Explain the Principles of Underwriting Practices that are followed by Insurance Companies in India while developing various Insurance Products.

Insurance is a concept of the creation of a fund of premiums collected from various persons by pooling all of their risks, from which the financial losses of those few who suffer from the insured perils are compensated. The theory of probability, which can predict with a certain degree of precision, the possibility of a certain event occurring that can give rise to a claim provided there is sufficient data on past experience, is invariably the basis on which the concept of underwriting rests. It follows that a prudent underwriter will necessarily have to build up data on claims lodged and this has to be done continuously. Further, this database has to be separately compiled for each of the different insurance portfolios - Fire, Marine & Miscellaneous. Having put this practice in place, he should follow certain basic principles before accepting a risk. The principles that guide an underwriter before accepting a risk are: Selecting insureds that fit the company's underwriting standards: Only those insured whose actual loss experience does not exceed the loss experience assumed in the company's rating structure will be selected. The rate is based on a low loss ratio. For example, if the expected loss ratio is 20 percent and a rate is set accordingly, only those insured will be selected, who can meet the required criteria, so that the actual loss ratio for the group will not go beyond 20 percent. There should be proper balance within each rate classification: The underwriter must be able to group insured in such a way that the average rate in the group is enough to pay for all claims and expenses. Therefore, units with similar loss-producing features are placed in the same class and charged the same rate, ensuring that a below-average insured is compensated for by an above-average insured. Charging equitable rates: The rates that apply to one group should not be charged to another group as well. This would mean that one group is unduly subsidising another group. For example, in the case of life insurance, charging the same premium rate for people in the age group of 20-25 years and those in the age group of 50-55 years will result in the younger lot subsidising the older people. This amounts to overcharging and the younger persons will then look out for some other insurance company that has a more equitable system.