Study 3: Underwriting the Applicant - Summary

Question 1

Aspects of a typical application which are of interest to an underwriter

Answer 1

• The applicant’s name
• The broker or agent
• The applicant’s contact information
• The desired effective and expiry dates
• The applicant’s occupation
• The applicant’s loss experience
• Whether the applicant has been cancelled by any previous insurers
• Whether the applicant qualifies for any premium discounts
• Who signed the application and how it was signed

Question 2

Purpose of examining an application

Answer 2

Provides an overview of how the underwriter analyzes the subject of insurance, and how the underwriter learns about the applicant

Question 3

Importance of who is applying

Answer 3

• Allows the underwriter to distinguish between the named insured and the persons insured
• Ex. the named insured on an auto policy is the person named on it, but the policy also insures every other person who drives or occupies the vehicle with the insured’s consent

Question 4

Who is insured in a homeowner’s policy

Answer 4

The person named on the policy’s coverage summary page and, if living in the same household, the named insured’s spouse, relatives, and any person under 21 in the insured’s care. Also, a student living away from home but who is dependent on the insured for support.

Question 5

Importance of insured persons in personal lines policies

Answer 5

• A policy may seem desirable based on the named insured, but less so based on who else may be covered
• Further investigation may be needed to determine the relationship of unrelated individuals, or if others may pose a hazard to the risk

Question 6

Names on applications for business insurance

Answer 6

• Even more important to investigate the names for business insurance - the first party named is responsible for payment and other responsibilities
• Business insurance policies may be in the names of corporations. Important to investigate which people run those corporations (ex. do they have a criminal record?)

Question 7

Additional (Named) Insureds

Answer 7

• Distinct from applicants, but are involved with the applicants in a way that gives them a particular interest in protection provided by the policy
• Ex. A contractor who does work for a municipality may list the municipality as an additional insured on its liability policy
• Typically found in commercial rather than personal policies

Question 8

Mortgagees and their interest in an insurance policy

Answer 8

• Property is often used as security for a loan. When the security is real property, the loan arrangement is called a mortgage
• Mortgagor (the borrower) and mortgagee (the lender)
• The mortgagee has insurable interest in the property since they would suffer a loss if it were damaged or destroyed
• The mortgage clause protects the interest of a mortgagee. The main benefit is that the policy covers the mortgagee even if the named insured is unable to recover because a condition of the policy has been breached

Question 9

Credit checks

Answer 9

• Commonly done for commercial risks through D&B or Equifax
• Underwriters may also ask for financial statements as an alternative
• Becoming more common for personal risks (link between credit score and propensity for insurance claims)

Question 10

Underwriters can discover the following about the applicant or risk when consulting the broker or agent

Answer 10

• The source of the business and the proximity of the broker, for example, to the risk in question
• How the broker made contact with this risk
• What the broker’s relationship is to the risk—to its principals or executives
• Whether the broker’s relationship to the risk creates any conflict of interest
• The number of brokers who have handled the risk before the current broker submitted the application to the insurer for the applicant
• The extent of the application
• Whether the broker is submitting the entire risk for the underwriter’s consideration or just the less attractive, more difficult-to-insure aspects of the risk

Question 11

How brokers can influence the underwriter’s decision

Answer 11

• From the broker or agent, the underwriter may find that a seemingly negative fact should be considered a positive fact
• Ex. the insured’s elderly mother lives at home. This could be considered an increased risk (for instance, if she requires a hotplate or kettle in her room) or a decreased risk (since the house is less likely to be unoccupied)

Question 12

The broker’s or agent’s report

Answer 12

• A broker or agent may personally inspect a risk and include a report with the submission
• Most frequently for personal or small commercial risks

Question 13

Effective and expiry dates

Answer 13

• Normally, the effective date lies in the future. The underwriter would take care not to issue a backdated policy
• Requests for backdated policies may concern underwriters - possibility a loss may have occurred between the requested date and the date they applied
• This may also imply a moral hazard regarding the applicant - are they operating with utmost good faith?

