C120 Underwriting Essentials - Learning Objectives Ch. 1-9 (Study summaries )

5LO3 (Pt. 2) Describe the types of exposures an underwriter considers when underwriting a commercial risk.

2. Products Liability: The products liability exposure arises from the possibility of injury to a third party from the use of a risk's product. There can be products liability exposures for many commercial risks. o Whether the product is consumable or not, the underwriter's analysis of a risk's products liability exposure should include underwriting details appropriate to any exposure, such as o the name and address of the risk; o the number of years it has been in business; and o its payroll and receipts and other measures of its financial well-being. • The underwriter's analysis should also include questions that more specifically concern products liability exposure. These would include warranties and packaging, as well as the product itself. • A commercial risk is generally an employer. Though most jurisdictions have some form of government-run workers' compensation insurance, an employer still faces an employers' liability exposure for employees in trades and classes not subject to the workers' compensation acts. o Employers Liability Coverage: Coverage for the legal liability imposed on an employer to pay damages to an employee injured by the employer's negligence. • This is not workers' compensation insurance, where special acts of legislature set out specifically the relationship between the employer and employees in certain circumstances and the formula by which awards in each case are computed.

6LO4 Explain why physical damage coverage and vehicle class is important to the underwriter's assessment of repairing damaged vehicles.

The CLEAR System: Physical damage insurance is rated on the Canadian Loss Experience Automobile Rating (CLEAR) system, which is based on loss costs and passenger injury. CLEAR is a method for classifying different models of cars for insurance purposes by using historical claims data, including collision, comprehensive, direct compensation—property damage, and accident benefits coverages. • Modifications to the Vehicle: The type or class of a vehicle affects the exposure to loss that the vehicle represents: Some vehicles cost more to repair, especially if they have a great deal of technology, than others or are more likely to be stolen than others. o Repairs and Unrepaired Damage--Aftermarket modifications are not limited to suspension systems, paint jobs, and stereos. The underwriter must also be alert to any vehicle damage repaired with aftermarket parts instead of parts from the original equipment manufacturer. • Making the Underwriting Decision: The answers to all the underwriter's questions about the applicant for automobile insurance will form a profile of the risk on which to base the underwriting decision. That profile will be compared against the parameters of the insurer's underwriting manual or line guide to help the underwriter decide about the risk.

1LO1 Explain the importance of an underwriter's role in an insurance company.

The Evolution of the Underwriter • An underwriter is an insurance professional employed to accept or reject risk on behalf of an insurer. • Investor of Capital • An underwriter is responsible for investing shareholder capital. • The risk of loss to an insurer is the risk that its capital may be depleted by a loss for which it must indemnify an insured. Therefore, in accepting or rejecting risk on behalf of an insurer, underwriters are in effect investing the insurer's capital in those risks they accept and declining to invest capital in those risks they reject. • Building a Profitable Portfolio • To build a profitable portfolio of such insureds, the insurer needs a strategic plan. That plan will involve identifying o the types of risk the insurer wants to pursue; o the lines of insurance it wants to underwrite; o the reinsurance it can arrange; o the amounts of insurance it will offer for risks of different types and sizes; and o the approach it will take to pricing, among other considerations.

2LO1 Explain how the underwriter analyzes the insurance policy

• All policies share a need for clear, unambiguous wording. • Insurance policies are governed by the legal principle of contra proferentem, or against the offeror. • An underwriter will often be asked to participate in a manuscript policy drafted by an outside party— perhaps an insurance intermediary, such as a broker or an agent. The underwriter must be able to read and understand the manuscript policy and be able to assess the coverage it offers to determine whether to participate in the risk. • To firmly grasp the principles that should be reflected in any wording, the underwriter should understand the general way in which policy wordings evolve. A wording begins with a need for coverage. • Policy wordings are also shaped by legal considerations over which the insurer has no control. If a Canadian insured has exposures in another country—say, the United States or Great Britain—the policy wording must somehow reflect the distinct characteristics of the US or British legal system. • Insurance as a contract is a point worth emphasizing, and a brief review of contract law will provide useful context for any discussion of insurance policies. • A contract has the following five elements: 1. Agreement 2. Capacity of parties to contract 3. Consideration 4. Genuine intention 5. Legality of object • The law in Quebec is based on the Civil Code of Québec. Inevitably, there are differences in the ways that contracts are described in Quebec and in the rules that govern them. The following are the four requisites to a binding contract in Quebec: 1. Consent 2. Capacity to contract 3. Cause of contract 4. Object of contract

3LO2 (pt. 2) Explain why it is important for an underwriter to know about an applicant's loss experience.

