UNDERWRITING RISK
Ask staffs in an insurer what are risks associated with underwriting risks and chances are you will get "the risk factors when evaluating the cases underwritten" as a general statement. Here is an except from BNM's defining underwriting activities.
"Insurance underwriting deals with the principles and practices concerning the acceptance or rejection of risks, fixing of premium rates, terms and conditions, the amount of acceptance, retention and reinsurance."
INTERNAL AUDIT COVERAGE
BNM has prescribed minimum coverage (GL-13-1) by IAs when reviewing the underwriting process of the insurance company. The areas are as follow:-
1. Risks Inherent in Underwriting
2. Policies and Procedures
3. Reinsurance
4. Accounting and Financial Reporting
5. Legal and Regulatory Requirements
6. Others
I would draw attention to item 1. Risks Inherent in Underwriting with its contents explaining that "the internal auditors should review the mechanism used by management to identify and manage the risks associated with underwriting. Risks associated with the underwriting process include timing, investment return, credit, expenses and loss occurrence risks.The management should address these risks when developing the underwriting strategy of the company"
For item 3. Reinsurance, BNM stipulates that "it is the responsibility of the management to fix retention level for various types and classes of products for general insurance and per life assured basis for life insurance and fixing of retention is the primary factor in the placement of reinsurance."
For reinsurance process, BNM require internal auditors to check mainly on retention limits, reinsurance contracts, Fac arrangements, XOLs and other administrative matters.
Below is a list of risk associated with the risk inherent in underwriting and reinsurance process. Apart from the key items prescribed by BNM, I have added a few risks i have identified. I will cover the details of risks and impact for XOLs, fac arrangement and processes in subsequent posts. Meanwhile you may read up on my post on managing reinsurer's risks.
-Underwriting Process Risks
Financial loss due to selection of risks insured.
-Timing Risks
Uncertainty over the likelihood of an insured event occurring or the time when claims payments will fall due.
-Pricing Risks
Financial loss due to inadequate premiums charged for risks insured.
-Product Design Risks
Poor design and pricing of insurance products (pressure from competition)
- Economic environment Risks
Adverse affect on the company due to changes in socio-economic conditions
-Policy Behavior Risks
Unanticipated behaviors of the policyholder (from annuities and cash-value insurance)
-Net retention risks
Losses due to catastrophic or concentrated claims experience arising due to
inappropriate retentions set.
-Business Credit Risks
Failure of re-insurers & high o/s premiums from top producers (general ins.)
