SS2 Commerce Lesson Note on Underwriting and Reinsurance

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TOPIC:  INSURANCE

CONTENT:  (a) Underwriting and Reinsurance

                  (b) Types of risk

                  (c) Terms frequently used in insurance industry

Sub-topic 1: Meaning of Underwriting

 Underwriting is the process of measuring risk exposure and determining the premium that need to be charged to insure the risk. It also means an undertaking to compensate an insured for a risk or part of the risk. This is common in marine insurance because of the enormous cost involved which cannot be borne by one insurance company.

Underwriter is a marine insurer who offers to cover, underwrite or assume a portion of a risk. The underwriter would write under the details of the risk, his name and the proportion he has accepted. A very good example is the Lloyd Underwriter, an association of London underwriters incorporated in 1871 by Edward Lloyds. They are organized in syndicates that undertake a fraction of the risks brought to them by the agent of the shippers. Lloyd’s underwriter is not a corporation, but it provides facilities to members to transact business and is not responsible for losses incurred by the underwriter.

Meaning of Reinsurance: Reinsurance is the transfer of risk one insurer to another. It provides additional security to the insured and all other policy holder. This is a situation whereby an insurer agrees to insure with another insurance company all or part of the risk. By spreading large risk among many insurance companies, losses will be reduced. For example, the insurance of a large vessel will definitely involve a very heavy claim; the insurance company can therefore reduce its potential loss by spreading the risk among other insurance companies. In Nigeria the companies that specialize in accepting transfer of risk include; Nigeria Reinsurance, African Reinsurance, Continental Reinsurance etc.

EVALUATION

1. Define the following terms;

(a) Underwriting

(b) Underwriter

(c) Reinsurance

2. Mention the names of insurance companies in Nigeria that specialise in accepting transfer of risk.

Sub-topic 2: Types of risk

 Risks are inevitable in the daily conduct of people or businesses and insurance is about risk. However, some risks are insurable while others are not insurable.

Insurable risks are the type of risks which the insurer can make provision for or insure against because it is possible to collect, calculate and estimate the likely future losses. It holds the prospect of loss but not gain. The following are the basic types of risk under insurable risk.

1. Particular risks: This type of risk has origin out of individual decision and actions. The causes and effects are personal. Examples include fire, accidental damage to a car, and theft of one’s property, etc. Such risks are supposed to be the concern of the individuals involved and as such insurable.

2. Pure risks:

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