• An accurate picture of an applicant's loss experience is especially challenging to obtain in commercial insurance. • In seeking out and analyzing a comprehensive loss history for any risk, the underwriter must always remember two points: 1. 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. 2. The amount of a loss is less important than the circumstances of a loss. Those circumstances may reveal that mere good luck prevented a smaller loss from being a much larger one. • The real issue is continuity of insurance. The applicant's record with previous insurers is useful information in much the same way as is a job applicant's record of employment. Just as with an employment record, an insurance record allows inferences to be made about the applicant's stability, creditworthiness, and general character, in short, the moral hazard he or she may represent.

7LO2 Explain the ratemaking process.

• An actuary applies specialized knowledge of the mathematics of finance, statistics, and risk theory to problems faced by insurance companies, pension plans, government regulators, social programs, and individuals. • A rate will be adequate (the rate charged for a particular class of risk should be sufficient to cover the anticipated losses and expenses associated with that risk) when two conditions occur: 1. The actuarial forecast of future losses based on past losses is accurate for the population. 2. The sample represented by the book of business written by a particular underwriter or insurer is representative of the population. • Considerations an actuary will run through: o Classifying risk based on the types of objects of insurance, the hazards of exposure, or both o Determining the number and nature of the rating classes o Selecting the proper measure of exposure o Gathering loss statistics o Predicting future losses based on past losses o Calculating the pure premium from the predicted losses o Calculating the total premium o Calculating the premium rate or unit cost • Ratemaking—classify risk > determine rating classes > select proper measures of exposure > gather statistics > predict future losses > calculate pure premium > calculate total premium > calculate the premium rate or unit cost.

9LO1 Explain how different internal circumstances impact the underwriter's role

• An easy way for underwriters to adhere to the internal environment of their organization is to follow the line guide that has been established by their employers to direct their work. o Many decisions made daily by underwriters are explicitly addressed in the insurer's line guide or procedure manuals. o To make decisions about matters not directly addressed in the insurer's manuals, underwriters must develop and apply judgment. • Centralized Insurers: Insurers who practise a centralized approach tend to retain the bulk of the underwriting authority in the head office or for supervisors or managers in the branch. o Very detailed and structured line guides are created for underwriters, which allow for much less discretion when accepting risks or setting terms. • Decentralized Insurers: A decentralized insurer gives much more autonomy and discretion to its underwriters. o The line guide or procedure manual may be less detailed than that of centralized insurers, which means underwriters for decentralized insurers tend to refer decisions to their superiors less frequently than their centralized counterparts.

3LO1 (pt. 2) Explain the significance of the information provided about the applicant and other parties with an interest in the insurance coverage.

• An underwriter will check the effective and expiry dates the applicant has requested and confirm that the insurance, if written, would indeed take effect at a future date. o Signatures: Many insurers do not have standard application forms, other than for automobile insurance, where an approved form must be used by law. o Unsigned applications: An unsigned application is common. As insurance has become increasingly automated by computers and call centres, more applicants have come to apply for insurance over the telephone or by using the Internet. • The employment status of a personal-lines applicant is of interest for the light it sheds on potential moral hazards. Even if an applicant is employed full-time at a recognized company, the underwriter should look at how long the applicant has been employed there. The equivalent to years employed for a commercial risk is the number of years that the commercial risk has been in business. • Another condition worth investigating is any discrepancy between the applicant's occupation and his or her total insurable value, or TIV.

6LO2 Describe the automobile insurance application and why this information is important to the underwriter.

