The Underwriting Process Demystified

Underwriters hold the key to insuring your business or organization. An underwriter plays a vital role in determining if the risk you or your organization poses is acceptable to the insurance carrier and if so, at what price they can make an adequate profit. The purpose of the underwriting process is to ensure that a potential insured is properly classified and adequate premium is charged to spread the risk of loss to all potential insureds. If that sounds like socialism, and there is a lot of talk about health insurance and socialism lately, just consider the consequences of each person or organization bearing the full brunt of their risk exposures. Now, doesn’t insurance seem like a great alternative?

Since the underwriter plays a front-line role when you purchase insurance, what do underwriters look for? Here are some of the things an underwriter may evaluate when deciding whether to insure our business.

• How long has the business been in operation? Underwriters normally like to see three full years of operation. If your business is new, be prepared for a more difficult time finding coverage.
• Is your business financially sound? For example, if you own investment properties and you are “upside down” on several of them, underwriters may cast a dubious eye at your account. Cancellations for non-payment of premium never please underwriters, either.
• If you have a vehicle fleet or commercial buildings, are they in good condition, clean and outfitted with adequate safety measures? Are your vehicles in a secure location when not in use?
• Where is your business located? Insuring a tavern in East Los Angeles is harder than insuring at tavern in Westchester, New York.
• How have your losses been in the past three-to-five years? Your agent will obtain loss runs that catalogue your loss history. Most underwriters want to see a better-than-average loss history. You can explain some outliers, but standard insurance carriers will not want to embrace your account with an adverse loss history.
• Does the owner of the business actively manage the operation on a daily basis?
• What safety and loss prevention programs are in place? Do you have weekly or monthly safety meetings and a safety manual in place? For workers’ compensation insurance, many underwriters want to see a return-to-work program where injured workers are brought back to work in a temporarily modified position post injury. This saves wage replacement costs when injured employees cannot perform their full job function.
• Does your organization have a drug and alcohol policy? Is it enforced?
• Do you pre-screen employees for criminal and motor vehicle records?
• Are vehicles used for personal use? In the auto dealer industry, a “take-home” used to be a given, especially for supervisory positions. After many adverse jury verdicts arising out of this exposure, underwriters began to insist on a “no-take-home vehicle” policy.
• How many drivers do you have under the age of 25?
• How are your employees oriented? How much supervision does your company extend to employees?
• Is your insurance application filled out completely and neatly? No kidding, a sloppy application can indicate that you pay little attention to detail. Especially when purchasing professional liability coverage, this can turn off the underwriter immediately.

Prior to binding coverage, underwriters will review your loss runs, request inspections and check insurance claims databases. Most insurers fight to compete in today’s softer insurance market and have increasingly turned to automated underwriting processes that validate and cross-check information on your application. Your honesty and how you interact with the carrier in the initial stages of the underwriting process can mean the difference between a carrier accepting or rejecting your risk. In addition, any misstatement on an insurance application can rescind coverage, leaving you bearing the risk without insurance.