Ø The u/w’s analysis of any risk can be generally considered in two parts:
· An analysis of the subject: the person, people, or organization applying for insurance
· An analysis of the object: the property, liability, crime, boiler and machinery, auto, or other exposure to loss for which the applicant seeks insurance.
- We will refer to the subject of insurance as “the applicant”
- One of the most important sources of information for an u/w is the application.
· The applicants name, broker or agent, phone contact numbers, policy period, applicant’s occupation, applicant’s loss experience, any previous cancellations, any applicable discounts, who signed the application and how it was signed.
- Named Insured and the person insured – example being an auto policy insures the person named on it. But it also insures every other person who drives or occupies the insured auto with the named insured’s consent.
- If 2 or more names are on the application that seem to be unrelated, further investigation is required.
· The u/w should examine the relationship that does exist between the named parties.
· The u/w should look for insurable interest of each named party; only the names of parties with an insurable interest should be allowed to remain on the application.
· In commercial, the 1st party named on a commercial policy is responsible for the payment of premium, among other responsibilities. In personal lines the order of names has no bearing.
· Applications in corporate names – investigation should be done of the principles of the business. What is their experience level in running a business? Do they have a criminal record? If the named corporation has subsidiaries then it would be prudent to find out who is running the subsidiary, are they engaged in other activities or have other exposures that are less attractive.
Ø Additional insureds, whether named on the policy or not, are distinct from the applicants, but they are involved with the applicants in a way that gives them a particular interest in the protection to be provided by the policy.
· Typically found in commercial insurance rather than personal
· Definition of additional insured – is any party not automatically included as an insured but entitled to a certain degree of protection under the policy.
· Definition of additional named insured – is any party, other than the original named insured, identified as an insured in the policy declarations. ANI has more rights under the policy than does an AI but also more responsibilities.
Ø ANI must receive copies of a letter of cancellation sent by the insurer to the original insured. Employees, executives, and directors of an ANI are covered if the policy is for liability, not so for an AI. Breach of a policy condition by an ANI could render the policy’s coverage void; that is not true for an AI.
Mortgagees
· Often property is used for security for a loan. Where this security is real property (land or buildings) the loan arrangement is called a mortgage. Where the security is personal property (other than land or buildings) the loan arrangement may be a chattel mortgage.
· A mortgage conveys an interest in property as security for a debt. The borrower (mortgagor) retains possession and use of the property used as security for the loan, but the lender (the mortgagee) acquires an interest in the property and the right to sell it to discharge the borrower’s debt. This interest is registered with registry or titles to establish the mortgagee’s claim to the property ahead of any purchaser to whom the mortgagor might sell the property before repaying the mortgage.
· As the mortgagee has insurable interest in the property their interests are protected by a mortgage clause. That is the mortgagee is covered even if the named insured is unable to recover because a condition of the policy has been breached.
Credit Checks
Ø Commonly done for commercial risks. This can be done by D & B, or request for the insured’s financial statements. Financial statements can aid in credit check as well as assessing the applicant’s overall financial strength and stability.
The Broker or Agent
Ø What is the broker or agent’s source of business?
· How did the broker make contact with the risk?
· What is the broker’s relationship to the risk – to its principals or executives?
· Does the broker’s relationship to the risk create any conflict of interest?
· The number of brokers who have handled the risk previously.
· The extent of the applications: Is the broker submitting the entire risk or just the less attractive, more difficult aspect of the risk.
- The more an u/w can find out about a risk from the broker, the more facts the u/w has in which to make their decision.
Ø A broker may personally inspect a risk and include a report with the submission to the u/w; this is most frequently done with personal lines or small commercial risks that would not justify the cost of a formal inspection.
Ø The broker or agent should be underwritten as well in order to put faith into the types of risk they will look for you as an u/w to insure.
Telephone Numbers
- Contact numbers listed on an application can tell the u/w a lot:
- Are the home and business numbers the same? Could indicate a home base business on a personal risk.
- Are the area codes the same?
- Does the applicant list cell-phone numbers or land based phone numbers? A land based number may be an indication that they are more likely to remain in that location for some time where cell phones indicate more of a mobility.
- Questions about phone numbers tend to be more important for personal risks than commercial.
Effective and Expiry Dates
Ø A prudent u/w will check the effective and expiry dates the applicant has requested. The u/w must take care not to issue a backdated policy.
· Definition of a backdated policy – is a policy that will become less effective retroactively after the applicant applies for it.
· A backdated policy should be a concern for an u/w because of the possibility that one or more losses occurred between the effective date sought by the applicant and the date the application was made.
· The main concern is the moral hazard it may imply concerning the applicant.
· If an u/w agrees to a back dated policy, they should ask for a signed declaration from the applicant that there have no losses to the applicant’s knowledge during the period from the requested effective date of coverage to the time of application.
The Applicant’s Occupation
Ø Employment status of a personal lines applicant is of interest for the light it sheds on potential moral hazards:
· If the applicant is unemployed, the moral hazard is clear. They may be unable to pay the premium or at worst deliberately cause a loss for cash they may receive to settle a claim.
