic long ones, + Study in blocks of no more than 45 minutes, with a break of 5-20 minutes between blorks. Stat the study session with the tas you least want to do, Be strict with your use of time. Use of the study materials + Before commencing your studies, take a look atthe overal swucture and contents ofthe study text and ‘the topics covered. Brel sean the material to give yourself an idea ofits ecope. How you wil be ready to study the course chaorer by chapter. + Make your vn aates on wha you read. This makes it easler to remember. ‘Use your course materials actively: walte on them, dravv on them ox highlight them, do anything which wit, help with your revision. * Study under conditions that suit you best and do what you know works for you! Revision + Hake fuluse of your oxn nots, This means keeping them nan orderly ny, and ensuring thot you are ableto find patulartpies easly: perhaps by using diferent colored markers. + Goover atria eared reg, though quel. This helps to xin you log tert ero + Waite down marin facts an ary them around so that you can test yourself hen you have afew spare smoments. + Test your understanding by thinking the material trough n your hea peont. + oni sv evison unl the oy before the examination, and ry not odo Loo much ast-inute ein ittends to confose ater than help. rad by Cling through with other« sume cig pce Use any support available + Itis important fora precticl subject like insurance to recognise that in order to gain the most from your studies you need to build on your formal learning by drawing on the additional resources that are availabe, this may include talking to your colleagues at war, reading workplace publications and referring to professional journals and websites. Oon’t forget thatthe syllabus a the font of this study text aso ing, contains list of useful additonalContents A Principles of utmost good faith [va 3 What isa materia acl? € Duly a disclosure [a D Consequences of nondisslosure 16 E Physical and moral 16 F Obtaining material facts ee Ww A Quota 2a B Proposal form 28 © Promium eateulaton © Policies, cover notes and cortiieates of insurance Contact eertalny F Premium payment Appendix 21: nlormation eal for application by telephone or internet ‘ar insurance proposal form B Exceptions BS © Condtons D Escesses, deductibles and tranciees 30 E Warranties, conditions and ropresonttios Anpendis 91: Entree rom home iserance policy document ieee neice 2 Renewals 42 1 Cansetaion imirvzonse Imsescnutewniro noes initio {A Motor insurance 52 1 Heath insurance 5/6 Household insurance 58 1 Trevel insurance E Eonded warrantes| Ce eos Mae eu} A Properly insurance 1 Pecuniary Lia ce insurance ae nets A Hebines me 8 Authorised eaters and suppers [7 6 Fisk onl and 1 Uninsured loss recovery services. i a eat ic A Basic principles of underwriting ae B Specific underwriting considerations fet us Frau: prevention, detection and consequences us D Equality Act 2010 | us E Dala Protection fet 1098 ws ‘Appendix 8:1; Data Protection Ast Facsheet 1 Datareguied a 3 Importance of claims iteration of {© Froquorcy and severity of claims ae a Clams os ais 6 ‘count perfomance and monitoring a7 2 Rsk premium wwe 8 Expenses 10 Return on capital amployed(ROCE) 108 D Investment income a [108 E Premium taxes 1016SUEUIEDEN AMS SCE A Markt cy 3 Risk acevmutation © Reinsurance Cases cited I Sates Indexwrantte Irsuseceurzotn pmsIntroduction sn the eatty days of marine insurance the details ef» ship or cergo to be insured would be described on a stp. This slip would be takem to Lloyd's and the person who was to cary the risk would read the details, ‘hen sign the slip under the details ofthe risk. In this way, the person careying the rsk known as the vocewies, ‘The underwriting process is far more complicated nowadays but the term stil appties. ‘You wil be familiar withthe concept ofthe common pool, the contributions of many people ta this pool and ‘out of whieh the losses ofthe few are met, In essence, the task oF the underwriter isto manage this pool as «ffetively and profitably as possible. Thinking ofthe role af underwriting inthis vay we could say that itis the ole of the underwrite to: ‘+ ses the ris which people bring to the pool + decide whether or not to accept the vsk, orhow much to accepts *+ determine the terms, conditlans and scope of cover to be offered: and + calculates suitable premium, In this course we shal be looking at the procedures involved in underviting ina general sense, as well <2 examining the specific undensriting considerations applicable to the main classes of general insurance business Our course of study will encompass looking atthe steucture and content of peliey wordings, premium bayer, enewal and cancelation procedures os wells the main aspects of rating. The developments in ‘lated products and services willbe examined and we shal conclude by intvoducing the prineipes involved ln managing he underwriting account.as Is important to have the credentials. — Join the growing community of insurance professionals by becoming a member of the Cll. Statistics show that a member's pass rate is higher than a non member’s. Join up to get help passing exams: * Discounts on learning materials, exams, seminars, study and revision days ~ membership can pay for itself + Free access to exam guides for written exams + Recommended textbooks and online fact files * Technical reference books and newsletters + Support from other focal institute members| * Coaching on exam technique and revision courses. ‘And ongoing support for your career: * Use our world renowned designations - Cert Cl, Dip Cil, ACI and Chartered Status + News and regulatory updates, + Online career support centre + UK tax-payers can claim income tax relief on membership fees. Membership from as little as £5.84* a month by Direct Debit. To sign up please contact us on 020 8989 8464 or visit www.ci.co.uk/join “tembetship prices are evened on 1 January each year and are subjet ‘wan oveall maximum increase of Stine wth our Royal Chater.Material facts (arene Learning objectives Introduction Key terme ‘A Panis of west god ah 28 Whatie a materia fot? © Duly at zeosere D Consequences of nonasiosure E Pyscs and moat hazard F Dotining materia acs Koy points Hee Question anewors Satst questions Leaming objectives, After stucying this chapter, you should beable to + explain the principles of good fath; + define a material fact and give examples; + explain the principtes ofthe duty of disclosure; + explain the consequences of non discls + explain the parallels ond differences between periland hazard; Sie emit iGaeSs * eoplain moral ane physical hazard and how they relate t the Insurance undenwrting process; + describe ‘methods used by underwsiters to obtain material facts,” Faron hau rt acess Introduction We have already introduced the idea that the role of underwriting involves “assessing the risk which people bring to the poo!’ In this opening chapter we shall be concentrating an the importance of material facts in that essessment, he duty of disclosure as well as examining the significance of physical and morat hazard for underariters. We shal algo lookat the weys in which underuariters obtain material facts, ‘You wil study the legal principles that apply to insurance in depth elsewhere In your course of study, However, to fully understand the concept of material facts, we shall begin tis chapter by reviewing the important principle of utmost good faith which is central tothe buying and selling ofineurance. is chp eae ptt of flog: ian z Dutyofdscosue Mort haar = A Principles of utmost good faith A contrat i anagretment between two paris which’s legally binding. Hever, no al agreements are legal contacts For contrat tobe legally binding cetin elements must e present. Theseindude + an aceptance ofthe afer; + consideration: that sa benefit recived by one pr ofanaiet. ty in eturn for 8 promise ofthe performance of an act, Elsewhere in your course of study you will lear that theve ae ether important elements which also must be ‘resent, but forthe purposes of his course we are gong to focus on these three aspects. Using an insurance contract as an example we can appreciate more easily haw they apply in practice, ‘with contracts in generat, tere is. maaan the contracting partes to provide information that has not been requested. The legal principle involved is known by a Latin term, caveat emptor, which translates as {cf the buyer beware. There is, however, a measure of legal protectin in the form of such statutes as the Misrepresentation Act 1967, the Consumer Credit Act 1974 and the Sale of Goods Act 1979 which provide protection for consumers agains: unfair practices. Tees 6 Canela would certainly not be far or jus: there wil lays be things known particulary by 2 person wanting insurance that are nt knovin by a potential insurer and which, if they were known, cay affect its decision to accept the risk or on what terms. In the case of London General Omnibus Co, Ltd v. Helloway (1912), the position was summarised as follows: ‘The person seahng fo insure may fay be presented to know al the cvcrnstances which mately affect the sk, and, general, a 0 some of them, te ony person who haste knoe, Ris because ofthis thatthe principe of caveat emptor does not apply in an insurance contract. Inits place is 28 duty of the utmost good faith (enown in Latin terms as uberrimae fides). Essentially, this duty means that a person wanting insurance (a propeser) must provide all information known by them tothe insurer. As with most thing, there are always exceptions to the rule and we shall come back to these laterin the chapter. ( iopens Utmost good faith can be defined as A posive duty voluntnly a iscose,accurally and fly alte fais material ‘wheter equesed oF no sk being propose, Parties must therefore volunteer all material information before the contract is finalised, The law does see the proposer as the main supple of the ‘material facts’, as they wil be the pacty whois ‘anare ofall the facts surrounding the subject matier. ‘An Important summary ofthe principle of utmost good faith wes given in Razones v. Bowen (1928) As fo undenrtertnow rating andthe man who comes oti to zechim to insure knows everything, it 's the dy of te assure... make a ul escosure tothe underwier wthout beng shed o al he mata Dcamstances. This is exresse by saying tsa conirac ofthe utes god faith, The princinte does apply to both parties, and the 1986 case of Donque Keyser Ullmann SA v. Skandia (UK) ‘Insurance Compony Ltd confirmed thatthe duty also applies to an insurer. Inplctte, ahs on bp ome aul at, Tho a equa on he pat ots Hse il 00 ‘opi ian erate nfomaiy abi ta Goer uteh ena oleae, Pevd ihe Reer mses ler at eto bn venetian py eel make acy oft cocuon aval ong ft disso ul be demaa io have bnenimnde Pn Ae B What is a material fact? Now we can soe hovr the term ‘material fact’ fits in with the principle of utmost good fa ‘now exactiy what s meant by materiat fact. re now aved to Generally speaking, a material fact is something that has a beating onthe risk insured, for example: * household insurance: the risk address has a thatched roof; + motor nsurance: the proposer has had three claims inthe previous year ‘twoule’t make any difference at all~ the proposer would stil need to dstlose them as the underiter ‘needs tobe aware of such facts since they might affect the decision regarding accepting and cating the risk Similarly, any special terms or conditions imposed by past insurers or an insurer's retusa athe fo accept a Proposal orto renew an existing polley must be isclosed. The Marine insurance Act 1906 defines a material fact, aod is worded as follows: Every ccumstances mata which would infuenes the jdgoment ofa prudent insurer in sing the presivn ‘determing whether ne vate the ck. ‘n essence, material fects are those that an insurer would regard as likely to influence the acceptance and assessment ofa proposal. fa proposer in any doubt about whether a fact is material or nt Uisclosed. leat di — The courts lest whether a fat is material by looking att rom a prudent insurer's point of view, They do not

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