• Automobile Application Overview: On the application, the underwriter must identify all persons who are to be insured under the policy. When more than one person will be insured, the underwriter should ascertain the relationship between them. . But caution flags should appear for an underwriter who apparently receives an application from an elderly woman for insurance on the vehicle she uses to go to church each Sunday, yet the vehicle she wants to insure is a pickup truck. • Automobile Application Details: An underwriter will want to learn something about the applicant—the person or corporation that would be covered under the policy. The underwriter could begin by finding out whether the applicant for automobile insurance is already a client of the insurer • The Leased Vehicle: As an owner of automobiles under long-term leases, a lessor has a legal responsibility under compulsory insurance laws to insure them. Generally, a lease agreement makes the lessee responsible for insuring the leased vehicle under an owners' policy, with the lessor shown on the policy as the owner of the vehicle and the lessee added as an additional insured under the endorsement that grants the lessee permission to rent or lease. o Vehicle Maintenance--Along with the vehicle's use, the underwriter should also be concerned with its maintenance. A well-maintained vehicle is less likely to fail its driver and thereby be involved in an accident than is a poorly maintained vehicle. The most important concern is whether maintenance is done regularly

5LO2 (Pt. 2) Explain how the Canadian legal system impacts how liability insurance is handled in Canada.

• Civil law may impose liability in two ways: 1. Tort o A tort is a legal wrong arising from a duty fixed by law. o For insurance purposes, the most common torts are negligence and nuisance: • Negligence is the failure to use the degree of care expected from a reasonable or prudent person. • In terms of nuisance, individuals may allege only private nuisance. Such legal actions are rare. 2. Breach of contract o A breach of contract occurs when one of the parties to a contract fails to fulfill one of its obligations under the contract. o Liability insurance usually has only limited application to breach of contract. o A contract is a legally binding agreement between two or more persons for a particular purpose.

7LO3 Describe how ratemaking is applied.

• Class rating: Class rating is used when statistics can be gathered on a large number of risks that share common characteristics. o For example, the same basic risk factors are either present or absent for most automobile insurance risks. The same is true for homeowners and small business insurance. This makes it possible to statistically measure the claims experience for each risk factor, something that is not possible for more complex risks. • Schedule Rating: Schedule rating is used when the body of statistical data is too fragmented to permit class rating. o One of the best examples of such fragmented statistical data may be found in commercial property insurance, where the number of risk characteristics is so large that the cells in the statistical plan do not contain enough data to provide a credible basis for estimating future claims costs—there are just too many possible variations of perils and hazards.

2LO4 Identify the skills an underwriter needs to underwrite effectively.

• Components of the Underwriter's Toolkit: o The Environment: To understand a risk, an underwriter must be able to place it in appropriate contexts. The largest context in which to understand a risk is its political, social, and economic environment. o The Legal System: An underwriter must have a sound understanding of the legal system that governs all parties to the insurance contract and to any losses that might be incurred under that contract. o The Business: The business in this context refers both to the insurance industry and to any number of industries that produce risk for the underwriter to accept or reject. o The Product: Underwriters should understand the legal aspects of the insurance contract and be familiar with the many types of policies that may express a contract of insurance. o The Risk: All the other categories of knowledge discussed serve as context for perhaps the most important category: the risk itself. The underwriter needs to understand as much as possible about the applicant and about the perils and hazards the risk faces. o Other Skills: Underwriters need both technical skills and people skills. • Generally, technical skills are tangible, measurable skills uniquely associated with a particular job. • People skills are intangible skills that are hard to measure and generally useful in any job: o Technical o Analytical o Communication o Organizational o Other Requirements: • Cooperation with other professionals both inside and outside the insurance company is made possible by a combination of communication, knowledge, and technical skills required to know what is needed from these other professionals, obtain what is needed, and make sound use of it afterward. • Among the many valuable personal characteristics in an underwriter, perhaps the most important is curiosity.

4LO2 Explain how COPE is applied in assessing a property risk for a singlefamily dwelling.

• Construction: The construction of a house has to be done to acceptable building codes. In assessing an application for insurance, an underwriter would want to review the following items regarding the construction of the house. • Size of dwelling • Type of construction • Type of heating • Age of dwelling • Under construction or renovation • Concealed spaces • Occupancy: An underwriter will examine various aspects about the occupancy of the single-family dwelling. The more people, the greater the amount of activity that could lead to a fire or other insured loss. Things to consider include: • Number of people in the dwelling • Number of kitchens • Long- or short-term lease • Tenant insurance • Owner visits • Home business • Condition of the dwelling • Vacant or unoccupied • Common or special hazards

4LO3 Explain how COPE is applied in assessing a property risk for a business.

• Construction: The underwriter will review the following aspects about the construction of the building in which any commercial operation is housed: • Building age or location • Municipal bylaws • Construction • Construction materials • Heat source • Power loss contingency • Occupancy: The occupancy of the risk is the business. Not all commercial businesses are the same, so the underwriter can look into the following areas to better understand the operation: • Real business • Hours of operation • Storage arrangements • Housekeeping and maintenance • Customers • Seasonal operation times • Special hazards • Flammable liquids

2LO3 Explain the purpose of the sections commonly found in insurance policies.

• Coverage Summary: This part of the policy usually consists of a separate page and is sometimes referred to as the declarations. It includes the following information: o The parties to the contract o The commencement date, term, and expiry date o The premium and rate o The amounts insured • Insuring Agreements: The insuring agreements section states the following: o The subject matter of the insurance—description of the property covered o The perils insured against o The exclusions o The circumstances under which the insured may receive the proceeds of insurance • Statutory Conditions/Quebec General Conditions: Statutory Conditions/Quebec General Conditions are applicable to automobile, accident and sickness (A&S), and fire insurance policies. o Policies may contain both Statutory Conditions and Policy Conditions. Policies in Quebec contain only General Conditions. • Policy Conditions: While the policy conditions are sometimes considered as part of the insuring agreements, they are referred to separately to draw attention to them. o Certain former Policy Conditions have, over time, become Statutory Conditions but statutory conditions do not apply to every class of insurance. o Policy Conditions are provisions that state the rights and duties of the insured or insurer. • Signature Clause: This clause is found immediately following the insuring agreements or the conditions. o A policy is signed either under hand or under seal, but the former method is more general. o There is for practical purposes no difference between the two methods. o The policy is signed by the insurers only; the insured's signature is not required.

6LO3 (Pt. 2) Explain how the use of a vehicle will influence the underwriter's judgment.

• Exposures: Bearing these underwriting and rating classes in mind, the underwriter will most want to answer this question about the use of an applicant's vehicle: What kinds of exposure to loss are posed by the use of the vehicle? The underwriter will answer that question by taking into consideration the following factors: o Kilometres per Year--Generally, the more kilometres that a vehicle is driven each year, the greater the exposure. o Business or Personal Use--Sales professionals often find themselves in unfamiliar areas when they go to visit a new client or prospect. When a driver is not familiar with the area, the possibility for loss is greater than if the territory is familiar. o Passengers--A real estate professional might carry prospective buyers in a car insured for business use, but he or she might also carry passengers in a car insured for personal use; for example, in a carpool arrangement. Whenever a vehicle carries passengers, there is a greater liability exposure. o Highway or City--All vehicles are more at risk in the city because of higher traffic volume. o Vehicle for Hire--Automobile policies generally allow insureds to receive compensation for gasoline or mileage from passengers they carry, as in a carpool arrangement; but compensation for hire is typically excluded. o Personal or Commercial--When an insured works in a trade, an underwriter must ask questions about use, especially if the insured has a commercial vehicle. • Other Vehicle Use--The purpose of the non-owned automobile policy is to protect an employer when employees operate, on behalf of the employer, vehicles not owned by the employer.

8LO1 Explain why it is important for underwriters to have good, strong professional relationships with both internal and external stakeholders.

• Good relationships can make underwriters' jobs easier by giving them access to information that can be valuable or even necessary to properly underwrite. o They help give underwriters perspective by understanding the roles of other insurance professionals, which can help them proactively prepare for a conversation. • Underwriters should nurture good relationships with the following groups of insurance professionals: o Other underwriters o Reinsurers o Brokers o Agents o Risk managers o The claims department o The actuarial department o The loss control department o The legal department

5LO2 Explain how the Canadian legal system impacts how liability insurance is handled in Canada.

