The Challenges for Life Insurance Underwriting Caused by Changes in Demography and Digitalisation
Underwriting is a vital stage in the life insurance process and involves accepting individuals into an insurance fund on particular terms. The purpose of this chapter is to provide an overview of the underwriting development and its associated processes s
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The Challenges for Life Insurance Underwriting Caused by Changes in Demography and Digitalisation Ilona Kwiecień, Patrycja Kowalczyk-Rólczyńska, and Michał Popielas
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Introduction: The Main Concepts Involved in Underwriting Life Insurance
The insurance market specialises in risk trading. Insurance companies collect information on risks in various ways and accept them at an appropriate price (premiums). Insurance risk assessment is an underwriting function and is one of the key business processes in an insurance company’s operational activities. As a mechanism for financial stability, underwriting contributes to the formation of a well-diversified and profitable insurance portfolio for the insurer (Mkrtychev and Enik 2018). Underwriting is a concept that derives from English and refers to the process of selecting and classifying insurance applications (Vaughan 1982) and evaluating and pricing the risks proposed for the insurance. This involves the insurer deciding whether a particular risk is acceptable and, if so, whether the normal terms and conditions will apply. The underwriter monitors the classes of businesses that are underwritten and regularly reviews rates and strategies (Benett 2004). The main purposes of underwriting areas follow (Poprawska and Jędrzychowska 2016): • Prevention of risk anti-selection (negative selection): anti-selection occurs when the demand for insurance is reported by people who are considered to be an above-average risk—ensuring the balance of the portfolio (more damaging risk categories should be compensated for by less damaging categories) and proper selection of the number of individual risk categories so that their total loss ratio is not higher than assumed. Thus, the future loss ratio for a given insurance group is close to the historical course on which the tariff premium was determined. I. Kwiecień (*) · P. Kowalczyk-Rólczyńska · M. Popielas Wroclaw University of Economics and Business, Wroclaw, Poland e-mail: [email protected]; [email protected]; michal.popielas@ue. wroc.pl © Springer Nature Switzerland AG 2020 M. Borda et al. (eds.), Life Insurance in Europe, Financial and Monetary Policy Studies 50, https://doi.org/10.1007/978-3-030-49655-5_10
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• Ensuring the profitability of insurance operations: the aim of underwriting is to produce and maintain a profitable account of customers in a constantly changing business environment (Atkins and Bates 2008). Thus, the goal of underwriting is not to select risks that incur no losses: it is to avoid a disproportionate number of bad risks, thereby equalising the actual losses with those expected. In addition to this goal, underwriting has several other objectives. While attempting to avoid adverse selection through the rejection of undesirable risks, the underwriter must secure an adequate volume of exposures in each class. Additionally, they must guard against the congestion or concentration of exposures that might result in a catastrophe (Vaughan and Vaughan 2008). Information asym
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