Insurance risk has many faces, each depending on the type of insurance being considered. When à client is buying full coverage car insurance, for example, as an insurance underwriter, you’re looking at a long list of insurance risks that represent potential losses, including:
- Car damage from a collision
- Car damage from other than a collision incident
- Bodily injury for the driver and passengers
- Theft
- Liability suits from causing bodily injury or death to third parties
- Liability suits for causing property damage to a third party
- Vandalism
- Rental car reimbursement costs
- Towing and roadside assistance charges
These are some of the insurance risks that may be faced by every car driver. When underwriting an auto policy, however, there are other risks that must be taken into account in order to arrive at the right policy and the right premium amount. A teen driver, for example, carries a much higher risk than an older, experienced driver and the cost of his/her policy will reflect this difference with higher premium rates.
Other risk factors besides age may include driving history, gender, zip code, credit history, age and type of car being insured, and more. All of these risk factors go into determining whether a policy should be offered to a particular driver and at what cost.
Types of Risk
Our daily lives are full of risks, some of which are considered insurable while others are not. Risk may be simply defined as the possibility of loss or injury or something that imperils or endangers. An insurance risk, however, must conform to the following:
- The loss being insured must be definite and be measurable (assessable) financially.
- There must be a sufficiently large number of individuals with similar loss exposure, allowing for the use of The Law of Large Numbers.
- Realization of an inured loss must be accidental and unexpected. It must not be intentionally caused by the insured.
- The person taking out the policy must have an insurable interest, standing to suffer loss if a loss occurs.
Life Insurance Risk
When underwriting a life insurance policy, the only real risk factor to consider is how soon the insured will die and trigger the payment of a claim. What determines the answer to this question has to do with factors such as age, lifestyle, personal habits, family medical history, and personal medical history of a policy applicant. Additional risk factors may include:
- Hobbies
- Occupation
- Gender
- Driving history and more
Home Insurance Risks
When issuing a homeowner’s insurance policy, the number of insurance risks facing the homeowner that you’ll be underwriting can be considerable. A standard policy is broken down into several sections, each providing specific protection and each carrying its own specific risk factors.
Coverage A – the protection covering the dwelling.
Coverage B – the protection covering other structures not attached to the dwelling such as a free-standing garage or tool shed, fences, walls, swimming pools, etc.
Coverage C – the protection covering personal property and household contents. Property may also be protected when off-site, such as a camera stolen from a hotel room while the insured is on vacation.
There is typically a list of 17 risks or perils included in a standard home insurance policy. These range from fire and lightning damage to windstorms, hail, explosions, theft, vandalism, smoke, falling objects, accidental discharge of water or steam, and more. The risk level is determined by the likelihood that any of these risks will be realized in the home being underwritten. A home located in an area that has seen numerous wildfires will naturally be considered a higher risk to insure than one with no such exposures.
Much goes into the formula for determining the risk of insuring a particular home, including age of the structure, location, past claims history, and general condition of the home. A thorough home insurance inspection can be conducted to help determine whether a particular residence should be offered insurance coverage by your company and if so, an accurate cost for the policy.
A Risk Sharing Contract
Insurance is a form of risk management whereby a risk-sharing contract is drawn up, in the form of an insurance policy, between the insurer and the insured. The insurer agrees to underwrite a certain amount of the insured’s risk in exchange for a specified fee, or premium. As an underwriter, your job is to determine as accurately as possible the amount of insurance risk represented by the policy applicant and decide whether or not offering to insure this applicant seems to be in the best financial interest of your company. This is determined after a thorough study of the various risks represented by the applicant.
If it’s decided that it should be profitable for your company to insure a particular entity or individual, it’s then left to determine the amount of premium required to offset the costs involved with writing the policy and the payment of any future claims. This is the main goal of accurate underwriting and basically boils down to the nature and amount of risk being shared between your company and your client.
Insurance Underwriting
Insurance underwriting is best defined as risk assessment or risk evaluation. It may apply to insuring an automobile, a home, a business, a person’s health, or a person’s life. As an underwriter, your task is to decide whether it’s worth taking a chance on providing coverage to a specific person or business. If you determine this risk-sharing transaction would likely be profitable to your company, you must then decide how much premium to charge the insured in exchange for the protection being offered.
There are numerous factors that go into determining how much of a gamble your company will be taking by providing insurance coverage to a particular individual or entity. There needs to be a fairly accurate idea of the potential for something to go wrong that would cause your company to have to pay out on a large claim. It would be irresponsible of your company to risk issuing a policy if the odds of having to pay an expensive claim are high. Take, for example, an individual diagnosed with cancer attempting to secure a life insurance policy. Accurate underwriting of this policy would show its issuance to be imprudent.
Determining Risk Levels
Deciding exactly what is an acceptable level of insurance risk includes a careful study of:
- Information provided on an applicant’s policy application
- Data found from various sources, including automated computer programs
- Statistics
- Actuarial guidelines
- Information from inspections and other physical examinations
This can help in accurately predicting most risks and, once completed, can aid in setting accurate premiums relative to risk levels.
Sealing the Deal
As an insurance underwriter, you likely have all the needed tools at your disposal to make accurate determinations regarding policy issuance and premium amounts charged. For home and/or commercial property insurance underwriters, a critical factor in your insurance underwriting process is a thorough, professional property inspection. This hands-on, in-personal property analysis is the best way to uncover hidden risks previously undetected.
Insurance Risk Services (IRS) is a four-decades old company that performs first-rate residential and commercial inspections. See what they can do for you!
