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Underwriting
Services Underwriting is the process of reviewing
risk and establishing pricing. It
sets, and then applies, underwriting standards to new and existing members,
then monitors on-going performance against those standards. Underwriting also develops underwriting
manuals, policy forms, and coverage terms and conditions. Pricing is frequently risk
specific, relying on actuarial modeling.
The actuaries usually use a combination of industry pricing models
tempered by the specific results of the group to set basic rates. Underwriters often modify the actual
premiums charged to reflect individual risk characteristics and unique
business (i.e., the RRG/group captive) needs. When an outside vendor (not an
employee) provides these services, the customary fees are 5 to 7 percent of
premium. At first blush, this appears
favorable to the commercial industry where these fees are probably closer to
10+ percent. But is 5 to 7 percent of
premium reasonable? Not necessarily. Commercial insurers also have extensive
back-office operations, internal support services, bureaucracy, and real
estate offices to support. Research
and development also requires money.
Many of these costs are minimal or nonexistent for RRGs/Group
Captives. Hence, their costs should be
lower. Is 5 to 7 percent the right
amount? That depends on the services
rendered. In our experience, even that
amount can be high. This percentage
range may not be appropriate for a fairly labor-intensive risk (e.g., a construction
industry captive) but be inappropriate for a high-premium/low-servicing risk
(e.g., professional malpractice). |
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