Study 3: Underwriting the Applicant

Question 1

What is an application? (1) and what are the parts of an application most important to an underwriter? (9)

Answer 1

• An application is a request by a prospect for insurance. The parts that are most important to an underwriter include:
• Applicant’s name
• The broker or agent
• Applicant’s telephone contact numbers
• Desired effective and expiry dates
• Applicant’s occupation
• Applicant’s loss experience
• Whether applicant has been cancelled by any previous insurers
• Whether applicant qualifies for any premium discounts
• Who signed the application and how it was signed

Question 2

Applicant’s name - Why is it important for an underwriter to know who is applying for the application of insurance? (3)

Answer 2

• Its important for an underwriter to investigate the applicants because of the distinction between named insureds and persons insured.
• A named insured is the person or party designated in the policy as the insured, where as a person’s insured can be every other person who occupies or uses the insured property. (Ex: named insured in auto policy is person named on policy, persons insured are everyone else who drives or occupies vehicle)
• if two or more names on application seem to be unrelated, further investigation may be required. Underwriters should always examine relationships between the named parties.

Question 3

What is a homeowners policy? (1) and how does it define insured? (2)

Answer 3

• A multi peril insurance policy for dwelling risks, combining coverages for fire and extended coverages, including theft and liability
• Insured is often defined to include the following:
• • The persons named on the policy coverage summary page.
• • If living in the same household, the named insureds’ spouse, relatives, and any person under 21 in the insureds care, as well as students attending university.

Question 4

Why may it be even more important to investigate the applicants name under a commercial lines or business insurance policy? (4)

Answer 4

• The first party named on a business insurance policy will be held responsible for payment of premiums, among other responsibilities. In contrast, the order of names in a personal policy does not have the same effect.
• Business insurance policies may be written in the names of corporations rather than people, but risks arise from the activities of people, so an underwriter must investigate the people who run the corporation.
• The need to investigate named corporations may be greater when the corporation is large enough to own subsidiary corporations. Those subsidiaries may have other exposures which makes risk less favourable.
• If applicant is numbered company, or a company name shown together with personal name, the underwriter should be alert to a possible moral hazard.

Question 5

What are the differences between an additional insured and an additional named insured? (2)

Answer 5

• An additional insured is a person other than the named insured who is protected by the terms of a policy.
• An additional named insured is any party, other than original named insured, identifies as a named insured under the policy declarations. They have more rights under the policy than the additional insured but also more responsibilities.

Question 6

What is mortgage? (1) Chattel mortgage? (1)

Answer 6

Mortgage - Property is often used as security for a loan. Where the security is real property (land, building, etc.), this loan arrangement is referred to as a mortgage.

Chattel mortgage - Where the security is personal property.

Question 7

Other than named insureds, what other party may have an interest on the property being insured?

Answer 7

• A mortgagee. They acquire interest in property by using it a security for a loan. They have the right to sell the property if a burrower defaults on payment
• Their interests are protected by the addition of a mortgage clause. If the insured breaches the contract, mortgagees are still able to recover for damages if a loss occurs.
• Underwriters’ opinion of a risk will also be affected by the prominence and reputation of the mortgagees.

Question 8

Why do insurers perform credit checks? (3)

Answer 8

• It is a way to check an applicants overall financial strength and stability
• Some underwriters might ask for financial statements as an alternative way to check credit history
• More commonly done for commercial risks

Question 9

The broker or Agent - How are brokers and agents an important source of info for an underwriter when they are analysing the applicant and the risk? (7)

Answer 9

They are important because an underwriter can discover a lot when consulting with them, such as the following:

• • The source of the business, and proximity of the broker
• • How broker made contact with the risk
• • What brokers relationship is to the risk
• • Whether brokers relationship to risk creates any conflict of interest
• • Number of brokers who have handled risk before current broker submitted application
• • The extent of the application
• • Whether broker is submitting entire risk for underwriters consideration, or just the less attractive and more difficult aspects of the risk

*The more an underwriter can learn from a broker, the more facts they have to make a decision on accepting or rejecting risk

Question 10

What is the broker’s or agent’s report? (2)

Answer 10

• When broker or agent personally inspect a risk and include a submission to the underwriter
• Most frequently done for personal lines risks, or small commercial risks for which premium would not justify the costs of a formal inspection.

Question 11

What is a back dated policy? (1) and why is it a cause of concern for the underwriter?(3)

Answer 11

• A policy that will become effective retroactively after the applicant applies for it. (Ex: applied for it on Sept.17, but requests coverage for Sept.1)
• It is concerning because there is a possibility that one or more losses occurred between effective date sought by applicant and the date the application was made.
• Can also represent possible moral hazard from the applicant who is looking to receive payment for loss that already occurred
• If underwriter does decide to back date a policy, they must get a signed declaration from applicant saying that no loss has occurred between requested effective date and application date.

