Insurance Risk – The Driving Force Behind Insurance Underwriting

Insurance Risk - The Driving Force Behind Insurance Underwriting

The entire insurance industry revolves around the concept of insurance risk. Without insurance risk, there would be no insurance business. Whether it’s film star Betty Grable’s legs that were insured for $1,000,000. back in the 1940s or Bruce Springsteen’s $6 million insurance policy on his voice, where there’s a potential for financial loss, there’s usually a way to insure against that loss.

Time Magazine has a Top 10 Oddly Insured Body Parts list that includes a professional football player’s hair (Troy Polamalu), a comedian/actor’s crossed eyes (Ben Turpin), an actress/singer’s breasts (Dolly Parton), a restauranteur’s taste buds (Egon Ronay) and a professional cricket player’s moustache (Merv Hughes). The list also includes world-famous British soccer player David Beckham who, in 2006, purchased what’s believed to be the most expensive personal insurance policy in the sports field, valued at nearly $200 million. Each of these policies was centered around the potential loss of something on which the insured depends or depended for their financial stability.

Accurately Underwriting Insurance Risk

While the above mentioned insurance coverages are unique and underwriting these particular policies would require you, as the underwriter, to figure outside of the box, most insurance underwriting is more straightforward.

For most insurance underwriting, your job as the underwriter is to properly identify the insurance risk class into which the proposed insured falls. Insurance risk class defines a particular group of individuals (or companies) with similar characteristics that, utilizing the law of large numbers, can be used to determine the insurance risk associated with writing coverage for a particular individual or company.

The above mentioned “odd” insurance policies were written for unique individuals, each of whom aren’t really members of any specific large group that can be used to approximate the amount of insurance risk they represent. Most insurance policies, however, such as auto, life and homeowner’s, can be underwritten using standard insurance underwriting data and processes including statistics and actuarial guidelines.

The Insurance Underwriter’s Job

As an insurance underwriter, it’s your job to evaluate your company’s risk in insuring an individual’s:

  • Home
  • Health
  • Life
  • Automobile
  • Driving

Depending on the type of insurance coverage you’re writing, you decide whether or not you believe it would be profitable for your company to provide insurance coverage for a particular individual or company. This involves determining the level of insurance risk the proposed insured represents. You then set a price for the policy, which establishes the amount of premium to charge in exchange for the coverage offered.

Underwriting Involves Risk Evaluation

Your insurance company is basically gambling when providing coverage, weighing the potential profitability of issuing a particular policy against the potential of something happening that will trigger a claims payment to the insured. A good example is an individual diagnosed with terminal cancer applying for a life insurance policy. An insurance company would be foolish to issue a policy under such circumstances, virtually ensuring a payout in the near future. This situation presents an unacceptable insurance risk. This information is determined during the process of underwriting, using data, inspection information and guidance from actuaries.

Types of Risks

Different types of insurance risk affect different types of insurance policy underwriting. Consider the following:

Life Insurance Risks – When writing life insurance policies, the risk to the insurer is that the insured will pass away before the premiums paid for the policy surpass the amount of the claims payout of the death benefit. This cannot be figured on the policy of just one individual, but on the entire risk class being insured by your company. Money collected in the form of premium will be invested and hopefully deliver profits. A certain number of policyholders will allow their coverage to lapse before a claims payout is required.

Vehicle Insurance Risks – Vehicle insurance has provisions that can cover a wide range of risks. Almost all states require at least a minimum amount of liability coverage. This protects third parties in the event the insured is held responsible for causing injury, loss of life or property damage with their vehicle. Some states also require uninsured/under-insured coverage of all drivers. Other, optional insurance protections include:

  • Collision Coverage – to help the insured pay for damage done to their vehicle in a collision
  • Comprehensive Coverage – to help pay for damage done in a non-collision scenario such as fire, vandalism or theft
  • Personal Injury Protection (PIP) – to help pay the insured’s medical bills incurred in a vehicle accident

Insurance risks associated with driving include a number of factors having to do with the nature of the individual being insured. Heavy drinkers, for example, pose a high risk to insurers due to their potential for driving after drinking. Drivers with a history of speeding or driving recklessly pose a heightened risk to potential insurers. Teen drivers and aged drivers are shown to make more claims on their auto insurance policies. Other risks may cause a vehicle insurance company to increase rates because data shows higher claims rates include drivers with poor credit and those living in areas with high accident rates or high high crime rates.

Homeowner’s Insurance Risks – Your home, which may well represent one of your largest investments, carries with it numerous risks your insurer must consider when writing a policy. A standard home insurance policy offers protection against a long list of perils that could cause potential losses. Typically, standard policies cover 16 perils including fire, lightning, windstorm, explosion, smoke, vandalism, theft and more. You’re also covered for liabilities stemming from injuries or property damage done to third parties while visiting your home.

The risk home insurers face involves the condition of a home, including the roof, the HVAC system, the electrical system and plumbing. If any of these systems have problems, a thorough home inspection should uncover them and fixing the problems will lessen the insurance risk the insurer faces.

While some risks such as hurricanes or lightning strikes cannot be anticipated, other risks can be identified and future claims they may represent can be mitigated. Consider these risks:

Loose steps in the front porch or uneven sidewalks pose a trip and fall risk and should be repaired

A backyard swimming pool poses a risk to visitors and all safety steps should be observed, including:

  • Adult supervision at all times
  • Fully fenced area
  • Easily accessible rescue equipment
  • Poolside telephone with emergency number posted
  • Emergency training for CPR for everyone in the home

Trampolines and treehouses are high-risk equipment and should include protective devices

Certain dog breeds are considered dangerous and some are restricted from coverage by some insurance companies. Liability charges from dog bites are one of the top liability claims on homeowner’s policies, with the average settlement in 2019 of more than $43K.

Risk is All Around

There’s no avoiding all risk, as risk is all around us. There are, however, risks can be lessened by prudent behavior. If you live in an area prone to flooding or earthquakes, you would be wise to insure your home with earthquake and/or flood insurance. At Insurance Risk Services, we know how risk levels affect the insurance underwriting process. Contact us to learn how we can help with your underwriting needs.