PERSONAL-COMMERCIAL UNDERWRITING

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By Chungu Katotobwe

A further distinction among property and casualty underwriters is whether they underwrite personal lines or commercial lines. Although both individuals and businesses need property and liability coverages, the insurance needs of an individual are very different from the insurance needs of a business.

In addition, there are many, many types of businesses and therefore many different sorts of risks associated with these varying business types. Hence, within the commercial lines area, there may be many specialized underwriting functions.

If an underwriter works with commercial lines applicants, the underwriter is generally familiar with risk management principles and methods as they apply to the type of business being insured. Such underwriters also are knowledgeable regarding the type and scope of risks associated with various business entities.

They understand that the risks related to running a supermarket are different from those that exist when operating a manufacturing plant. Depending on the insurer, a commercial property and casualty underwriter may even specialize in underwriting specific types of businesses.

For instance, if an insurer markets to those needing boilers and machinery insurance and also to those with extensive data processing facilities, one set of underwriters may work with the boilers and machinery applicants and another set would work with those with data processing protection needs.

If a property and casualty underwriter works with personal lines applicants, the underwriter will have a deep understanding of the specific risks facing individuals, such as home owners or drivers. A home owners insurance underwriter will understand differences in home construction materials, the safety impact of various security systems, and other factors that determine the rates and insurability of a home owners applicant.

A personal vehicle insurance underwriter will be an expert in understanding the various safety features in all makes/models of cars, what types of drivers are statistically found to be safe drivers, and so on. An underwriter working with highly valuable personal property owned by an individual will be familiar with appraisal reports and appropriate security measures that should be taken to protect the property.

Another area of specialty for underwriters is life and health insurance. A life and health insurance underwriter is familiar with things such as the impact of medical history and other health issues on insurability. The health or life underwriter is able to read and understand medical reports such as the attending physician statement and data gathered from the Medical Information Bureau as and where they exist.

Due to the extensive regulatory environment surrounding health insurance, health insurance underwriters are also very familiar with National regulations regarding health coverage.

Liability insurance underwriters must be familiar with the liability risks found inherently in commercial businesses, professionals or individuals. They must also be able to evaluate past losses, judgments and settlements in terms of the likelihood of reoccurrence in order to determine the relative future risk.

They must also be familiar with current trends in court judgments and with liability laws in order to properly evaluate high risk applicants. Many types of insurance are written on a group basis, and health insurance is often written in this manner. Group insurance is handled some-what differently from individual policies for underwriting purposes.

Generally, in life and health insurance group programs, a rate is established that applies to the entire group to be insured. This rate is established by analyzing the characteristics of the group as a whole, as well as individuals within the group. This rate is generally reviewed and revised on an annual basis.

Under some types of group underwriting, individual rates are assigned to individuals within the group, but a discounted rate is applied because the individual is part of the group, so the insurer’s marketing costs are reduced on a per coverage basis. A group offering vehicle coverage to its members may have rates assigned in this way.

Some forms of group insurance, especially when offered as part of an employer’s benefit package, may be subject to National regulations. Because group underwriting differs in operations and regulation from individual underwriting, an insurer may use specialized underwriters for group insurance.

When evaluating applicants, underwriters determine whether insurance on the applicant will be; rejected, issued on a substandard basis, issued on a standard basis or issued on a preferred basis.

Insurers reject applications for insurance when they find that the applicant represents a risk that falls outside of the underwriting standards established by the insurance company. These underwriting standards take into consideration many items, such as regulations that require the insurer to establish adequate rates, laws that mandate that certain factors cannot be used to reject an application, insurance principles such as insurability and indemnity, the marketplace in which the insurer sells its products and the profit the insurer hopes to make on its business.

The decision to issue a policy on a substandard basis occurs when a risk is not deemed to be outside underwriting standards, but is considered to be of high risk within those standards. The insurer generally has three basic options when it offers a substandard policy issue to an applicant. It may; a) issue the policy with a higher premium than would be required for a standard policy b) issue the policy with limited benefits c) issue the policy with certain exclusions.

The insurer may charge a higher premium to applicants deemed to be of higher risk  than those who would be considered a standard risk as long as those higher rates fall within certain parameters. First, if the insurance policy is one that requires that rates be filed with the country in which the policy is issued, the rate must be approved by that country.

Secondly, the rate should not be discriminatory. The insurer must charge every insured with the same characteristics the same rate. Thirdly, in some countries higher premium may not be charged based on certain items as defined in National Legislation. The insurer must of course comply with such legislation in determining whether to charge higher premium rates or not.

Insurers may also respond to substandard applicants by offering a policy with limited policy benefits. Again, whether the insurer may limit benefits is regulated by National legislation. For example, under long-term care policies, some countries require that policies offer a minimum home health care benefit limit as a certain ratio of the nursing home benefit limit.

Therefore, a long-term care insurer may not limit the home health benefit on a policy in a manner that would not comply with legislation. Assuming National regulations are followed, an insurer may offer lower policy limits on certain coverages to a substandard applicant, or could offer lower policy limits for all coverages to such an applicant. Dealing with substandard applicants by limiting policy benefits is most common in commercial coverages.

Another option an insurer may have is to offer a substandard applicant a policy that excludes coverage for certain property. This applies to insureds or operations that are deemed too high a risk for the insurer to cover. As with the other options discussed, such exclusions must be allowable under National regulations.

This type of exclusion is most common in commercial property and liability coverages. For example, an insurer may cover all the property owned by a business, except property within a building whose operations have been discontinued. Or, an insurer may offer to provide liability coverage for all business operations except for that portion of the business that has potential pollution liability that is too high for the insurer to cover.

Note: In this column I offer insurance information in general. Do not completely rely on this column to make particular insurance decisions. For specific insurance advice email me at; insuculture@gmail.com

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