1. Underwriting is the process by which an Insurer determines whether and under what conditions to accept a risk. Weaknesses in the systems and controls surrounding the underwriting process can expose an Insurer to the risk of unexpected losses which may threaten the capital adequacy of the Insurer.
2. The risk management system for underwriting risk should normally include at least the following policies and procedures:
a. clear identification and quantification of the Insurer's willingness and capacity to accept risk;
b. clear identification of the classes and characteristics of insurance business that the Insurer is prepared to underwrite including:
i. geographical areas;
ii. the types of risk that may be underwritten; and
iii. criteria for the use of policy exclusions and reinsurance;
c. formal evaluation processes for the effective assessment of risks underwritten including:
i. criteria for assessing risk;
ii. methods for monitoring emerging experience; and
iii. methods by which emerging experience is taken into account in updating the underwriting process;
d. appropriate approval authorities and limits to those authorities that are definitive and specific (including controls surrounding any delegations that are given to intermediaries of the Insurer);
e. concentration limits; and
f. methods for monitoring compliance with underwriting policies and procedures such as:
i. minimum standards of documentation;
ii. internal audit;
iii. peer review of policies underwritten;
iv. assessments of brokers' procedures and systems to ensure the quality of information provided to the Insurer is of a suitable standard; and
v. in the case of reinsurers, audits of ceding companies to ensure that reinsurance assumed is in accordance with treaties in place.