(February 2019)
Underwriting the American Association of Insurance Services (AAIS) Agricultural Output Program involves examining several different areas. They begin with broad, general information and narrow down to specific issues. Various insurance companies may add to these or emphasize certain areas instead of others.
Ownership or management is an underwriting component that affects every line of business. This includes the length of time the risk has been in business as well as its financial stability. New businesses have higher failure rates that vary by class. New businesses that experienced, successful managers start have better chances of succeeding than similar risks that do not have the benefit of such experience.
One of the first areas underwriting considers is eligibility. Businesses that do not meet the program’s eligibility requirements must be disqualified and considered under other commercial insurance coverage forms or policies. Major problems arise when risks are written on the wrong coverage form or policy. Losses that ineligible risks generate distort program and class loss ratios. A given risk’s eligibility should be verified before it is submitted.
Eligibility is only the first step. The insurance company must also accept the risk, based on its underwriting requirements. Not every company writes every eligible risk because it may not have an appetite for a certain class of business. The insurance agent provides information about the risk via the application, loss runs, and other data. Insurance companies may or may not inspect a risk before they write it and the information the agent discloses about the risk is critical.
Dun and Bradstreet (D&B) produce different types of information to analyze a business risk’s financial aspects. This includes background and public information on the company, its owners and officers, payment history, and details on late payments, past failures, or bankruptcies. The amount of information available varies from risk to risk because it is based on public records and documents and interviews with the company’s management and its customers. Publicly held or large companies usually disclose significant amounts of relevant information. Smaller companies, especially Limited Liability Companies (LLCs) and privately-owned companies, usually provide much less information.
Financial issues can lead to moral and morale exposures that can destroy an operation.
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Example: The summer has been brutal. Farley Acres reviews its sales and costs figures and realizes it is not even breaking even. Its owners become desperate. A week later, they report a highly unusual type of fire that started in the main barn and spread unchecked to other property. |
Morale hazards are less obvious than moral hazards. However, they can be more insidious. The named insured becomes lackadaisical in monitoring potential loss situations.
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Example: Acme Farms becomes cash-strapped. It cancels its waste removal firm contract and takes its trash to the landfill "as needed." Dust and grease accumulate and becomes residue. Under-utilized employees replace the professional cleaning crew. Small losses begin to mount as a result of the change. |
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Example: Rhonda completely loses interest in her business after her daughter tells her she will not take it over when Rhonda retires. Devastated by the news, Rhonda cuts back her hours. Her employees notice the lack of interest and follow suit. Weeds and grass go uncut and trash is not removed. Repairs are not made. Debris accumulates. Teenagers discover they can make free use of some of Rhonda’s storage buildings. A fire breaks out one evening while a group of kids is having a party. They scatter, and the fire burns unchecked. Such a loss would be covered, but it is very likely that Rhonda’s coverage would be non-renewed. |
Major losses can and do occur once the insured is no longer overly concerned with continuing the business.
After identifying and evaluating exposures and hazards, the risk's loss history must be reviewed. This usually requires at least five years of information. Loss history should include details on the types of property losses, when they occurred, the peril that caused the loss, circumstances, amounts paid, and deductibles. It is also important to determine what the named insured did afterward to reduce the chance that the same loss might happen again. Loss frequency and loss severity are important issues that must be considered as part of the overall risk evaluation.
Developing accurate and complete loss information is important for another reason. It cements the relationship between the insurance agent, the named insured, and the insurance company and facilitates establishing an effective and affordable insurance program. Loss history is also used as part of the property rating formula when the deductible is less than $5,000. This is another reason why having at least five years of accurate and credible loss information is very important.
Property underwriting starts with C.O.P.E. This stands for Construction, Occupancy, Protection, and Exposure.
Evaluating the building or structure's susceptibility to loss or damage from covered perils is a critical consideration. Covered perils are extremely broad. This coverage form applies to more different types of property than most standard property coverage forms.
Fire is always the primary consideration. A wood or frame building is more susceptible to a fire spreading quickly and causing greater damage than a more fire-resistant building.
Buildings in areas subject to tornadoes, hurricanes, or high winds should be built to minimize the damage these perils cause.
Another construction feature to consider is the structure's age and the dates when its various systems such as the heating system, the roof, plumbing, and electrical systems were last updated or replaced. Any of these elements not properly or regularly maintained can increase the chance that a significant loss will occur or may encourage a morale hazard of hoping that a loss will happen so that it will “pay” for the replacement.
Construction quality is equally important. Inferior construction that does not meet current building codes is always a concern. Buildings must have an adequate number of properly constructed load bearing walls.
The building's occupancy and how it is used is another important consideration. This involves identifying the operations performed or conducted in it that could start or contribute to a fire spreading. The types of property, contents, processes, chemicals, flammables, and other combustibles that can add fuel to a fire must be examined carefully. Consider the following:
Fire is only one concern with respect to evaluating occupancy. Some operations, particularly meat related, involve property that is attractive to burglars or are targets for theft. Some operations have a higher exposure to loss or damage from vehicles or aircraft, such as being adjacent to a busy highway or an airport. Certain occupancies, such as alcoholic beverage bottlers and meat processing, may raise extreme or emotional social responses that increase the potential for vandalism, burglary, and arson.
Protection falls into two broad areas. One is public protection. The other is private protection.
Public protection
When considering public protection as it relates to fire, the crucial factors are the type of public protection available and the fire department's response time. Public protection ranges from the volunteer fire department available on an irregular and unpredictable basis to the fully paid municipal department available around the clock.