Question 12

Are applications required to be signed?

Answer 12

• No, they are not required to be signed but it is suggested to have them signed.
• Personal lines insurance applications are sometimes signed, but commercial applications are rarely signed

Question 13

Why may privacy legislation require applications to be signed? (4)

Answer 13

Required signed applications if the underwriter wants to obtain info from any of the following:

• ISD (Insurance services division) and ICPB (Insurance crime prevention bureau), both divisions of IBC
• Govt motor vehicle records (MVR’s) for auto insurance applications
• A credit reporter, such as Equifax

-Privacy legislation also requires that an insurer approve insurance for an applicant only if it has received a signed application

Question 14

The applicants occupation - Why is the employment status of an applicant important for analyzing the risk? (3)

Answer 14

Its of interest because it sheds light on potential moral hazards:
-If applicant is unemployed, the moral hazard is clear. At best, they may be unable to pay the premium. At worst, they may deliberately cause a loss so they receive settlement .

• If applicant is self employed, moral hazard is difficult to assess. They could be a struggling business who may deliberately cause a loss to receive settlement, or they may actually be a successful self employed business.
• If applicant’s stated occupation is vague, more investigation is required (The term business person or manager, without any accompanying details are to vague, and requires underwriter to ask questions to learn more)

Question 15

Why may it be important to an investigate the applicants occupation, along with there total insurable value (TIV)? (3)

Answer 15

• There may be discrepancies between both. A policy could cover a house that costs $750,000 and the insured under the policy makes minimum wage. Or a person has a small property worth $10,000, but is a senior executive at a large company.
• In first example, underwriter should question financial ability of applicant to afford the house. Can represent possible moral hazard, or the applicant may have just inherited the house.
• In second example, it could be possible that the applicant is deliberately seeking to under insure to reduce the premium, or it is possible that they are not aware of true value of their property.

Question 16

Why is it important for an underwriter to know about an applicants loss experience? (3)

Answer 16

• Losses an applicant suffered in the past are an important indicator of losses they may suffer in the future
• Past losses can provide clear picture of the property risk, as well as reveal info about the applicant (their attitude, if they take any safety precautions, possible moral hazard)
• Can help reveal that similar losses might occur in the future if preventative efforts are not taken to reduce risk.

Question 17

Confirming “no losses” - If an applicant indicates “none” in the space for loss experience, how may an underwriter confirm if that information is true? (2)

Answer 17

• Can check industry data bases (Autoplus or HITS) or conduct a simple Google search of applicant’s name.
• If a hit is found, the underwriter must ensure that it is the same person even if the loss occurred at another location, and if it is determined to be the same person, they must seek an explanation from the broker, as sometimes applicants may not report small losses.

Question 18

Why must an underwriter investigate any denied claims the applicant may have had in the past? (2)

Answer 18

• Might identify a potential moral hazard in the applicants habit of seeking cash from an insurer for illegitimate claims.
• Denied claims costs the insurer more than claims that were never made, since the insurer still incurs expenses in establishing a file and adjusting the claim

Question 19

Why is it more difficult to obtain an accurate picture of an applicants loss experience for commercial risks? (3)

Answer 19

-Because many business circumstances allow a commercial risk to report no loss experience and believe, or at least argue, that it is doing so in good faith.
(Ex: Selling a location that suffers a severe loss, but not reporting the loss because you do not own that location anymore)

• Sometimes if risk has never had insurance coverage, and their is no insurance record for it, it may have suffered losses which have never been reported
• Some applicants won’t report losses if there less than the deductible
• Applicants must report all losses

Question 20

What are the two main points an underwriter should always remember when it comes to loss experience? (2)

Answer 20

1) Losses are not the same as claim- A loss may occur without it ever having been reported and without ever opening up a claim for it.
2) The amount of a loss is less important than the circumstances of the loss - Circumstances may reveal that mere good luck prevented a small loss from being a much larger one

Question 21

Why would an underwriter want to know about any prior cancellations of insurance that an applicant may have? (2)

Answer 21

• Applicants record with previous insurers is useful info in much the same way as a job applicants record of employment. An insurance record allows inferences to be made about the applicants stability, creditworthiness, and general character. In short, the moral hazard he or she may represent
• Underwriters must investigate any prior cancellations thoroughly, as it might not imply moral hazard all the time. Sometimes insures may cancel just because they do not cover that line of insurance anymore.