Underwriting Risk in the Reinsurance Industry

Every insurance claim entails a certain amount of underwriting risk for the insurance company, which can be mitigated by the underwriting process.

Read more here.

Underwriting Risk in the Reinsurance Industry

When we submit an insurance claim in the event of an accident, injury or disastrous event, how does the insurance company determine the amount to be compensated to the insured?

In disastrous events such as floods or fires, does the company have enough to pay for all the insurance claims? Every insurance company faces underwriting risk with every insurance claim, which can be mitigated by an underwriting process.

THE UNDERWRITING PROCESS EXPLAINED

Basically, the underwriting process is how an insurance company evaluates its risk. It is a process to be done by an underwriter that helps an insurance company decide whether providing coverage to a consumer or business would be profitable.

Underwriters do not just use existing data and guidelines supplied by actuaries to evaluate risk; it involves more statistics, future projections and trends to produce a comprehensive report.

This underwriting practice is evident in all kinds of insurance — from motor insurance to home and personal insurance — to charge premiums and approve claims based on the level of risk.

WHAT IS UNDERWRITING RISK?

Underwriting risk refers to the potential loss that emerges from faulty underwriting, which impacts the financial health and profitability of the insurer. The premium received by the insurer must incorporate both the risk premium and the solvency requirements.

Whenever an insurance claim arises, the underwriter needs to evaluate the premium received and determine the number of claims paid out by taking into account the company’s profitability. If the premium received is not sufficient to cover the insurance claims, the insurer is confronted with the probability of a loss. 

WHAT DOES IT TAKES TO MITIGATE UNDERWRITING RISK?

Underwriting operating models vary significantly based on the industry, geographical region, client size, and product offerings — there is no ‘one-size-fits-all’ solution to mitigate risks.

The skills of underwriting require not only qualitative judgments on industry performance but also rigorous portfolio management to be updated with the current market conditions to avoid pitfalls and target opportunities.

Having a structured approach to analyzing exposures by articulating hard-learned experience to reflect intuitions can also mitigate underwriting risk. Besides that, using data-driven tools can also be a great support for human judgment.

CONCLUSION

Malaysian Re is the largest national reinsurer (by asset) in the Southeast Asia region, underwriting all classes of general reinsurance business as well as general and family retakaful businesses through its retakaful division, Malaysian Reinsurance Retakaful Division.

The company has built an extensive business portfolio over the years, with solid fundamentals and a proven record of accomplishment. Malaysian Re is a regional and international player, having established a strong market presence in Asia and the Middle East. 

Visit https://www.malaysian-re.com.my/our-solutions  for more information.

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