Question 14

Signatures on an application

Answer 14

• In personal lines insurance, applications are sometimes signed. In commercial, they are signed rarely
• E-signatures have become more common since Covid-19

Question 15

Unsigned applications

Answer 15

Common these days - more applicants applying over computers or the phone. Can pose a problem as privacy legislation requires signed applications for insurance if the underwriter wants to obtain information from the following:

• Government motor vehicle records (MVRs) for automobile insurance applicants
• A credit reporter, such as Equifax or D&B

Question 16

The employment status of a personal-lines applicant sheds light on the following moral hazards

Answer 16

• If unemployed: they may not be able to pay the premium, or might deliberately cause a loss for the cash from the claim
• If self-employed: can be difficult to assess moral hazard. Self-employed may refer to a struggling or unsuccessful business, or the client may be doing very well. There would be a need to investigate further.
• If the occupation is vague: the underwriter must find out more. Ex. “business person” - doing what? What line of business? The applicant must have reasonable answers.

Question 17

Occupation and Total Insurable Value (TIV)

Answer 17

• Worth investigating any discrepancy between the applicant’s occupation and their total insurable value (TIV)
• Ex. an applicant wants coverage for a $2M home, but lists their job as a cashier at a convenience store. Or a senior executive at a bank who only needs $10K in property coverage.
• Underwriter should investigate whether the applicant poses a moral hazard - can they afford the home in question? Are they just trying to secure a lower price by undervaluing their contents?

Question 18

The importance of loss experience

Answer 18

• The losses an applicant has suffered in the past are important indicators of losses they may incur in the future
• Ex. a fire at an auto body shop due to storage of flammable liquids would reveal A) the inherent threat of fire from the ignition of such liquids, and B) the heightened risk of fire posed by carelessness or inadequate safety standards
• This may also reveal information about the applicant’s attitude towards loss (moral hazard) if no preventative measures have been taken

Question 19

Confirming “No losses” on an application

Answer 19

• Applicants may indicate “none” for previous losses, but the underwriter or insurer may still want to check industry databases or Google searches to confirm
• Databases: CGI Canada’s AutoPlus (for auto claims), Habitational Insurance Tracking System (HITS) for property claims, Commercial Tracking System (CTS) for commercial property data

Question 20

Denied claims

Answer 20

• Applicants may disclose denied claims on their application, or the underwriter may discover them during the course of inquiries
• Denied claims should be investigated, since it costs the insurer more than a claim never made (due to needing to establish and investigate the file)
• Denied claims may indicate a moral hazard (i.e. insurer seeking cash for illegitimate claims) or physical hazard (i.e. previous damage that wasn’t repaired)

Question 21

Loss experience for commercial risks

Answer 21

• Challenging to obtain loss experience for commercial risks, since they can report no loss experience and argue that they are doing so in good faith
• Ex. a business at a previous address suffered a loss, but reports no losses since they are now at a new address
• Prior losses are still important for underwriting the risk, even if the address is no longer part of the risk
• Similar situations occur if the applicant suffered a loss but didn’t have insurance at the time, therefore doesn’t feel the need to disclose the loss
• Some applicants may feel that losses below their deductible don’t need to be reported since there was no payout from their policy
• All losses - regardless of insurance or claims payouts - should be disclosed

Question 22

Two critical points in seeking out and analyzing a comprehensive loss history for any risk

Answer 22

1. Losses are not the same as claims. A loss is significant information for an underwriter whether the applicant bore the loss or the insurer paid for it as a claim.
2. The amount of a loss is less important than the circumstances of a loss. Those circumstances may reveal that mere good luck prevented a smaller loss from being a much larger one.

Question 23

Prior cancellations

Answer 23

• Important to know, but the underwriter should avoid jumping to conclusions
• Ex. a prior poilcy may be cancelled because the insurer no longer wanted that class of business, which has nothing to do with the applicant
• Real issue is continuity of insurance - record with previous insurers is important for the same reason that employment history is important when applying for a job
• Jumping carriers every year to get a better rate may cause an underwriter to decline since they won’t expect to keep the business for more than one year