What factors are considered during UNDERWRITING?

During the underwriting process, the underwriter considers different factors that may affect the potency and exposure of the risk involved. Such underwriting factors include the insured’s information (such as age, gender, and occupation), the subject matter’s risk exposures, and the risk control measures taken.

Underwriters establish such factors through tools like the proposal forms, internet research, physical inspection of the property (surveys), visiting the business premises, and going through the business’ important documents such as financial statements, articles of association, and memorandum to establish the source of income.

Proposal forms refer to the document prepared by the insurer that helps the underwriter to collect most of the facts that are material to the insurance contract such as the proof that the client has an insurable interest in the subject matter. Proposal forms contain four main sections: the general questions about the proposer and his insurance history, specific questions with regards to the risk to be insured, and the declaration part to legally bind the proposer for the answers provided. A completed proposal form is assessed, and if accepted, the underwriter will quote a premium and state any special terms that may apply. Proposal forms are considered to be part of the policy (legally binding), so utmost good faith from the proposer is of great importance. Proposal forms are used for many personal insurances such as household insurance and motor insurance policies, and the majority of small and medium-sized commercial risks such as employer’s liability insurance and fire insurance.

Surveys or physical inspections of the property are normally used in property insurance of complex risks such as household insurance, fire insurance, engineering insurance, and business interruption insurance. For most complex risks, proposal forms are not appropriate because of the amount of information required, so other means such as surveys are considered. The survey is done by the risk surveyor who will later on the issue a report to the underwriter with detailed information of the property and the plan showing the layout of the premises. The risk surveyor’s report will enable the underwriter to assess the risk and quote an appropriate premium for the risk.

Conducting research on the client or the client’s business. This can be done through internet research or going through the books of accounts, quarterly reports, memorandum, and articles of association of the business. The information discovered through the process of research can be verified by directly questioning the client or their broker. Like any other business, an insurer’s main objective is to run a profitable business, hence it is necessary for their underwriters to analyze the risks of the potential clients before agreeing whether to insure them or not.

Meeting with the client is another way that the underwriter could use to better analyze the risk exposure of the client or their business. The underwriter will directly interview the client and ask them questions that will draw out all the information material to the insurance contract. A meeting with the client is mostly done in commercial insurance underwriting as they tend to possess a more complex outlook with regard to their risk exposures. Meeting the client will draw out information such as the source of funds for their business and establish the financial and operational risks of the business.

Writing to the proposer is another method that underwriters use when trying to assess the client’s risk exposure. This process is usually done in the case of personal insurances such as private motor insurance, health insurance, and domestic package insurance products. Underwriters have a professional duty of understanding the risk exposures of the client or client’s business that they are about to contract with and writing to them could establish a trail that could be used in the place of a proposal form. Underwriters write to the proposers through official letters or emails.

An example of an underwriting process for household insurance:

The underwriting process in the household insurance considers a lot of factors about the insured’s property such as the construction material and the location of the building, and how they increase the risk exposures of the insured perils. Insurance companies use multiple factors when setting the proposer’s home insurance rates, therefore homeowners should get quotations from multiple insurance companies and compare their premium prices so as to get the best deal for their insurance policy.

Security systems and other protective fixtures will have reduced the client’s total risk exposure, and this may influence the underwriter to easily accept the risk. Having protective fixtures around the house signals a good actuarial risk to the insurance company and the underwriter will likely award the insured a discount on the premium. Security fixtures are in place as a way of reducing risks; for example, fire extinguishers reduce the risk of accidental fire, and electrical fences and alarm systems reduce the risk of theft.

The final step in the underwriting process is the issuance of a cover note or insurance policy. The policy is issued so that both parties to the contract are clear on the contractual obligations and the agreed terms and conditions. The policy shall contain the details of the insurance cover (provisions and exclusions), the period of the cover, and the premium charged by the insurer. The contract of insurance is in effect once the insurance proposal is accepted, and the premium is paid. The policy is just the evidence of the insurance contract, not the contract of insurance in itself; the contract exists irrespective of the existence of an actual policy document and the absence or loss of it does not invalidate the insurance contract.