• Governmental power in Canada is divided by the Constitution Act between the federal, provincial and territorial, and municipal governments.The responsibilities assigned to each level of government include the following: • Federal: Military affairs, foreign relations, the national currency, the postal service, financial regulation of banks and insurance companies, among others. • Provincial and territorial: Property rights, education, health care, and the regulation of the insurance industry, among others. • Municipal: Police, fire, water, and other services that municipalities are authorized by provincial governments to provide or perform within their boundaries. • There are two systems of civil law in Canada, arising out of Canada's historical roots in the cultures of England and France. 1. In Quebec, the Civil Code of Québec covers every area of law, from birth certificates to insurance contracts, from corporations to mandates, from mortgages to wills. 2. In other provinces and territories, the system of common law applies.

1LO3 Explain how underwriters use the line guide to assess and decide upon a risk.

• If the line guide expresses the insurer's strategic plan (or an important part of it) and the underwriter is to implement the strategic plan, then the underwriter's job may be described in one sense as applying the line guide. • An underwriter responsible for underwriting individual risks is known as a file underwriter. An underwriter responsible for groups of risks is known as a portfolio underwriter. • Applying the line guide most often means using its criteria to assess whether to accept or reject a risk and to determine what terms might make a risk acceptable. In general, an underwriter might approach a risk with questions around the following: o Length of time in business o Type of loss o Perils o Physical hazards o Moral hazard o Required information • An insurer's business is to earn premium while minimizing loss. That need for premium imposes a bias on the underwriter to try to write as much business and to accept as many risks as possible. • Generally, then, an underwriter will reject a risk only if forced to by one or more of three considerations: 1. The risk is of a class not permitted by the line guide or in some other way falls short of minimum requirements specified in the line guide. 2. Market conditions or competitive considerations require it. 3. The risk is, on its own merits, too flawed to be accepted, and it is not possible to negotiate terms on which the risk could be made acceptable.

8LO2 (Pt. 2) Explain why it is important for underwriters to maintain good relationships with industry organizations and customers.

• In a competitive marketplace, it has become increasingly important for businesses in all sectors of the economy to focus their attention on the customer. o Since underwriters serve not one customer but many, one of the particular challenges is not only to focus on the customer but to identify the customer. o With this understanding of customer in mind, underwriters should consider all the people they deal with as customers and behave accordingly. • In support of cooperation among parties, almost all insurers in Canada subscribe to IBC's Agreement of Guiding Principles. o This agreement guides insurance practice concerning multiple insurance policies where they depart from statutory specifications, where the law is unclear, where gaps exist in the law, or in unusual or disputed circumstances. o For the Agreement of Guiding Principles to be effective, organizations need to have clear and healthy communication in problematic circumstances to ensure mutually satisfactory outcomes. o Where there is tension between organizations, perhaps arising out of past disputes, it may be much more difficult to resolve disputes.

2LO2 Describe the unique features of insurance contracts and why it is important for the underwriter to be aware of these features.

• Insurance policies cannot be taken out on just any person or property. An insurance buyer must have an insurable interest in the object of the insurance. o Insurable interest is an interest that the insured must have in the subject matter of the insurance purchased so that if the event insured against occurs, the insured will suffer a pecuniary loss. • Insurable interest prevents people from profiting from others' loss. o Closely related to that principle is the principle of indemnity, which says that insured people should not profit from their own loss. o Indemnity is a contract, expressed or implied, to repay in the event of a loss. The insured neither gains nor loses. • In any contractual relationship, the parties are expected to be honest. But the insurance contract requires a still higher standard of honesty. o The parties are expected to contract not merely in good faith but in utmost good faith. o Utmost good faith is a legal principle calling for the highest standards of integrity on the part of the insured and the insurer.

6LO1 Describe the process for underwriting automobile risks

• Mechanical Underwriting: Automobile insurance is the most heavily regulated line of property and casualty insurance in Canada. While each province and territory has its own unique characteristics regarding auto insurance regulation, some features are common: • The policy forms for automobile insurance are government approved. • Compulsory insurance laws make it mandatory that every automobile owner have access to insurance. • Underwriter's Skill and Judgement: Given the degree to which government regulates automobile insurance, it might seem that underwriting automobile insurance is essentially mechanical and not really underwriting at all. It is certainly necessary to apply skill and judgment in commercial automobile insurance. • The Registered Owner, the Actual Owner, and the Drivers: The underwriter should watch for the possibility that the registered owner of the vehicle may not be the actual owner of the vehicle. Information about who will be driving the vehicle to be insured is critical to the underwriter, since the greatest exposure to loss will occur when the vehicle is being driven. • Driver Experience: Another important piece of information for the underwriter is the length of time that the driver has been licensed to drive—in particular, the length of time the driver has been licensed to drive in Canada.

