NISM-Series-X-B: Investment Adviser (Level 2) · Basics of Insurance

Insurance Industry Structure and Underwriting for NISM X-B

Updated 11 October 2026 · Fact-checked

The insurance industry consists of insurers, reinsurers, intermediaries and the regulator IRDAI. Underwriting is how an insurer selects and prices risks, deciding whether to accept a proposal and on what terms. Reinsurance lets an insurer pass part of its risk to another insurer. To solve questions, identify who performs which role.

Understand Insurance Industry Structure and Underwriting

Insurance moves risk from many people to an insurer that pools premiums. The insurer collects premiums, takes on the risk and pays valid claims. In India, insurers are life insurers, general (non-life) insurers (which include standalone health insurers) or reinsurers, and all are regulated by IRDAI.

Underwriting is the process of assessing a proposed risk. The underwriter reads the proposal form, looks at age, health, occupation, habits, sum assured, or in non-life the property, location and past losses. Then the underwriter accepts at standard terms, accepts with a higher premium or conditions (a loading or exclusion), or declines. Good underwriting keeps like risks in the same pool and stops adverse selection, where those most likely to claim buy cover most eagerly.

Reinsurance is insurance for insurers. The original insurer, called the ceding company, passes part of its risk to a reinsurer in return for a share of premium. This protects the insurer against large single losses or many losses together, and lets it write bigger risks. The policyholder still deals only with the original insurer. The reinsurer has no direct contract with the policyholder.

Intermediaries connect customers and insurers. They include individual agents, corporate agents such as banks, brokers, insurance marketing firms, web aggregators and surveyors or loss assessors. Agents, including corporate agents, represent the insurer. A broker represents the client and can place business with more than one insurer. A web aggregator is a separate comparison and lead channel. It does not fit the agent-versus-broker split. Always check who represents whom.

Claims settlement is where the promise is tested. The insured intimates the claim, the insurer examines documents and, in non-life claims, a surveyor often assesses the loss. The insurer then pays, or repudiates with reasons. Prompt, fair settlement builds trust in the insurance market, which also includes insurers, intermediaries, regulators and customers working together.

Key formulas to remember

Underwriting outcomes: Accept at standard terms | Accept with extra premium or conditions | Decline; These are the three standard decisions on a proposal.
Reinsurance relationship: Policyholder ↔ Insurer (ceding company) ↔ Reinsurer; The contract of reinsurance is between the two insurers. The policyholder has no claim on the reinsurer.
Representation: Agent (including corporate agent) → acts for insurer | Broker → acts for client | Web aggregator → comparison and lead channel, neither of the two; A common trap in MCQs on intermediaries. A web aggregator does not fit the agent-versus-broker split.
Underwriting purpose: Underwriting objectives: risk selection, risk classification, pricing; This is a list, not an equation. Together these objectives help guard against adverse selection. Use it to recognise underwriting objectives.

How to solve Insurance Industry Structure and Underwriting questions

Use this method for any structure or underwriting question. Most questions test who does what.

1Read the question and mark the role asked about: insurer, reinsurer, intermediary, underwriter or regulator.
2Recall the core function of that role in one line.
3For underwriting, ask: is the question about selection, classification or pricing of a risk?
4For reinsurance, identify the ceding company and the reinsurer. Remember the policyholder is outside the contract.
5For intermediaries, check whom the person represents: agents (including corporate agents) act for the insurer and brokers act for the client. A web aggregator is a comparison and lead channel and fits neither.
6Eliminate options that give one party another party's function.
7Pick the option that matches the function exactly, and check for words like always or only.

Quickest way: Role-to-function matching

When to use it: Use it for one-line MCQs that ask who does what in the insurance industry.

Insurer = takes risk and pays claims.
Reinsurer = takes risk from insurers.
Underwriter = selects and prices risk.
Agent = for insurer. Broker = for customer.
Surveyor = assesses non-life loss.
IRDAI = regulates. Cross out options that swap these.

Common mistakes in Insurance Industry Structure and Underwriting

Saying the policyholder can claim directly from the reinsurer.
Students think reinsurance covers the customer.
Fix: Remember reinsurance is a contract between insurers. The insurer stays liable to the policyholder.
Treating a broker as the insurer's representative.
Agents and brokers both sell policies, so they look alike.
Fix: Agents, including corporate agents, act for the insurer. A broker acts for the client. A web aggregator is a comparison and lead channel and fits neither side.
Thinking underwriting happens only after a claim.
Confusing underwriting with claims investigation.
Fix: Underwriting is done before the policy is issued, at proposal stage.
Believing underwriting means rejecting risks.
The word is linked with refusal.
Fix: Underwriting includes accepting at standard terms, accepting with changes, or declining.
Mixing up adverse selection with moral hazard.
Both relate to higher chance of loss.
Fix: Adverse selection occurs before the contract as riskier people seek cover. Moral hazard is changed behaviour or dishonesty after cover.

Worked examples

Example 1

An insurer has issued a large fire policy on a factory and passes part of the risk to another insurer. Which statement is correct?

Show the solution

The first insurer transfers part of the risk, so it is the ceding company.
The other insurer is the reinsurer.
Reinsurance is a contract between these two insurers.
The factory owner is not a party to it, so the owner's claim is still against the original insurer.

Answer: The original insurer remains liable to the factory owner, and the reinsurer shares the loss with the insurer under the reinsurance contract.

Example 2

A proposer with a health condition applies for a life policy. The underwriter accepts the proposal but charges a higher premium. What is this called and why is it done?

Show the solution

The underwriter assessed the health risk at proposal stage.
The proposal was accepted, but not at standard terms.
The higher charge is an extra premium or loading, as the risk is above average.
This keeps the risk pool fair and reduces adverse selection.

Answer: It is underwriting with a loading. It prices the higher risk fairly and protects the pool from adverse selection.

Exam tips

Expect questions that test roles, so memorise one-line functions for insurer, reinsurer, broker, agent and surveyor.
In reinsurance questions, check whether the option gives the policyholder rights against the reinsurer. That option is wrong.
For underwriting, remember it occurs before the policy is issued and covers selection and pricing.
Read intermediary questions for the word represents. It decides between agent and broker.
If an option says always or never, test it against the three underwriting outcomes before choosing.

Practice questions from Basics of Insurance

Insurance Industry Structure and Underwriting in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Insurance Industry Structure and Underwriting: frequently asked questions

What is underwriting in insurance?

Underwriting is the insurer's process of assessing a proposed risk before issuing cover. The underwriter decides whether to accept it, at what premium and on what terms, or whether to decline it.

What is reinsurance and how does it work?

Reinsurance is insurance bought by an insurer from a reinsurer. The insurer cedes part of its risk and shares premium, so large losses do not hurt it badly. The policyholder deals only with the original insurer.

What is the difference between an insurance agent and a broker?

An agent represents the insurer and sells its products. A broker represents the customer and can place business with different insurers. This distinction is often tested.

Why is underwriting important for an investment adviser to know?

It explains why premiums differ by client and why a proposal may be loaded or declined. It also helps you advise clients to disclose facts fully and accurately.