(June 2018)
The Businessowners policy is designed for specific types of occupancies. These can be grouped together, and rates established due to common characteristics. Because of the rating technique employed, only those occupancies that match the eligibility requirements can be included. This means that the first part of underwriting is establishing that the risk is eligible.
Related Article: AAIS Businessowners Policy Eligibility
Eligibility is a major issue but not the only one. The insurance company must determine that an eligible risk is also acceptable. The application discloses a great deal of information about the risk. Many insurance companies do not inspect these businesses and the agent’s knowledge of the risk is the basis used to underwrite them. Any information not disclosed when the risk is submitted usually remains unknown until a loss occurs. The agency that regularly withholds relevant information or that does not provide sufficient information will eventually have problems writing business with the company because of deteriorating loss ratios.
Management is one aspect of underwriting that affects every line of business. The length of time the risk has been in business as well as its financial stability must be reviewed. New businesses have a higher failure rate that varies by class of business. New businesses that have managers who have previous success at similar businesses have a better chance of success than ones that do not have the benefit of such experience. New franchise operations are usually more successful than non-franchise operations because the owners work with a successful business model and benefit from the franchisor's experience, support, and advertising.
Dun and Bradstreet (D&B) and other financial reports provide information underwriters use to analyze the risk’s financial condition. They provide background and public information on the business and its owners and officers, payment history, and details on any past bankruptcies or failures. The amount of information available varies because it is based on public documents and interviews with the risk’s management and its customers. Publicly held or large companies usually provide more relevant information than small ones. Smaller businesses (especially Limited Liability Companies [LLC's] or privately-owned companies) are usually less willing to share their financial information.
Loss analysis is another important underwriting discipline. Loss ratios, loss frequency, and loss severity must be evaluated because these risks usually generate small premiums and even one loss can generate an unacceptable loss ratio. The named insured usually provided this information in the past, but computer technology and capability make obtaining this information from the insurance company much easier than in the past.
Property underwriting always begins with the basic property elements of
Construction, Occupancy, Protection, and Exposure (COPE). This approach
is used primarily to evaluate the fire hazard, but it is also useful to
identify and measure other potential perils and causes of loss.
The procedure that AAIS uses to determine construction is very clear,
especially in cases where a building has more than one type of construction. A
building of mixed construction that consists of more than one-third combustible
material is classified as frame,
regardless of any other type of construction present. The construction is
non-combustible if two-thirds of the floor, roof, and exterior wall area are
non-combustible. If more than one-third of the floor and roof is combustible,
the building is considered combustible. A building is considered fire resistive
only when two-thirds of its floor, roof, and exterior walls are fire resistive.
Buildings with brick veneer over frame walls are treated as frame, not joisted masonry. The agent must
investigate and determine the type of construction as AAIS defines it.
Construction quality must be evaluated after the type of construction is
determined. If the building is old, any updates and renovations to it must be disclosed
and evaluated. This includes details on what was done, who did it, and when it
was done. The overall construction must be acceptable. The building design
itself should not create any loss issues, such as with windstorm or ice
buildup.
|
Example: Graber's Shoe Store is a small store in a
joisted masonry building in the downtown area. After it closes one Friday evening, the walls suddenly sag,
the roof collapses, and the building is destroyed. The construction quality is
determined to be inferior, which was an issue compounded by the weight of
multiple layers of roofing material that caused the loss. |
Risk eligibility is
primarily based on occupancy and the way the risk controls its exposures. The covered
business personal property’s susceptibility and damageability must also be
evaluated. Overall maintenance and housekeeping of the premises should be satisfactory,
and the risk should have appropriate loss prevention and control techniques for
fire, theft, and other perils or causes of loss.
This primarily addresses how well the building is protected against the peril of fire. It includes both external (public) protection and internal (private) protection.
External protection means the risk's access to public protection. AAIS uses three classes: Protected, Partially Protected, and Unprotected.
In addition, anything that might hinder a fire department’s response and access to the premises must be evaluated. Some examples are railroad crossings, dead-end roads, traffic congestion, rivers, bridges, tunnels, and other geographic or man-made obstacles or impediments.
