C120 (2011) - Chapter 3 – Underwriting the Applicant

 The underwriter’s analysis of any risk can be generally considered in two parts:
o An analysis of the subject: the person, people, or organization applying for insurance
o An analysis of the object: the property, liability, crime, boiler and machinery, auto, or
other exposure to loss for which the applicant seeks insurance.

 We will refer to the subject of insurance as “the applicant”

o One of the most important sources of information for an underwriter is the application.
 The applicant’s name, broker or agent, phone contact numbers, policy period,
applicant’s occupation, applicant’s loss experience, any previous cancellations, any
applicable discounts, who signed the application and how it was signed.

Named Insured and the Person Insured – an example being an auto policy insures the person
named on it, but it also insures every other person who drives or occupies the insured auto with
the named insured’s consent.
If 2 or more names are on the application that seems to be unrelated, further investigation is
required.
 The underwriter should examine the relationship that does exist between the named
parties.
 The underwriter should look for insurable interest of each named party; only the names of
the parties with an insurable interest should be allowed to remain on the application.
 In commercial, the first party named on a commercial policy is responsible for the payment
of premium, among other responsibilities. In personal lines the order of names has no
bearing.
 Applications in corporate names – investigation should be done of the principals of the
business. What is their experience level in running a business? Do they have a criminal
record? If the named corporation has subsidiaries then it would be prudent to find out who
is running the subsidiary, are they engaged in other activities or have other exposures that
are less attractive. If the applicant is a numbered company or a company name shown
together with a personal name, the underwriter should be alert to a possible moral hazard.

Additional Insureds – whether named on the policy or not, are distinct from the applicants, but
they are involved with the applicants in a way that gives them a particular interest in the
protection to be provided by the policy.
 Typically found in commercial insurance rather than in personal
 Additional Insured defined: is any party not automatically included as an insured but
entitled to a certain degree of protection under the policy.
 Additional Named Insured defined: 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 an additional insured does but also more responsibilities.
 An additional named insured must receive copies of a letter of cancellation sent by the
insurer to the original insured. Employees, executives, and directors of additional named
insureds are covered if the policy is for liability, not so for an additional insured. Breach of
a policy condition by an additional named insured could render the policy’s coverage void;
that is not true for an additional insured.
Mortgages

 Often property is used for security on a loan. Where this security is real property (land or
buildings) the loan arrangement is called a mortgage. Where the security is personal property
(other than land or buildings) the loan arrangement may be a chattel mortgage.
 A mortgage conveys an interest in property as security for a debt. The borrower (mortgagor)
retains possession and use of the property used as the security for the loan, but the lender
(mortgagee) acquires an interest in the property and has the right to sell it to discharge the
borrower’s debt. This interest is registered with the registry or titles to establish the mortgagee’s
claim to the property ahead of any purchaser to whom the mortgagor might sell the property to
before repaying the mortgage.
 As the mortgagee has insurable interest in the property, their interests are protected by a mortgage
clause. That is the mortgagee is covered even if the named insured is unable to recover because a
condition of the policy has been breached.

Credit Checks

 Credit checks are commonly done on commercial risks. This can be done by D & B, or a request
for the insured’s financial statements. Financial statements can aid in credit checks as well as
assessing the applicant’s overall financial strength and stability.
 Becoming increasingly common for personal risks too.
o A correlation has been established between an applicant’s score in applying for a bank
loan and the applicant’s propensity for insurance claims.

The Broker or Agent

 What is the broker or agent’s source of business?

o How did the broker make contact with the risk?
o What is the broker’s relationship to the risk – to its principals or executives?
o Does the broker’s relationship to the risk create any conflicts of interest?
o The number of brokers who have handled the risk previously.
o The extent of the applications – is the broker submitting the entire risk or just the less
attractive more difficult aspect of the risk.
 The more an underwriter can find out about a risk from the broker, the more facts the underwriter
has in which to make a decision.
 A broker may personally inspect a risk and include a report with the submission to the
underwriter; this is most frequently done with personal lines or small commercial risks that would
not justify the cost of a formal inspection.
 The broker or agent should be underwritten as well in order to put faith into the types of risk they
will look for you as an underwriter to insure.

Telephone Numbers

Contact numbers listed on an application can tell the underwriter a lot:

- Are the home and business numbers the same? This could indicate a home based business on a
personal risk.
 - Are the area codes the same?
- Does the applicant list a cell phone number or land based phone numbers? A land based
number may be an indication that they are more likely to remain in that location for some time
where cell phones indicate more of a mobility.
- Questions about phone numbers tend to be more important for personal risks than commercial.

Effective and Expiry Dates

A prudent underwriter will check the effective and expiry dates the applicant has requested. The
underwriter must take care not to issue a back-dated policy.
 Back-dated Policy defined: is a policy that will become effective retroactively after the applicant
applies for it.
 A back-dated policy should be a concern for an underwriter because of the possibility that one or
more losses occurred between the effective date sought by the applicant and the date the
application was made.
 The main concern is the moral hazard it may imply concerning the applicant.
 If an underwriter agrees to a back-dated policy, they should ask for a signed declaration from the
applicant that there have been no losses to the applicant’s knowledge during the period from the
requested effective date of coverage to the time of the application.

