Study 3 – Underwriting the Applicant
1. What are the two parts of an underwriter’s analysis of any risk? (p. 3)
i. An analysis of the subject: the people, person, or organization applying for insurance.
ii. An analysis of the object: the property, liability, crime, boiler and machinery, automobile, or other exposure to loss for which the applicant seeks insurance.
2. What is the distinction between the named insured(s) and the person(s) insured? (p. 4)
The name on an application form might seem to be merely a formality, so that the underwriter will know in what name to have a policy produced should the applicant become an insured.
A named insured is the registered owner and person whom has a financial relationship with the object being insured with. A person insured is anyone whom the named insured gives to consent to operate or use of the objecting being insured.
3. Why is it important to investigate commercial insurance policies when they are written in the names of corporations rather than people? (p. 5)
In commercial lines, it can be even more important to investigate the name or names on an application. The first party of several named on a commercial lines policy will be will be the party held responsible for the payment of the premium, among other responsibilities of the insured; in contrast, the order of names on a personal lines policy has no bearing on which the parties bears the insured’s responsibilities under the policy.
The need to investigate a named corporation may be even greater when that corporation is large enough to own subsidiary corporations. These subsidiaries may be run by different people than the named corporation. The subsidiaries may be engaged in activities or have other exposures that make the risk posed by the named corporation less attractive to the underwriter.
4. What is the difference between an additional insured and an additional named insured? (p. 6-7)
An additional insured: is any party not automatically included as an insured but entitled to a certain degree of protection under the policy.
An additional named insured: is any party, other than the original named insured, identified as an insured in the policy declarations. An additional named insured has more rights under the policy than does an additional insured but also more responsibilities.
5. Explain the roles of a mortgagor and a mortgagee. (p. 7-8)
A mortgage conveys an interest in property as security for a debt. The borrower (the 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 the appropriate registry or land titles office to establish the mortgagee’s claim to the property ahead of any prospective purchaser to whom the mortgagor might sell the property before repaying the mortgagee.
The main benefit of a mortgagee clause for the mortgagee 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.
6. How are credit checks useful to an underwriter? (p. 8)
Credit checks are commonly done for commercial risks. They are used to assess the applicant’s overall financial strength and stability.
7. What details about the broker, agent, and risk can an underwriter discover from the agent or broker? (p. 9)
Source of business:
· The source of the business and the proximity of the broker to the risk in question
· How did the broker make contact with this risk?
· What is the broker’s relationship to the risk?
· Does the broker’s relation to the risk create any conflict of interest?
Number of previous brokers:
· The number of brokers who have handled the risk before the current broker submitted the application to the insurer for the applicant.
Extent:
· The extent of the applications
· Is the broker submitting the entire risk for the underwriter’s consideration or just the less attractive, more difficult-to-insure aspects of the risk?
8. What can an underwriter find out by looking at the telephone numbers listed on an insurance application? (p. 10)
This is especially important in personal-lines risks – the exposure represented by a homeowner if heightened if, for example, he or she is running a home business from the basement. The telephone numbers could be an indicator of such an exposure.
9. What might an underwriter conclude about an application who provides a land-based telephone number as opposed to a cell-phone number? (p. 11)
An applicant who takes the time and incurs the expense of having a land based telephone installed is more likely to remain in that location for some time. Conversely, an applicant who can easily change locations without worrying about details such as canceling a land-based telephone service might do just that and change locations.
10. What is a back-dated policy? Why should an underwriter be concerned about issuing a back-dated policy? (p. 12-13)
A back-dated policy is a policy that will become effective retroactively after the applicant applies for it. The insurer may be liable for losses prior to the application date and may find itself paying claims for losses that occurred before it had even agreed to provide coverage. The main concern about a request for back-dated coverage is the moral hazard it may imply concerning the applicant.
11. Why is it important for an underwriter to look the employment status of a personal-lines applicant? (p. 14)
If the applicant is unemployed, the moral hazard is clear as he/she may be unable to pay the premium or might deliberately cause a loss for the cash they might receive to settle the claim.
12. Why should underwriters investigate discrepancies between an applicant’s occupation and his or her total insurable value? (p. 14-15)
If the applicant’s stated occupation is vague, the underwriter must probe further as there may be a possible moral hazard in order to assess the insured’s total insurable value (ITV).
13. Why might an underwriter check with ISD/ICPB when assessing an applicant’s exposure to loss? (p. 15)
A check with ISD/ICPB (the Investigative Services Division or Insurance Crime Prevention Bureau) may be standard to see if there are any records of suspicious losses involving the applicant.
14. What might an underwriter learn about an applicant by looking at his or her ISD/ICPB designation? What must an underwriter keep in mind when looking at an ISD/ICPB designation? (p. 15-16)
An underwriter may be able to determine if the insured has had “frequent” suspicious losses or has been pegged “warning-avoid.” The prudent underwriter pays attention to the applicant’s ISD/ICPB designation but also remembers that the database is built on suspicion of criminal activity, not conviction of it. That and respect for an applicant’s privacy require that the underwriter use the database with discretion.
15. What might a denied claim suggest about an applicant? (p. 16)
A denied claim might identify a moral hazard in the applicant’s habit of seeking cash from an insurance company for illegitimate claims. A denied claim could also identify a physical hazard that could cause a legitimate claim if the underwriter accepts the risk.
16. Why is an accurate picture of an applicant’s loss experience especially challenging to obtain in commercial insurance? (p. 17)
Because 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.
17. What two points should an underwriter always remember when seeking out and analyzing a loss history for any risk? (p. 18)
· “Losses” are not the same as “claims.” A loss is significant information for an underwriter whether the applicant bore the loss or the insured paid for it as a claim.
· The amount of a loss is less important than the circumstances of a loss. These circumstances may reveal that mere good luck prevented a smaller loss from being a much larger one.
18. What might a cancellation of coverage by a previous insurer suggest about an applicant? Why must an underwriter not jump to conclusions about an applicant’s prior cancellations? (p. 18)
Such cancellations may imply moral hazard on the part of the applicant however, the underwriter must be careful about jumping to conclusions.
It is possible that the applicant’s previous coverage was cancelled because the prior insurer no longer wishes to writer the applicant’s class of business.
An applicant may also have been “jumping carriers” in an effort to improve the terms of his/her coverage.
19. What does it mean if a broker is said to be “blocking the market”? (p. 19)
A broker who tries to prevent competing brokers from obtaining quotes from other underwriters by approaching those underwriters first is said to be blocking the market.
20. What must an underwriter consider regarding premium discounts? (p. 20)
The importance of discounts lies in pricing as it is important that the applicant is charged correctly. If the price is too high, the insurer may lose the business on renewal to another insurer. If the price is too low, the insurer may be inadequately compensated for the risk it assumes in providing insurance.
21. When does privacy legislation require a signed application for insurance? (p. 20)
Privacy legislation requires signed applications for insurance if the underwriter wants to obtain information from any of the following:
· The ISD/ICPB
· Government motor vehicle records (MVRs) for automobile insurance applicants.
· A credit reporter, such as Equifax or D&B
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