· If the applicant is self-employed, it becomes more difficult to assess if they represent a moral hazard. Further investigation is required.
· If the applicant’s stated occupation is vague, required further investigation.
· Length of employment should be looked at for stability and continuity the greater this is the less the moral hazard they represent.
· For commercial, the number of years the insured risk has been in business. The more years in business the less likely it is to present a moral hazard.
Occupation and Total Insurable Value (TIV)
Ø Any discrepancy between the applicant’s occupation and his or her total insurable value should be investigated. Such as a convenience store clerk insuring a $750,000 home. Investigations should reveal whether the home is as a result of illegal dealings (which the risk should be declined) or as a result of a family inheritance.
Loss Experience
Ø The record of losses that a risk has incurred in the past is a critical tool for assessing the exposure to future loss that the risk represents.
Ø Leaving the loss experience blank is unacceptable. If there have been no losses then the applicant should indicate none, but not leave the space blank.
Ø Even if the applicant says no losses, the u/w may check with a crime prevention bureau to see if there have been any records of suspicious losses involving the applicant. This information is highly sensitive and only authorized persons will have access it. The fact that a check by an authorized person produces a HIT is confirmation that an applicant’s name is in the database. This should make the u/w very wary.
Ø There are differing designations for people in the ICPB database. F refers to someone who has had frequent suspicious losses, while a W means warning-avoid. The u/w should pay attention to the designation but remember that the database is built on suspicion of criminal activity and not conviction of it. Out of respect for the applicant’s privacy, the u/w must use the database with discretion.
Ø If an applicant indicates no losses in the loss experience and u/w should still check the ICPB database for the applicant’s name. If there is a hit this raises the issue of utmost good faith and paints the applicant as a distinct moral hazard.
Ø The insurer should investigate a denied claim, as a denied claim might identify a moral hazard. A denied claim could also identify a physical hazard that could cause a legitimate claim if the u/w accepts the risk.
Loss Experience for Commercial Risks
Ø An accurate picture of an applicant’s loss experience is more challenging for commercial risks. May business circumstances allow a commercial risk to report no loss experience and believe that it is doing so in good faith.
Ø If a commercial risk sustained a severe loss is important information to the u/w. It is a reflection of management, house keeping and other risk factors.
· u/w should be alert for locations a risk still owns but have removed insurance coverage from. An applicant may not feel they need to list losses on locations they no longer carry coverage on.
· No previous insurance poses the same type of risk. This may occur on a personal risk where the applicant sustained a loss but did not carry coverage, if they did carry the coverage they would have claimed for this loss; therefore, no losses are reported.
· Same line of reasoning goes for not reporting losses that have fallen under the deductible.
· Presence or absence of insurance does not excuse an applicant from disclosing any losses on a location.
Ø Seeking out and analyzing a comprehensive loss history for any risk, the u/w must always remember two points:
· Losses are not the same as claims. A loss is significant info for an u/w whether the applicant bore the loss or the insurer paid for it as a claim.
· The amount of a loss is less important than the circumstances of a loss.
Prior Cancellations
Ø Prior cancellations by previous insurers may imply a moral hazard on the part of the applicant. But the u/w must be careful not to jump to conclusions.
Ø Reasons for the cancellation are important; the prior carrier may have no longer wished to write a particular class of business. An applicant bay also have been jumping carriers looking for better terms, many u/w’s would decline the risk as an indication that they could very well lose the business also on renewal.
Ø Continuity of insurance is the real issue. The applicant’s record with previous insurers is useful information.
Ø Portfolio transfers may be a reason why an u/w has been asked to provide insurance when a policy has been cancelled.
Ø A broker who tries to prevent competing brokers from obtaining quotes from other u/w’s by approaching those u/w’s first is said to be blocking the market.
Ø A good u/w will be aware of conditions in the insurance market and sensitive to the coverages and terms that competing insurers offer on risks like the applicant being considered. That knowledge will allow an informed response if a broker is simply inviting the u/w to match a competing quote.
Premium Discounts
Ø Discounts are most relevant to personal lines insurance.
Ø To the u/w the importance of discounts lie in the pricing. It is important that the applicant is charged the appropriate premium. If too high (due to not applying discounts that the applicant is eligible to receive) the u/w may lose the business, if too low insurer will not be adequately compensated for the risk it is taking on.
Signatures
Ø On some types of business a standard application form may not be used. However, on a standard application there is a space for the applicant’s signature.
Ø Commercial insurance, signatures are rarely required except on such things as a statement of values submitted with an application.
Ø When a signed application is received, the applicant’s signature should be checked against the broker’s signature to ensure the same hand does not do them.
Ø Privacy legislation requires signed applications for insurance if the u/w wants to obtain info from any of the following: ICPB, MVRs (motor vehicle records), or a credit report. It also requires an insurer approve insurance for an applicant only if it has received a signed application from the applicant.
Ø In an effort to expedite business through use of internet or phone, some insurer’s send out applications in the mail to be signed and returned. This is a practice that must be followed up on.
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