The Applicant’s Occupation

Employment status of a personal lines applicant is of interest for the light it sheds on potential moral
hazards:
 If the applicant is unemployed, the moral hazard is clear. They may be unable to pay the premium
or at worst deliberately cause a loss for cash they may receive to settle a claim.
 If the applicant is self employed, it becomes more difficult to assess if they represent a moral
hazard. Further investigation is required.
 If the applicant’s stated occupation is vague, it requires further investigation.
 Length of employment should be looked at for stability and continuity, the greater this is the less of
a moral hazard they represent.
 For commercial, the number of years the insured risk has been in business. The more years in
business the less likely it is to present a moral hazard.

Occupation and Total Insurable Value (TIV)

Any discrepancy between the applicant’s occupation and his or her total insurable value should be
investigated, such as a convenience store clerk insuring a $750,000 home. Investigations should reveal
whether the home is as a result of illegal dealings (which the risk should be declined) or as a result of a
family inheritance.

Loss Experience

 The record of losses that a risk has incurred in the past is a critical tool for assessing the exposure
to future loss that the risk represents.
 Leaving the loss experience blank is unacceptable. If there have been no losses then the applicant
should indicate none, but not leave the space blank.
 Even if the applicant says no losses, the underwriter may check with a Crime Prevention Bureau to
see if there have been any records of suspicious losses involving the applicant. This information is
highly sensitive and only authorized persons will have access to it. The fact that a check by an
 authorized person produces a HIT is confirmation that an applicant’s name is in the database. This
should make the underwriter very wary.
 There are differing designations for people in the ICPB database.
o F refers to someone who has had frequent suspicious losses.
o W means warning-avoid.
 The underwriter should pay attention to the designation but remember that the database is built on
suspicion of criminal activity and not conviction of it. Out of respect for the applicant’s privacy,
the underwriter must use the database with discretion.
 If an applicant indicates no losses in the loss experience; the underwriter should still check the
ICPB database for the applicant’s name. If there is a hit, this raises the issue of utmost good faith
and paints the applicant as a distinct moral hazard.
 The insurer should investigate a denied claim, as a denied claim might identify a moral hazard. A
denied claim could also identify a physical hazard that could cause a legitimate claim if the
underwriter accepts the risk.

Loss Experience for Commercial Risks

 An accurate picture of an applicant’s loss experience is more challenging for commercial risks.
Many business circumstances allow a commercial risk to report no loss experience and believe
that they are doing so in good faith.
 If a commercial risk sustained a severe loss, this is important information to the underwriter. It is a
reflection of management, housekeeping and other risk factors.
o An underwriter should be alert for locations a risk still owns but has removed insurance
coverage from. An applicant may not feel they need to list losses on locations they no
longer carry coverage on.
o No previous insurance poses the same type of risk. This may occur on a personal risk
where the applicant sustained a loss but did not carry coverage, if they did carry the
coverage they would have claimed for this loss; therefore, no losses are reported.
o Same line of reasoning goes for not reporting losses that have fallen under the deductible.
o Presence of absence of insurance does not excuse an applicant from disclosing any losses
on a location.
 Seeking out and analyzing a comprehensive loss history for any risk, the underwriter must always
remember two points:
o Losses are not the same as claims. A loss is significant information for an underwriter
whether the applicant bore the loss or the insurer paid for it as a claim.
o The amount of the loss is less important than the circumstances of the loss.

Prior Cancellations

Prior cancellations by previous insurers may imply a moral hazard on the part of the applicant.
The underwriter must be careful not to jump to conclusions.
Reasons for cancellation are important; the prior carrier may have no longer wished to write a
particular class of business. An applicant may also have been jumping carriers looking for better
terms, many underwriters would decline risks as this is an indication that they could very well lose
the business on renewal as well.
Continuity of insurance is the real issue. The applicant’s record with previous insurers is useful
information.
Portfolio transfers may be a reason why an underwriter has been asked to provide insurance when
a policy has been cancelled.
 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”.
A good underwriter will be aware of conditions in the insurance market and sensitive to the
coverages and terms that competing insurers will offer on risks like the applicant being
considered. That knowledge will allow an informed response if a broker is simply inviting the
underwriter to match a competing quote.

Premium Discounts

 Discounts are most relevant to personal lines insurance.

 To the underwriter, the importance of the discounts lay in the pricing.
 It is important that the applicant is charged an appropriate premium. If too high (due to not
applying a discount that the applicant is eligible to receive) the underwriter may lose the business,
if too low the insurer will not be adequately compensated for the risk it is taking on.

Signatures

 On some types of business insurance a standard application form may not be used. However, on a
standard application there is a space for the applicant’s signature.
 Commercial insurance, signatures are rarely required except on such things as a statement of
values submitted with an application.
 When a signed application is received, the applicant’s signature should be checked against the
broker’s signature to ensure the same hand does not do them.
 Privacy legislation requires signed applications for insurance if the underwriter wants to obtain
information from any of the following sources: ICPB, MVRs (motor vehicle records), or a credit
report. It also requires an insurer to approve insurance for an applicant only if it has received a
signed application from the applicant.
 In an effort to expedite business through use of the internet or phone, some insurers send out
applications in the mail to be signed and returned. This is a practice that must be followed up on.