4LO3 (Pt. 2) Explain how COPE is applied in assessing a property risk for a business.

• Protection: In many ways, assessing protection for commercial lines is the same as assessing protection for personal lines: Is the risk located in an unprotected, semi-protected, or fully protected area? • Fire protection • Fire alarms • Fire extinguishers • Human element • Exposure: The exposures faced by a commercial risk are underwritten much like the exposures faced by a personal risk. There can be variations, though, so the underwriter should consider the following factors when looking closely at the commercial risk: • Proximity to other risks • Natural hazards

4LO2 (pt.2) Explain how COPE is applied in assessing a property risk for a singlefamily dwelling.

• Protection: With narrower ranges of occupancy and smaller budgets, personal risks tend to be less often or less extensively equipped with private fire protection. For a single-family dwelling, then, the most important aspect of protection may be public protection. Some considerations include the following: • Protected location • Sprinklers • Fire alarms • Exposure: Considering the following factors should give the underwriter some sense of the likelihood of loss to the applicant from risks in nearby dwellings or from nearby natural hazards: • Detached or not • Location • Flood plain • Sewer backup

1LO4 Explain why pure risk is insurable but speculative risk is not.

• Risk is the chance of loss. Specifically, the possible loss or destruction of property or the possible incurring of a liability. Sometimes referred to as the subject of an insurance contract. • Pure risk entails a chance of loss but no chance of profit. It is an insurable risk. • Speculative risk is an insurance term for a situation where the possibility of either a financial loss or a financial gain exists, such as in purchasing shares, or betting on horses. Speculative risk is usually not insurable, unlike pure risk. • A basic test to determine if something is insurable is to ask the following questions: o Is there a chance of loss? o Is there a chance of profit? • Types of Insurable Risks o Many kinds of risks exist, and there are also many kinds of insurance. These are generally divided into three broad categories: • Personal risks • Property risks • Liability risks • These categories of risk are usually grouped into three classes: 1. Personal lines: The insurance relating to individuals in their private capacity. Included are the home and its contents, automobiles, seasonal dwellings, boats, jewellery, furs, vacation travel insurance, major medical and surgery costs, and so on. 2. Commercial lines: The insurance relating to commercial operations, such as stores, professional offices, trucking operations, construction vehicles and contractors, and many other similar businesses. 3. Special risks: The insurance related to marine exposures, aviation, and high-risk industrial operations.

8LO2 Explain why it is important for underwriters to maintain good relationships with industry organizations and customers.

• Some of the industry organizations that benefit underwriters in their work and education include the following: o Underwriters Laboratories of Canada (ULC): An independent, not-for-profit product safety testing and certification organization; it tests products for public safety and evaluates them for their makers. o Insurance Bureau of Canada (IBC): An organization engaged in, among other things, working with the federal, provincial, and territorial governments on the legislative framework within which property and casualty insurance is practised. o SCM Risk Management Services: Provides risk information, loss prevention and control services, commercial inspections, actuarial and other specialized risk management, and insurance consulting services. o Insurance Institute of Canada (IIC): The premier source of professional education and career development for the country's property and casualty insurance industry.

9LO2 Explain how external trends impact the underwriter's role.

• Technology: As information dissemination has accelerated, so has the overall pace of business. Companies are now able to connect and integrate operations on a global level. • Global Influences: Insurance is a global industry. Canadian-owned insurance companies account for approximately one third of the Canadian industry's annual premium volume. The rest is divided in varying proportions among foreign insurers. Like many other industries of scale, the Canadian insurance industry is strongly influenced by its American counterparts, as well as those in Europe. • Social Trends: With increased mobility comes a heightened awareness of individual rights and entitlements. A result of that heightened awareness has been an increase in litigation in Canada. • Privacy Concerns: The many benefits and choices that technology has made available to Canadians has been accompanied by concerns for the right to privacy. There are amplifying concerns surrounding the safety, security, and improper sharing of personal information. • Judicial Trends: Underwriters should pay attention to judicial trends and court decisions regarding novel situations, as they will not only set precedent for future proceedings but also impact what underwriters may need to consider when making decisions.