Water supply is another extremely important component. The source and amount of water, water pressure, and rate of flow are all important. The current public grading system evaluates and grades public fire protection on a scale of one to ten, with one being the best public protection available and ten being no public protection at all. It is critically important to understand the grading system’s components and the public protection grade that applies to the risk as part of the overall fire loss evaluation.
Private protection
Private protection refers to individual risk protective measures installed to eliminate or reduce loss. Evaluating fire requires examining and determining several such measures. Some examples are automatic sprinkler systems, standpipes and hoses, fire suppression systems, water flow alarms, water storage tanks, fire brigades, and an adequate number of the correct types of fire extinguishers.
The protection provided to deter, reduce, or eliminate theft, burglary, and other crime losses must also be considered. Other issues are the types of safes, burglar alarm systems, watchpersons, locks, fencing, lighting, and other protective devices to protect against these kinds of losses.
Evaluating loss potential from wind and hail requires evaluating what the named insured has done to minimize losses to windows, glass, and property in the open.
The construction, occupancy, and distance of exposing properties near the named insured's location must be examined closely. Exposures that have significant potential for fire or explosion affect the named insured and its ability to secure adequate property insurance coverage. This is particularly a concern in rural areas that may have little zoning.
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Example: A retail farm supply store with few hazards of its own appears to be an attractive insurance prospect. The underwriter then notices that it is adjacent to an agricultural chemical manufacturing complex. |
The point is that underwriting and risk evaluation must include evaluating the hazards and exposures that surrounding and adjacent operations present. This affects both the building and its owner or its tenants if the owner leases space to others. A dehydrating facility next to an agricultural equipment and machinery manufacturer is a much different risk than a dehydrating facility next to a feed manufacturer or grain milling operation. Exposure analysis must include evaluating firewalls, fire doors, construction of both structures, vegetation between the buildings, and different building heights.
The risk’s geographic location and the resulting increase in hazards is another major consideration in evaluating and underwriting the risk. A few common examples are:
Property values must be adequate. Property not insured to value causes several problems:
Despite properly classifying the risk and assigning deficiency points, pricing is always inadequate if the limit is inadequate. If the correct rate is 1.00 and the correct value is $1,000,000, the correct premium is $10,000. The premium is automatically 25% deficient if the limit used is $750,000.
If property not insured to value sustains a total loss, the named insured cannot resume normal operations quite as quickly. Financing the difference could be the difference between resuming operations and remaining closed.
Word gets around fast when the limit needed to resume operations is inadequate. In such cases, the named insured may seek contribution from the agent alleging that it gave improper advice. The named insured also usually tells its friends and business associates of the problem. In addition, the insurance company may decide to review the agent’s book of business.
The basic deductible is $5,000. Lower deductibles are available, but surcharges apply.
Underwriting controls pricing and attention to detail is required. The underwriter must properly classify and evaluate every aspect of the named insured’s operation and assign numerical points that accumulate and determine the appropriate premium to charge. The difference in pricing in this program is that every risk is "perfect" at the beginning. The underwriter then assigns deficiency points for any deficiencies. This is much different from the traditional rating that contemplates the average risk. Rather than providing credits for above-average risks, the process requires the judgment of how far a given risk is from being perfect.
There are numerous additional, supplemental, and optional coverages in addition to coverage extensions. Underwriters evaluate each risk to understand and determine its coverage needs. One risk may have little or no need for these coverages. Another may need one or more of them.
This coverage form automatically includes some inland marine coverages. The coverage it provides should be compared to the coverage that separate coverage forms and policies provide to be certain that coverage is the same. If not, the named insured may be subject to a significant gap in coverage for the sake of convenience.
This coverage form can be endorsed to cover a variety of crime coverages. The current coverages provided should be reviewed before replacing them with the ones this coverage form provides to determine if there are any significant gaps in coverage.
Numerous endorsements are available to appropriately modify this coverage form’s already broad coverage.
Related Article: AG 0100–Agribusiness Property and Income Coverage Part Available Endorsements and Their Uses
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Important dwelling underwriting characteristics include its construction, age, replacement cost and market value (or price when the named insured purchased it), and the type of security and safety devices installed in it. The number of family units and household residents, public protection class, type of heating and cooling, information on remodeling and renovations, type of roof, and general housekeeping also must be considered.
Other important considerations are custom dwelling features, special or unusual equipment (elevators or wheelchair lifts), and expensive property. Otherwise acceptable dwellings that have very high or very low values may be a problem for some insurance companies because they fall outside their rating norm. However, they may accommodate some dwellings with very low values if they do not have undesirable characteristics, such as being in a substandard condition or at an isolated, unprotected location.
However, different characteristics should be considered as a whole in order to determine overall eligibility. Higher value homes with adequate security and public protection (along with high deductibles) may be acceptable. A new home with a small square foot area may be acceptable. A 20-year old home with a moderate value and size may be undesirable because it is in a remote location and is heated entirely by portable kerosene heaters. Dwelling characteristics that fall outside of one underwriting parameter may be balanced by other considerations.
These factors are all necessary to determine both rating and underwriting criteria. Each insurance company sets its own underwriting guidelines for the type of dwelling and household personal property it is willing to insure.
This coverage form has nearly everything most insureds could possibly want. While it places much of the burden on the insurance company and removes it from the insured, it might not always be the right choice. When addressing this issue, the following points should be considered: