The Mechanism that Insurance Companies Use to Underwrite and Price Essay

The Mechanism that Insurance Companies Use to Underwrite and Price that Class of Business - Essay Example Word-counts: 3061 Table of Contents Table of Contents 2 Introduction 3 Insurance and Risk Management 3 Marine Insurance and the Mechanism of Underwriting and Pricing of it 5 Marine Insurance 5 Major Classifications of Marine Insurance 7 Underwriting and Pricing Mechanism of Marine Insurance 7 Underwriting: The logic and the practical applicability 7 7 Underwriting mechanism 8 How Underwriting Works in Marine Insurance 9 Pricing the Marine Insurance 11 Basic Principles applicable to underwriting and pricing of an insurance contract 12 1- Utmost Good Faith: 12 2- Insurable Interest 13 Conclusion 13 References 14 Introduction In the view of Economics, Insurance is a technique of risk management that is basically used for compensating the risks of a contingent and uncertain financial risk. Insurance is social in nature and economic in practical since it represents the mutual cooperation and collaboration of various individuals as well as groups from their benefits by combining together w ith a view to reduce the consequences of financial risks. As Owojori and Oluwagbuyi (2011, P. 275) pointed out, Insurance is a comprehensive economic and social device for handling various risks that affect life, property and so on. This piece of research paper explains conceptual framework and theoretical underpinning of Insurance and its basic principles in relation to explaining the mechanism of underwriting and pricing Marine insurance by an insurance company.... Insurance company doesn’t guarantee decreasing of the uncertainty for the individual as to whether the financial risk will occur and it doesn’t alter the probability of risk-occurrence, but it reduces the probability of the financial risk that is connected to the specific event-occurrence (Vaughan and Vaughan, 2007, p. 35). For instance, from the business point of view, when the business man insures his ship against perils at sea, the uncertainty regarding the financial loss in that event will be eliminated. Insurance plays imperative role in the development of economy for the following reasons: Insurance helps pooling of the risks and ensures indemnifying the financial loss against risk of life or property, Insurance gives confidence to entrepreneurs that their loss, which may affect their continuity of the business, will be compensated, Ensures greater flow of money as surplus money in various insurance companies are widely used for economic and government related inv estments, Risk, loss and contingencies, if they are not compensated, will cause many companies or businesses go out of their operation which in turn adversely affects the development of the economy. Risk Management is wider term as it encompasses variety of tools including insurance too. Insurance is one of the techniques for risk management. According to ISO Guide 73, risk management is a coordinated, systematic and structured activities that direct and control a business or other organization with regard to the risk it faced (Reuvid, 2010, p. 58). An organization can take any of different forms of risk management tools. The optimum approach to the risk management is to seek attaining a balanced position, by protecting the firm from the impacts of any negative effects