Chapter 8, Problem 1LO

Summary Introduction

To discuss: The concept of risk and basics of insurance underwriting

Explanation of Solution

Risk:

Risk refers to the chances of incurring economic losses. The financial risk is associated with those things in which the individual have financial interest such as life of an individual, home, car, health and business. In order to mitigate these financial losses various strategies are used by the individuals which are as follows:

• Risk avoidance: The individuals try to avoid those activities and actions that involve the risk of loss. It is adopted whenever the cost of avoiding the risk is less than the cost of handling that risk in some other way.
• Loss prevention and loss control: Loss prevention includes those activities that reduce the chances of occurrence of a risk and loss control refers to those activities that reduce the severity of loss in case it occurs.
• Risk assumption: The technique used to bear the risk of loss. It is suitable the risk involved is of smaller amount and insurance proves to be an expensive choice.
• Insurance: A contract undertaken to mitigate the loss in case of its occurrence in exchange of the smaller amounts in the form of insurance premium is known as the insurance.

Underwriting refers to the process of deciding to whom the insurance coverage is to be provided and the amount of premium to be charged so that it represent the fair charges for covering the chances of loss. Underwriting helps the insurance companies to save themselves from the adverse selection, where the clients having higher risk apply for the insurance and gets the coverage. The underwriting process tries to improve always by the insurer so as to provide the exact cover to policyholders and be it attractive and competitive.