Chapter 2 Underwriting Commercial Property Insurance

Question 1

What is meant by First Line Underwriting?

Answer 1

Broker is the first to contact a client, assess and determine if business worth pursuing, monitor and report changes in risk, introduce insurance products to clients, suggests improvements to insurance companies.

Question 2

What is difference between Application and Submission?

Answer 2

Application is made with the expectation an insurance policy will be issued
Submission is a proposal for insurance. It is sent the insurer for consideration and consists of an application + verbal & written information (previous policy, loss history, loss details, photographs, financial statements)

Question 3

What are the processes of underwriting submission?

Answer 3

1. Completion of Survey:
   - Assists in identifying loss exposure
   - Eliminate unnecessary coverages
   - Develop other underwriting information needed by insurer
   * Surveys & Commercial Property Checklists help broker:
   - Alerts broker of potential loss exposure
   - Reduces chance of forgetting/ignoring needed coverage
   - Reduce E&O claim
2. Search for interested insurer
3. Meet Prospect and discuss quote and select insurer
4. Request binding coverage with selected insurer
   - On complex risks, insurers may inspect/survey risk or use an independent inspection company (Insurer Advisory Organization - IAO)
5. Review policy and deliver to client

Question 4

Describe the 5 classes of building construction

Answer 4

1. Fire Resistive (The Best)
   - Steel Frame, reinforced concrete, concrete brick, 2-3 hour rating
2. Non Combustive (Just fail to meet fire resistive standards)
   - Floors, roofs and supports of steel, iron, concrete; exterior walls are non-combustible materials
3. Heavy Timber (Quite Rare)
   - columns, beams, arches of solid wood or laminated timber, floor and roof of wood
4. Ordinary (Common)
   - combination of more than one type such as brick wall with frame roof and floor
5. Frame (Common)
   - supporting walls of wood, exterior of wood, stucco or metal and brick veneer

Question 5

When the building is more than 25 years old, underwriting will request more information for these 4 things:

Answer 5

1. Roof
2. Wiring and over current protection (fuses and circuit breaker)
3. Plumbing (steel pipes replaced with copper)
4. Heating (brick chimney to approved metal)

Question 6

Name the Five Common Hazards

Answer 6

HOPED

1. Heating
   - type of heating appliance, fuel used, chimney type
2. Occupancy
   - the other occupancy in the building of the insured can negatively affect the risk (existence of restaurant, garage, or night club)
3. Protection
   - Private protection (fire extinguishers and sprinklers), and Public protection (Fire hydrant/Fire hall)
4. Detachment
   - Proximity of insured premises to other commercially rated properties (residential properties will not be considered in this rating)
5. Electrical Services
   - Uses copper or aluminum (used between 1965-73)
   - use of automatic circuit breakers or fuses

Question 7

Define Special Hazards

Answer 7

include processes or operations that create a potential for loss (e.g. church burning incense, repair garage doing welding, bakery baking, butcher shops rendering and smoking)

Question 8

Define Broker Statement

Answer 8

Part of the application, requires that broker submit additional information pertaining to:
1. physical condition of the premises (adequacy of housekeeping)
2. business and general character of the applicant (years in business and at location)
3. Insurance history of applicant (losses in past 3-5 years)

Question 9

Define Supplementary Information

Answer 9

Part of the application, broker will need to provide:
1. number of years of experience in this business/location
2. loss experience
3. if ever declined, cancelled or refused insurance

Question 10

What are the 3 common duties of underwriters?

Answer 10

1. Risk Selection
   - to select risks that are profitable to insurer (to select risks that it will not be “selected against” e.g. taken advantage of by brokers placing worst accounts with the insurer)
2. Risk Classification
   - business risks are grouped into different classes based on their probability to suffer a loss (“class underwriting” contrasts with “individual underwriting”). The main advantage is having a consistent/appropriate premium charged.
3. Rate Making
   - based on the information from broker, class of business, external services (IAO) will determine the rate or premium to underwrite the risk. Rates change because of economic and claims number.

Question 11

Two types of market conditions that affect insurance costs

Answer 11

• Insurance premium can be affected by rising claims cost, extent of competition between insurers and interest insurers receive in investments. When interest rates are low, the cost of insurance will increase to offset loss of interest income. When interest rates are high, insurers will try to generate as much money as possible, this is known as cash flow underwriting

1. Soft Market: intense competition between insurers causes rates to be lower than usual.
   2 Hard Market: when profit margins or low and some insurers have had to withdraw or reduce the number of risks they can underwrite. This causes rates to increase.

Question 12

Define Hazard

Answer 12

A condition that may cause a peril to occur

Question 13

Define Physical Hazards

Answer 13

Conditions relating to premises or the environment which the risk is located which may cause a loss to occurred. This includes:

PETHOG

1. Protection (no fire extinguishers or long way from fire hall)
2. External Exposures (located adjacent to welding shop)
3. Type of building construction (building made wood vs masonry)
4. Housekeeping (combustible wastes stored long periods on premises)
5. Occupancy (restaurant more likely to suffer fire loss than book store)
6. Geography (location difficult for firefighters to reach)

Question 14

Define Moral Hazards

Answer 14

Subjective characteristics of applicant which could cause a loss. This includes:

IF MAP

1. Indifference to Loss (doesn’t take preventative measures to prevent loss because “has insurance)
2. Financial Condition (business owners having financial difficulty are more likely to commit fraud)
3. Moral Character (unethical people more likely to take advantage of insurance)
4. Associates (keeping in company with criminals may reveal a lot about character of insured)
5. Poor Management (no loss prevention controls or accounting records or lack of inventory control makes it difficult to detect and control losses)

Question 15

Two ways develop additional underwriting information

Answer 15

1. External Source
   a. The Broker
   b. Government Records
   c. Financial Rating Services
   d. Consumer Investigation Reports
2. Internal Source
   a. Loss Experience data
   b. Inspection reports
   
   • provide information on physical characteristics of risk, the attitude of applicant at time of inspection which may help determine future cooperation regarding claim or loss control suggestions
     c. Field representatives
     d. Claims information
     e. Production reports
   • the underwriter is more likely to grant insurance for accommodation business (sub standard, marginal business) if the brokerage has a large volume of business with insurer, consists of a good mix and is a profitable brokerage for insurer (low loss ratio)
     f. Underwriting guides and manuals
     g. Other underwriters

Question 16

Underwriters can make one of these four decisions regarding risks being submitted

Answer 16

1. accept submission as presented
2. reject the risk
3. accept but increase rate
4. accept risk at current rate but increase deductible

Question 17

Define Adverse Selection

Answer 17

Applicants most likely to have an insurance loss

Question 18

Define Supporting Business

Answer 18

Other insurance policies the applicant has with the same insurer. The insurer will be more willing to provide insured insurance if they have supporting business.