Insurance Underwriting

Insurance Underwriting
• Meaning and Defination
• Process and types of underwriting decision
• Common types of underwriting document
• Meaning and reasons of endorsement
• Policy cancelation
• Refunding premium
 Meaning Of Underwriting
• Underwriting is the process of assessing the
risk proposed to insurance with the terms and
conditions to be imposed on an insurance
contract.
• underwriter is the person on behalf of insurer
who accepts; rejects and sets terms and
conditions on proposed insurance policy.
 Underwriting procedure

• The normal underwriting procedures usually includes

the following steps;
1) Obtain completed and signed proposal form
2) Inspect the subject matter and receive surveyor report
3) Examine and select the risk based on proposal form
and surveyor report
4) If the risk is applicable, search the appropriate tariff on
the rate chart
5) Calculate the premium
6) Then prepare and issue the policy
 Common non life insurance documents and their content

• Insurance contract requires tangible evidence or

document from underwriting to the claim process.
Even if; the degree and types of documents varies
from policy to policy; the following are popular and
widely used by different insurance policies. These
are:
• Proposal form
• Cover note
• Certificate of insurance
• The policy
 1. Proposal form

• This is an offer of the proposer to insurer for

coverage of his property, life and liability against
risks which he is exposed.
• The insurer use printed proposal form for various
types of covers and insert questions according to
particular class of insurance concerned to elicit all
material facts concerning the risk.
• Note- Bank request proposal for loan called
business plan,simillarly insurers request propsal to
give coverage called proposal form.
 General information's found in proposal
form
• Proposer's name
• Risk Address: - In certain cases the address for which the risk attached is different from
insured's home address or the firm's register address.
• Proposer's Occupation
• Previous and present insurance history: - If other insurers impose special terms or
premium or declined the proposer or the risk in the past is important for new insurer to
investigate the circumstance before coming to a decision regarding acceptance and
terms.
• Losses and claims
• Particular information's: The underwriters will concern with certain information's which
is specific to their type of insurance being proposed. Examples of particular questions
on selected insurance policies are given below:
– Fire insurance: Construction and use of building and their value, sum insured, Extension of
cover required.
– Motor insurance: Type of cover required, details of the vehicle, age experience, claim and
accident of all regular drivers.
 – Employer's liability insurance: numbers and grouping of
employees and their annual wage per group, details of
dangerous machinery, details of dangerous substance used
with specific questions about certain substance or processes.
• . Declaration: There is usually declaration to effect that
the proposal is the basis of the contract and the
proposer will accept the insurer's usual form of contract.
• Signature: Below the declaration there is space provided
where the proposer and the underwriter are required to
put their signature.
 Cover note

• It is issued when the negotiation is on or a big risk is being pre-surveyed by

either company's officer or surveyor to afford temporary insurance
protection to insured. Once insurers accept the proposal with advance
premium either letter is issued or a cover note is issued.
• Sometimes policy is also issued straightaway. Cover note provides
immediate protection to the insured and contains all the necessary
information. The particulars of cover note are:
– Name and address of the insured
– Sum insured
– Cover granted
– Subject matter insured
– Basis of valuation (premium paid)
• Cover note is subject to tariff warranties and conditions of the policy. Since
it is unstamped document hence it is always followed by stamped policy
with in the time limit prescribed
 Certificate of insurance

• It is issued in motor insurance and marine cargo under open cover and
declaration policies.
• The motor insurance act says that the motor policy shall have no effect until or
unless certificate of insurance is issued in prescribed format.
• Instead of insurance policy, certificate of insurance is the only evidence of
existence of valid insurance required by motor vehicle act acceptable to police
Authorities. Certificate of insurance contains the following information:
– Serial number
– Name and address of insured
– Date of commencement of insurance and expiry date
– Use of the vehicle
– Particulars of the vehicle
• Registration number
• Engine and chassis number
• model and make of the vehicle
• Cubic cap[city
 The policy

