Ø The regulation of auto insurance is unique in each province but has many features in common:
· Policy forms are government approved
· Rates charged are approved and filed with the government.
· U/w rules such as the rules that an insurer uses to decline a risk are filed with the government.
· Compulsory insurance laws make it mandatory that every auto owner has access to insurance. For instance the facility market.
· Except provinces with Government insurance, the procedures for submitting a risk to the residual market are fixed and detailed.
“The power of why” – A personal u/w dealing with a routine request for additional coverage must think like an u/w and use the power of why to ensure that any additional exposure is properly identified and accepted on appropriate terms.
An u/w needs to understand the decision making process. The u/w should understand why the insurer’s u/w manual includes the rules it does concerning such matters as the type of car an applicant wants to insure, location, distance to work, and if the vehicle is used to commute.
The Underwriting Process for Automobile Risks
The u/w should be sure to do the following:
· Review the auto application
· Learn about the applicant
· Identify the lessor of any leased vehicle
· Examine the applicant’s relationship with the broker
· Ask about the use of the vehicle
· Identify the type or class of vehicle
· Ask about any aftermarket modifications that may have been made to the vehicle
· Find out about any repairs made to the vehicle
· Identify and distinguish between the registered owner and actual owner of the vehicle
· For each vehicle, establish the driver’s age and investigate his or her Canadian driving experience
· Investigate the maintenance planned for the vehicle
· Look for consistency between the age and other characteristics of a driver and the type of vehicle that he or she will be driving and for which insurance is sought
· Make the u/w decision
The application for Automobile Insurance
Ø The law concerning automobile insurance requires insurers to obtain a signed application from anyone who becomes an insured.
· Getting a signed application has become more of a challenge due to technology. An increasing amount of insurance is obtained either by phone or internet. The u/w must follow up with any applicant to obtain a signed application.
· The application should identify all persons who are to be insured under the policy that have insurable interest. Whether the policy is in a personal name or a corporation’s name, the u/w should ascertain the relationship between them.
The Applicant for Automobile Insurance
· The u/w should begin by finding out if the applicant is already a client with other lines of coverage.
· Knowing about other insurance can be useful as it may give the u/w access to financial info obtained from u/w other policies. Other lines of business may also include other info that could be useful.
· Credit surveys and other financial info can be obtained by companies such as D & B
· Credit rating may determine the applicant’s ability to pay the premium.
· The essence of an u/w’s work is to draw inferences and to make judgment about a risk from the imperfect info available and find the compromise that allow business to be written at a premium commensurate with the risk.
Lessors of Leased Vehicles
Ø The lessee generally arranges primary coverage for long-term leased vehicles.
· Makes sense as the auto is in custody and control of the lessee
· The lessee knows who will operate the vehicle, how it will be used and other important info that may not be known to the lessor.
· The lease agreement makes the lessee responsible for insuring the leased vehicle under an owner’s policy, with the lessor shown on the policy as the owner of the vehicle and the lessee added as additional insured under an endorsement that grants permission to rent or lease.
· If the leasing company is not well known the u/w should investigate further to ensure it is financially stable and does not pose a moral hazard. Less established lessors might not use standard contracts or use contracts with provisions that would be detrimental to the insurer.
· The u/w will also want to know whether there are leinholders or anyone else with a financial interest in the vehicle in addition to the lessor.
· Age of the vehicle is important. Most reputable leasing companies lease out newer model cars due to constant turnover. If they are leasing out 10-year-old vehicles more investigation is required.
The Relationship between Applicant and Broker
- Knowing the broker from whom the application came can reveal a lot to the u/w about the applicant.
- The u/w will want to know about the broker’s relationship with the applicant or principle driver.
- The applicant may be a less desirable risk to the u/w if he or she was unknown to the broker.
- Walk in type business especially should be looked at as to the reason for the applicant’s choice in the broker.
The Use of the Vehicle
Ø The chance that a vehicle will be involved in an accident and the amount of possible loss that would arise from that accident depends to a significant degree on what the vehicle is used for.
Ø The most important distinction for u/w’s in the uses of a vehicle is between personal and commercial use.
