Shopping for business insurance can be confusing if you don't know what factors insurers consider when evaluating applicants. You can make the buying process easier by learning the basics of insurance underwriting, and facilitate the process further by lowering your risk of losses and making your business more attractive to insurers.
Assumption of Risks
Insurers are in the business of assuming risks. When an insurer issues an insurance contract, it agrees to assume the risks described in the policy in exchange for a premium. Insurers make money by taking advantage of two statistical concepts: risk pooling and the law of large numbers. Insurers pool risks by accepting a large number of policyholders that have a low risk of incurring losses. They know that some of those policyholders will ultimately sustain a loss but expect they'll be in the minority.
The law of large numbers is based on the idea that losses become easier to predict as the number of risks increases. Insurers can predict losses more accurately if they insure many risks rather than a few. Loss prediction is an important part of the rate development process. Insurers need the ability to estimate losses accurately so they can develop rates that reflect the risks they're insuring.
When reviewing insurance applicants, insurers generally choose those that have a low risk of incurring losses. If an insurer isn't selective, it could pay out more money in claims and expenses than it collects in premiums. If its investment income doesn't cover the shortfall, the insurer could become insolvent.
What Underwriters Look For
When you apply for business insurance, an underwriter will review your application to ensure your company meets the insurer's underwriting standards. Underwriters use both objective and subjective information to evaluate insurance applicants. Objective information is typically obtained from documents such as experience rating worksheets and computer-generated loss runs. An example of subjective information is a written comment from the insurance agent stating that the applicant is an upstanding member of his community and an expert in his industry.
When assessing prospective policyholders, underwriters may use other sources of information besides the insurance application. For example, a property underwriter might obtain an Insurance Services Office (ISO) property report or a credit report on the applicant. Likewise, an auto underwriter might obtain a motor vehicle report for each of the applicant's drivers.
An underwriter may obtain both objective and subjective information about your business from a single resource. For instance, a physical inspection of your premises conducted by the insurer might reveal that your building has a metal roof (an objective fact) and that the structure is in good condition (a subjective opinion).
When evaluating your application, the underwriter will consider whether your company has risks that relate to the type of coverage you're seeking. For instance, if you're shopping for property insurance for a warehouse, the underwriter will consider the building's construction, occupancy, protection, and exposure (COPE). If you're seeking physical damage insurance for a dump truck, the underwriter will consider the age, condition, and size of your truck.
Underwriters also consider general characteristics of your business that could be relevant to any coverage. These are factors underwriters consider no matter what type of insurance you are buying. Here are some examples:
- Your company's business location.
- Your company's website address.
- Your company's loss history.
- The nature of your company's business operations.
- The number of years your firm has been in business.
- Annual sales or revenue generated by your business.
- Type of business organization (sole proprietorship, corporation, etc.).
- Whether your firm has a formal safety program.
- The name of your previous insurer.
- Whether any insurance has been declined, cancelled, or non-renewed within the last three years.
- Whether you or any company principal has been indicted or convicted of fraud, bribery or arson
- Whether you have any uncorrected fire or safety code violations.
- Whether you've suffered any bankruptcy, foreclosure or repossession within the last five years.
Many insurers use the standard applications forms provided by the Association for Cooperative Operations Research and Development (ACORD) to collect the data underwriters need to evaluate business insurance applicants. These forms provide for standardization and consistency between carriers, brokers, and agents.
Lowering Your Risk
You can make your business more attractive to insurers if you take some basic steps to lower your risk of losses, which can, in turn, help lower your premiums.
One important step is to institute a formal loss control program. An effective program will make your workplace safer for your employees, improve productivity, and reduce your insurance costs. You'll need to assess your hazards, develop an action plan, implement your plan, and keep accurate records. Ask your insurer for assistance if you need help setting up your program.
An important part of a loss control plan is ensuring your workplace complies with all applicable Occupational Safety and Health Administration (OSHA) standards. OSHA provides safety and health resources specifically designed for small businesses. For instance, the agency will provide a free safety inspection of your premises.
Another way to reduce your company's risks is to solicit advice from your insurer's risk control department. A risk control representative may visit your premises and offer suggestions about ways to reduce accidents.
A third loss reduction strategy is to analyze previous accidents, whether or not they resulted in insurance claims. Consider how the accidents happened and what could have been done to avoid them. Next, make the necessary changes to avoid future accidents. For example, suppose an employee was involved in a minor accident while talking on a cell phone. You can help prevent future accidents caused by distracted driving by drafting and implementing a written cell phone policy.