After a contract has been made between the proposer and

insurer it is recorded in a document called a policy. The policy
is normally divided in to the following:
• Heading
• Preamble or Recital clause
• Operating clause
• Schedule (descriptions of subject matter)
• Exceptions
• Signature
• Conditions
• Endorsement
I. Heading
• The heading gives the name of the insurance
company and the address of its registered
office.
• Example;
UNITED INSURANCE COMPANY
ETHIOPIA
Address
II. Preamble or recital clause
• This introduces the parties in the contract, i.e. insured
and insurer. It refers the proposal with declaration in
case the contract is based up on it.
• This clause also refers to the premium paid by the
insured as consideration. Comprehensively, this clause
includes the following three points;
– Refers the two parties; insured and insurer
– The proposal form is the basis of the contract
– The amount of premium paid or the agreement it will be paid
III. Operating or insuring clause
• This clause sets out the nature of insurance, which the
companies granting. it contains the essence of the contract.
• It also contains the perils covered under the policy and the
circumstance under which the company is liable to make
payment of claim to the insured.
• There are certain perils, which are excluded from the scope of
the policy are also mentioned in this clause. A reference also
made to sum insured and other limit of liabilities of the
company.
• Example; the policy read as:-
"NOW THIS POLICY WITHNESSETH......"
IV. The Schedule
• It contains all type of written information applicable to the particular
contract
• The schedule describes the subject matter for the purpose of
identification. For example, fire policy schedule provides the following
particulars;
a. Policy number
b. Agency
c. Date of issuance
d. Name, address and occupation of the insured
e. Peril insured and rate of premium
f. The date of commencement and termination of insurance
g. Detail description of subject matter of insurance
v. Exceptions
• Exceptions are limitation of the cover. Exception
began with the word such as "provided that the
company shall not liable for."
• Exceptions are found in operative clause, or among
the conditions. They can be founded listed by them
selves also.
• Exceptions must be written in clear terms and there
should not be any ambiguities about them. In case
there is any doubt it will go against insurer's interest.
Vi. Signature
• The policy is signed on behalf of the company
by manager or any other officers authorized
by the company. In other hand, it is under
hand.
 Vii. Conditions
• Conditions govern the contract. Normally they are printed on the back of
the policy. It fact they should be printed on the face of the policy above the
signature to make sure that the condition are incorporated in and form the
part of the policy it self. Conditions may be considerably vary between
classes of insurance and insurers, but the main intention of conditions are;
• To remained the insured about the prevention of loss
• To restrict the cover provided
• To grant privilege
• To out line certain procedure, e.g. formal notice of claim to insurer.
There are two types of condition:
1. Implied condition
2. Express condition
1. Implied condition
These conditions are the result of judicial
judgment or common law. Although these are
not written in the contract yet they are
implemented with full force. These conditions
are implied in all contract of insurance.
 – Express condition
• These conditions are written in the contract.
• An express condition can extend or limit the scope of implied
condition, for example, subrogation or contribution condition.
In case they are in conflict with each other then written
condition will overrides the implied condition. The written
conditions impose addition obligation on the insured. Some
types of express conditions are:
A. Condition precedent to the contract or policy
B. Conditions subsequent to the contract
C. Condition precedent to liability
A. Condition precedent to the contract or policy
• In case of this condition is not observed by
the insured the contract will be ineffective, for
example, non observance of utmost good faith
by insured, lack of insurable interest in subject
matter, etc.
B. Conditions subsequent to the contract
• These conditions are to be observed after the
policy has been issued and will continue to be
observed during the entire period of policy, for
example, the insured should not make any
material alteration in the subject matter of
insurance as stated in the policy.
C. Condition precedent to liability
• This conditions are to be observed when the
loss occur under the policy which is payable by
the insurer, e.g. immediate notice or with in
stated period in the policy a notice of particular
loss to be given to the insurer so that they can
make arrangement for assessment of loss or
completion of claim form and other formalities to
be completed by insured in connection with the
loss.
The effect of breach of above condition
The effect of breach of above condition varies with the nature of the
condition but following points are to be noted:
• Breach of condition precedent to the contract avoid the policy from
commencement but in absence of fraud the insured can claim refund of
premium paid by him in full for failure of consideration.
• Breach of condition subsequent to the contract avoids the policy from
the day the breach was manifested. In this case the premium will not be
refund to the insured either part or full as there is no failure of
consideration.
• Breach of condition precedent to liability does not avoid the policy. The
insurer will not pay the particular loss where either notice has not been
given or it is given after considerable lapse of time to the insurer.
• Duty of proof of loss is on insurers to prove that the condition has been
breached
 VIII Endorsement

• Endorsement governs the policy. They may limit or emphasize the risk
granted by the printed form of the policy. They may be printed, typed or
hand written on the policy it self. They are issued during the currency of
the policy to effect changes in the policy. Sometimes they are attached at
the time of issue of the policy. Usually endorsements are used during the
currency of the policy under the following circumstance:
 Change in insurable interest by way of mortgage or sale of property
 Change in sum insured
 Change in the risk, e.g. change construction of building
 Extension of insurance
 Change in address
 Transfer of goods to another location
 Cancellation of insurance
 Cancellation of policy

Once a policy is issued , it will normally continue till its expiry. However
under the following circumstance the contract is terminated:
 By order of the court
 By destruction of subject matter
 By breach of conditions of the policy
 By material alteration made by the insured with out the consent of
insurers
 By payment of total loss by insurers
 By mutual consent
 Insurers or insured exercise their power to cancel the policy as per
authority given by cancellation clause
 By assignment of insured of his entire interest in subject matter
 By liquidation or winding up of the insurer
 Refund of premium

• Once the premium is paid the insured is not

entitled to either whole or part of the
premium. However, there are a number of
exceptions to this rule which are as follows
A. Cases to refund full premium
B. Cases to refund partial premium
A. Cases to refund full premium
– Where the risk never attached; e.g. the subject
matter destroyed before the contract is concluded
– Where the policy is void by innocent
misrepresentation
– Where the contract is illegal but the policy stands
issued and the insured is not aware of the illegality
of the contract
B. Cases to refund partial premium
– When the policy is cancelled by mutual consent or
by insured
– If more than one policy has been effected for the
same subject matter
– In case of liquidation of insurance companies
– In case of fraud on the part of insurer