Internal (private) protection consists of automatic sprinklers and other types of extinguishing systems, fire extinguishers, and anything else that can stop or control a fire and keep it from spreading. Exterior locks and burglar alarms must be suitable for the exposure and be able to prevent or control burglary and theft losses. Storm shutters and other windstorm protection should be provided in certain parts of the country.
Adjacent or exposing occupancies or conditions can increase the risk of fire as well as other types of losses from other covered perils or causes of loss. Underwriting exposures require evaluating the surrounding buildings and their occupancies and examining the other occupancies in the same building that the risk occupies. Exposures can be serious problems, are usually beyond the risk’s control, and cannot be corrected or eliminated. Construction, occupancy, and protection are issues the risk has at least some control over and that it can change or improve. However, the only option for the risk exposed to a serious condition might be to move!
In addition, certain geographic issues may have to be considered or evaluated. Areas prone to earthquakes, windstorms, wildfires, hail, and other geographic or climatic problems may affect the risk and must be considered when underwriting it.
Liability underwriting begins with the named insured. Every operation of every named insured is covered. The nature of each named insured's business must be understood and thoroughly evaluated.
Bodily injury, property damage, and personal and advertising injury loss
potential must be evaluated based on the nature of the risk’s business and the
condition of the premises or location where it conducts operations. Controls to
prevent accidents and the condition of the premises must also be evaluated.
Adequate lighting, good sight lines and visibility, and clearly marked and
accessible exits and entrances should be provided. Customers should not have
access to the entire premises. They should be restricted to certain areas to
keep them from injury. Slips and falls generate a sizeable portion of all
losses. They can be controlled by being aware of the facility’s conditions and
correcting housekeeping problems and damaged floor coverings as they occur or
on a regular, scheduled basis.
Operations and exposures away from the owned premises are more difficult
to control. In those cases, effective and thorough job-site supervision is
important.
In addition, any unusual contractual obligations or additional insured
requirements must be evaluated and addressed.
Several endorsements are available. It is important to determine the endorsements each company has available and is willing to use. For the most part, businessowners coverage cannot be broadened significantly but some coverage options are available that should be considered.
A good risk can quickly become a problem if the pricing is inadequate and does not match the exposures it presents. The most important single factor in pricing is properly classifying the risk. This means determining and using the correct classification, construction, occupancy, and public protection class at risk. If any of these elements is incorrect, the rating will be wrong, and no discretionary underwriting credit or debit will correct the error.
Accurate property insurance-to-value is another key factor. Replacement Cost (RC) valuation applies if the limit of insurance equals at least 80% of the damaged property's replacement value at the time of loss. Underinsured risks are underpriced risks. To discourage the undervaluing of risks a penalty is therefore applied that can reduce loss payments from a Replacement Cost basis to an Actual Cash Value (ACV) basis.
Once the basic rating is complete, options to apply discretionary credits, debits, and other filed company deviations may be available. Businessowners policies do not usually have the range of pricing flexibility available in other Commercial Package Policies. Credits or debits are available for only physical or management characteristics that the basic rating does not already reflect. This means that management experience, exposing occupancies and operations, and the risk's loss history could significantly impact the final underwriting judgment pricing applied.
Endorsement and change requests occur with every risk and businessowners risks are no exception. The agent must review and evaluate any changes requested before sending them to the insurance company. A request for a new named or additional insured, a new location, or a new coverage can suggest a change in operations that could affect the risk's continuing eligibility. On the other hand, requests to reduce coverage or to delete an insured can signal significant changes or downturns in operations that could result in bankruptcy or insolvency.
These are important opportunities for the agency to improve and solidify its relationship with the client. When the business is growing, the agent should take the time to apply risk management techniques and help the client evaluate its future coverage needs. This attention and time spent also keeps other agents (who view the growing operation as a potential new client) from gaining a foothold. On the other hand, a risk that experiences negative changes usually needs some insurance counseling. If it can survive the challenging times, the agent’s assistance could be the significant difference that cements the relationship and retains the insured’s business as it gradually returns to growth and profitability. In addition, the agent who recognizes the signs of financial problems early may be able to intervene and help keep them from getting worse.
Underwriting eligible risks is increasingly an agency function. It provides opportunities for both efficiencies and abuses that can affect profitability and relationships. Eligible risks deserve the best product available but that is only when the fit is right, pricing is adequate, and underwriting integrity is maintained.