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Transforming Underwriting

MARCH 2004

A PROCESS LOOK AT UNDERWRITING TO D A Y

Private passenger automobile and homeowners are big, important lines that account for 37% and 11% respectively of the U.S. P/C industry’s total 2002 premium of US$377 billion.

Figure 1 provides a general view of how the industry underwrites these products today.

  • Before underwriting begins, actuaries create tiers and develop rates. Tiers are a way to group risks and policies by expected level of average losses paid. Insurers have used tiers for auto for several decades. An insurer may offer two, three or more tiers (standard, preferred, non- standard). Use of tiers for homeowners is more recent, but is becom- ing more common.

  • Actuaries also develop rates—namely, the premium for providing coverage to an applicant. The level of the premium is keyed to the likelihood a specific applicant will have a loss, given the facts and cir- cumstances known to the insurer. Rates are good only if two things are true. First, there must be a reliable relationship between the risk’s facts and circumstances on the one hand, and the likelihood of loss on the other hand. Second, the facts and circumstances must be correct

    • (e.

      g., a car really is only driven on Sunday, 1.5 miles to church).

Figure 1: The Underwriting Process Today

ACTUARIAL

  • Create Tiers

  • Develop Rates

DATA & INFO

  • Application

  • External Data

  • Internal (renewal)

Source: Celent Analysis

UNDERWRITING

  • Assemble & Review Data

  • Assign to Tier

  • Create Score / Underwrite

  • Decide

    • Accept & Rate

    • Reject

    • Further review

© 2004, Celent Communications. Authorized reproduction permitted.

www.celent.com

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