· Personal Use – auto used for pleasure. Private passenger type vehicles.
· Commercial Use – the use of an auto in the course of commercial activity. Could be private passenger type vehicles, trucks and vans.
· Business Use – a type of commercial use that combines elements of personal and commercial use. It entails the use of an auto for pleasure, business or both, and it tends to apply to private passenger cars.
Ø Major automobile classes
· Private passenger vehicles (business and pleasure use)
· Commercial vehicles (trucks and delivery vehicles)
· Public automobiles (buses and taxicabs)
· Recreational vehicles (motorcycles, snowmobiles, ATVs)
· Garage risks (road hazard and dealership risks)
· Non-owned automobiles
Ø What exposures does the use of the vehicle create?
· How far is the vehicle driven annually? The more km’s a vehicle is driven each year, the greater the exposure.
· Is the vehicle used for business? If so, does the business use of the vehicle result in the driver being in unfamiliar driving territory very often?
· Will the vehicle carry passengers? If the vehicle carries passengers there is a greater liability exposure.
· Is the vehicle used primarily on the highway or in the city? Vehicles driven in the city are more at risk due to higher traffic volumes
· Does the applicant intend to hire out the vehicle? Compensation for hire is typically excluded.
· Is the vehicle truly a personal vehicle, or is it more of a commercial type or otherwise subject to commercial premium rates?
· Are the applicant’s operations and the industry it operates in stable? An unstable industry may mean an unstable applicant.
· Is the business activity consistent throughout the year, or is it subject to seasonal fluctuations?
· What does the applicant use the vehicles for? What goods are carried? Who do they carry them for? Radius of operations? Maximum radius of operations?
· Do the vehicles have any kind of attached equipment?
· Where are the vehicles being stored? Are they stored in a locked garage or in a parking lot? Is the lot open or covered? Is it protected by alarms and a fence? Are goods or other property left in the vehicles overnight?
· Are the vehicles used to transport chemicals, explosives or other hazardous materials? If so, what materials are transported? What training and equipment does the applicant employ to ensure the safe handling and transportation of the materials? Are the materials potentially hazardous to the environment? What would be the consequences of a spill from a vehicle that had overturned or been involved in an accident?
· Do the applicant’s employees ever use their own vehicles on company business? If so, how often and for what purpose?
** Does the employer demand as a condition of employment that employees be willing to use their own cars in the course of employment, such as pizza delivery? The u/w will want to know whether the applicant has or needs a non-owned auto policy for this exposure.
- The law of master and servant, the fundamental principle is that, when a servant is engaged in his master’s business, his master is liable for the servant’s careless or negligent acts, even though his master was unaware of them and even though the servant exceeded his authority or disobeyed the express instructions of his master.
- When an automobile is used on a person’s behalf or under a person’s direction, that person has a definite responsibility for the operation of the vehicle and can be held liable for damages in the event of an accident even though he or she is not the owner or driver of the vehicle.
- The purpose of a non-owned policy is to protect an employer when employees operate vehicles not owned by the employer on behalf of the employer.
Ø Coverage under an owner’s policy for some autos not owned by the insured.
· Temporary substitute automobile is an auto not owned by the insured or anyone living in the insured’s home and being used as a substitute for the auto described in the policy because of the vehicle’s breakdown, repair, destruction or sale.
· Other automobiles are defined in the owner’s policy as autos other than the described auto that meet all of several conditions pertaining to the vehicle’s size and use.
Physical Damage Coverage and Vehicle Class
Ø Knowing the type and class of vehicle is critical to the u/w’s assessment of how expensive the vehicle would be to repair.
Ø The CLEAR System
· Physical damage is now rated on the CLEAR (Canadian Loss Experience Auto Rating) system, which is based on loss costs and passenger injury.
· MSRP (Manufacturer’s Suggested Retail Price) are still used by some insurers to rate private passenger and individually rated commercial automobiles based on how much the cars cost with some relatively minor consideration for damageability and repairability. Yet the MSRP is often unfair because it ignores certain important facts:
- Most collision claims result in repair rather than replacement of the vehicle
- Vehicle price is not the only predictor of repair costs
- Features such as antilock brakes, airbags, antitheft deterrents add to the price of the vehicle but may lower the likelihood of claims, claims costs or both, should not necessarily result in higher premium
- Vehicle price is not always the best predictor of claim frequency or severity
- Not all vehicles depreciate at the same rate
- Vehicles may exhibit different track records for different types of claims.
· The CLEAR system bases the premium for physical damage on the likelihood of the vehicle being involved in claims and what it will typically cost to settle each claim.
Modifications to the Vehicle
Ø The type or class of a vehicle applies to the vehicle as the manufacturer made it. Aftermarket modifications can affect the exposure to loss that a vehicle represents in a similar way to the vehicles type and class, making the vehicle more expensive to repair or more likely to be stolen or perhaps both.
Ø Each modification changes value and exposure to loss that the vehicle represents and the coverage and premium should reflect this. Photographs of the vehicle should also be obtained. See examples on page 20
Repairs and Unrepaired Damage
· The u/w should be alert to any vehicle damage repaired with aftermarket parts instead of parts from the original equipment manufacturer. Substandard parts may increase the exposure to loss if the vehicle is involved in a loss or worse could actually cause the vehicle to be in an accident.
· The u/w should be aware of any unrepaired damage and ask about it if no mention of it is made on the application. Unrepaired damage may make the vehicle less safe or roadworthy. Damage left unrepaired may also suggest a moral hazard on the part of an applicant too careless or indifferent to his or her own safety or the safety of others to maintain the vehicle in good repair.
· Some applicants will avoid mentioning unrepaired damage until the policy is issued and plan to make the claim for the damage that was incurred before the policy was issued.
The Registered Owner, Actual Owner and Drivers
- The subtlety the u/w should watch for is the possibility that the registered owner may not be the actual owner. A discrepancy would raise the question of insurable interest or moral hazard if a reflection of financial instability on the part of the actual owner and the absence of any info about the actual driver.
Ø The u/w must know who will be driving. The following questions will help to determine how the commercial applicant hires its drivers:
· Does the applicant require prospective drivers to complete application forms?
· Does the applicant interview its prospective drivers before hiring them?
· Are references checked?
· Does the applicant administer written and road tests to prospective drivers?
· Are copies of operator’s licenses kept on file?
· Are credit checks undertaken where the applicant’s drivers own the vehicles they operate?
· Is there a driver-training program?
Ø Whether the applicant is a personal risk or commercial risk, the u/w should obtain the names of all the drivers of the vehicle and look into the loss experience for each of them.
Ø The u/w should pay special attention to the class of license for each driver to ensure it is valid for the vehicle that will be driven.
Ø The u/w should obtain a motor vehicle record (MVR) for each driver to determine whether the driver has had any convictions or accidents in the last three years. The u/w should obtain detailed loss info as well as claims info.
Driver Experience
· An important piece of info for the u/w is the length of time the driver has been licensed to drive and in particular licensed to drive in Canada.
· Questions that should be asked:
- Is this a brand new driver who has just obtained a license?
- What class of license did the new driver receive, was it issued as part of a graduated licensing program?
- Did the new driver take a formal driver training program? If so, is there a certificate to prove it?
· Does the type of vehicle match up with the age and experience of the driver?
· The more drivers that drive a given vehicle, the greater the variation in driving habits and the more likely a loss of some kind will occur.
· The frequency of use should be noted for each driver, it allows the u/w to determine the primary and secondary drivers and identify any occasional operators.
Vehicle Maintenance
Ø U/w should establish if vehicle is maintained, is the maintenance performed by a t/p, and is there a regular maintenance program or contract.
Ø A well-maintained vehicle is less likely to fail or be involved in an accident than a poorly maintained vehicle.
Making the Underwriting Decision
Ø The first decision is whether to accept or reject the risk on the proposed terms. The u/w must remember that there may be alternatives or conditions that would allow the risk to be accepted, such as the following:
· A change in the applicant’s unsatisfactory policies or procedures (see example on page 26)
· A higher deductible – addresses loss frequency
· A higher premium
- All of these measures, either singly or in combination, offer the u/w alternatives to simply accepting or rejecting a risk as it is presented.
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