Notes on
The Underwriting Process and Risk Assessment in Insurance Contracts in Ghana
The underwriting process and risk
assessment are critical stages in the formation of insurance
contracts. These processes determine the terms and conditions under which an
insurer will offer coverage to a potential policyholder. They are essential to
ensure that the insurer can manage and mitigate the risks they undertake. In
Ghana, both the Insurance Act, 2021 (Act 1061) and guidelines
provided by the National Insurance Commission (NIC) govern these
processes, ensuring that they are conducted fairly, transparently, and in
compliance with local regulations.
The underwriting process involves
evaluating the risk presented by the insured, determining the premium amount,
and setting the terms and conditions of the policy. Risk assessment, on the
other hand, focuses on identifying, quantifying, and managing risks that may
affect the insured party.
1.
Overview of the Underwriting Process
Underwriting is the process by which an
insurer evaluates the risks associated with a proposed insurance contract and
decides whether to accept the risk, reject it, or impose special conditions. In
Ghana, underwriting is carried out by underwriters employed by the
insurer or through independent underwriting agents.
a. Steps
in the Underwriting Process
Application and Proposal
The underwriting process begins when the insured
submits an application or proposal form. This form contains details about
the person or property to be insured, the type of coverage required, and
the value of the insured property or liability.
The insured must disclose all relevant information,
and the insurer may ask for additional documentation to verify the
details provided.
Risk Assessment
The insurer evaluates the risks presented by the
proposed policy. This involves reviewing the applicant's background,
including health (in the case of life insurance), driving history (for
motor insurance), or property condition (for property insurance).
Risk assessment is based on various factors, such as
age, occupation, lifestyle, location, previous claims history, and the
nature of the insured property or business.
Classification of Risk
Based on the risk assessment, the insurer classifies
the risk into different categories (e.g., standard risk, substandard
risk, or high risk).
Standard risk refers to an applicant with typical
characteristics, while substandard risk represents applicants with
higher-than-average risk factors, leading to higher premiums or
exclusions. High-risk applicants may be declined or offered highly
restrictive policies.
Premium Calculation
After evaluating the risk, the insurer calculates the
premium to be charged for the coverage. Premiums are calculated based on
the risk profile of the applicant and the type and amount of coverage
required.
Factors influencing premium calculation include the
level of coverage, the risk category of the insured, and the claims
history.
Policy Issuance
If the insurer is satisfied with the risk assessment,
the policy is issued. The insurer will outline the terms and conditions
of the policy, including the coverage amount, exclusions, premiums, and
other relevant details.
If the risk is deemed unacceptable, the insurer may
either decline coverage or offer a modified policy with special
conditions or higher premiums.
2. The
Role of Risk Assessment in Insurance
Risk assessment is the core of
underwriting and directly influences the terms of the insurance contract. In
Ghana, insurers use a combination of statistical data, actuarial methods, and
subjective judgment to assess risks.
a. Key
Factors in Risk Assessment
Personal Information
In life and health insurance, the underwriter
assesses the health and lifestyle of the applicant. For example, factors
like age, gender, occupation, health history, and smoking habits may
impact the assessment.
In motor insurance, an applicant’s driving history,
age, and experience will influence risk calculations.
Claims History
The insured’s past claims history is a major factor
in the risk assessment. A history of frequent claims may suggest a higher
likelihood of future claims, which results in higher premiums or
rejection of coverage.
Location of the Risk
Geographical factors play a critical role in property
and motor insurance. For instance, if a person lives in an area prone to
natural disasters like floods or fires, the insurer may assess the risk
as higher and adjust the premium accordingly.
In Ghana, insurers consider the risk of political
instability, environmental hazards, and crime rates in certain regions.
Value of the Insured Property
The value of the property being insured affects the
level of coverage and the premium. For example, the value of a car, home,
or business property will determine the amount of insurance required and
the risk of potential loss.
Business Risks (Commercial Insurance)
For businesses, insurers assess the type of business,
operational risks, and potential liabilities. Factors such as safety protocols,
employee training, and the industry’s claims history will be taken into
account.
Legal and Regulatory Compliance
In Ghana, the insurer must ensure that the proposed
insurance meets all regulatory requirements. This includes compliance
with safety regulations and adherence to the minimum coverage standards
as stipulated by the National Insurance
Commission (NIC).
3. Types
of Risks Assessed in Different Insurance Policies
Life Insurance
Medical History: Insurers assess the applicant’s
medical history, family health background, and lifestyle habits like
smoking and alcohol use.
Age and gender are significant factors in
life insurance underwriting, as older individuals or those with high-risk
occupations may face higher premiums.
Occupation: High-risk professions, such as
pilots or miners, may be subject to higher premiums or exclusions.
Motor Insurance
Driving Record: Insurers evaluate the applicant’s
driving history, including any past accidents or traffic violations.
Car Model and Age: Newer or
high-performance vehicles may attract higher premiums due to their value
and repair costs.
Location: Insurance rates are also
influenced by the area of residence, with urban areas or locations prone
to theft or accidents typically resulting in higher premiums.
Property Insurance
Building Construction: The
materials used in the construction of the building (e.g., concrete vs.
wood) can affect the risk assessment.
Security Features: Homes with
security systems, such as alarms or surveillance cameras, may attract
lower premiums.
Location: Insurers assess the risk of
environmental hazards such as floods, earthquakes, or proximity to fire
stations.
Health Insurance
Pre-existing Conditions:
Individuals with chronic health issues such as diabetes or hypertension
may face higher premiums or exclusions.
Lifestyle Choices: Applicants
with habits like smoking, excessive alcohol consumption, or lack of
physical activity may be seen as having higher risks.
Age: Older individuals are considered at higher risk due to potential health issues that arise with age.
4. Use of
Technology in Underwriting and Risk Assessment
With advancements in technology, insurers
in Ghana are increasingly using data analytics, artificial
intelligence (AI), and machine learning to improve the
underwriting and risk assessment processes. These technologies help insurers to
more accurately predict risks, identify trends, and customize policies for
clients.
Big Data: Insurers collect and analyze large
volumes of data from various sources, such as government databases, online
platforms, and claims history, to better assess risks.
AI and Machine Learning: These
technologies allow insurers to automate certain aspects of underwriting,
improving efficiency and reducing human error.
5.
Regulatory Framework for Underwriting and Risk Assessment in Ghana
a.
Insurance Act, 2021 (Act 1061)
This Act governs the underwriting process in Ghana and
outlines the legal framework for insurers in conducting risk assessments.
It mandates that insurers use fair, non-discriminatory practices in
assessing risks and pricing policies.
b.
National Insurance Commission (NIC)
The NIC plays a key role in regulating underwriting
practices and ensuring that insurers in Ghana adhere to ethical standards,
including proper risk evaluation and adequate disclosure of policy terms.
c.
Licensing Requirements
Insurers and underwriters must meet certain
qualifications and obtain licenses from the NIC to operate in the Ghanaian
market.
6.
Conclusion
The underwriting process and risk
assessment are integral parts of the insurance contract formation in Ghana.
Through careful evaluation of risk factors, insurers can offer tailored
coverage that meets the needs of the insured while maintaining profitability.
Technological advancements are enhancing the efficiency and accuracy of these
processes, while regulatory frameworks ensure fairness and transparency in
underwriting practices. Both insurers and policyholders benefit from a robust underwriting
process that ensures risks are appropriately managed and adequately covered.
blogpay
Total Comments: 0