5LO1 Explain what third-party insurance is.

• The Challenge of Liability Insurance: In a court of law, the applicant is legally liable—that is, responsible—for another person's loss or injury. o A court of law decides such a matter when the applicant is sued by another person or organization, and the dispute goes to trial. • Third-Party Insurance Coverage: Another important consideration for a liability underwriter is whether a third party would be added as an additional named insured to a policy the insurer would issue if the risk were accepted. o Once third parties are added as additional named insureds to a liability policy, they effectively cease to be third parties and instead become first parties to the contract. • Underwriting Liability Insurance: Liability underwriting requires more speculation than property underwriting. o To speculate intelligently about exposures, a liability underwriter must follow the same sorts of developments in law and social trends that influence judges in their decisions. Therefore, one of the primary considerations for a liability underwriter is whether the exposures to loss presented by a given applicant are unusual.

6LO1 (Pt. 2) Describe the process for underwriting automobile risks

• The Underwriting Process for Automobile Risks: For any automobile insurance risk, the underwriter should be sure to do the following: o Review the automobile insurance application. o Learn about the applicant. o Identify the lessor or lessors of any leased vehicles. o Examine the applicant's relationship with the broker. o Ask about the use of the vehicle. o Identify the type or class of vehicle. o Ask about any aftermarket modifications that might have been made to the vehicle or vehicles. o Find out about any repairs that might have been made to the vehicle or vehicles. o Identify and distinguish between the registered owner and the actual owner of each vehicle. o For each vehicle, establish the driver's age and investigate his or her Canadian driving experience. o Look for some consistency between the age and other characteristics of a driver and the type of vehicle that he or she will be driving and for which insurance is sought. o Investigate the maintenance planned for the vehicle or vehicle. o Make the underwriting decision.

4LO2 Explain why it is important for an underwriter to know about an applicant's loss experience.

• The factors to be assessed in any physical risk are construction, occupancy, protection, and exposure or COPE: o Construction: It usually includes a description of the types of material used in the walls and roof of the applicant's building; it may include the size of the building, its age, the number of storeys, and the type of heating system and fuel. o Occupancy: It refers to the use of the property by its occupants. It includes the number of occupants, if there are more than one, along with a description of the operations of each, the space each occupies, the hazards associated with each occupancy, and any measures taken to reduce those hazards. o Protection: It includes both public and private protection. Public fire protection is described in terms of the town grade assigned to each municipality by the Fire Underwriter's Survey (FUS). Private protection includes sprinklers or other extinguishing systems, fire brigades, and fire alarm systems. o Exposure: It refers to the chance that the applicant will suffer a loss as a result of proximity to one or more other risks or potential causes of loss to the applicant.

5LO4 (Pt. 2) Explain the process for underwriting personal risks.

• The limit of liability of a personal liability insurance policy is not generally more than $1 million or $2 million. o But in an increasingly litigious society, there is both a greater propensity to sue and a rising trend in the amounts of damages awarded against someone who is found legally liable for harm to another. o A personal umbrella policy offers three main benefits in addition to those available under ordinary liability insurance (the primary policy): 1. Limits of insurance in excess of those in the primary policy 2. Drop-down coverage to cover certain exposures that the primary policy does not 3. Territorial limits wider than those in the primary policy • An underwriter must continue to pay attention to new sources of liability exposure arising from changes in the judiciary or in the broader society. One aspect of broader social change is technological change and the rise of e-commerce.

1LO2 Describe the parameters set for the underwriter in a line guide by the insurer

• The line guide specifies the criteria that an underwriter must consider when accepting or rejecting a risk. • These criteria, along with the general operating policies of the insurer, will help determine how the underwriter assesses the risk. • In particular, the underwriter will review the following: • Licensing • Types of Business • Lines of Insurance • Territory • Capacity o The occupancy of the risk o The level of public fire protection o The type of construction • Reinsurance • Pricing

3LO1 Explain the significance of the information provided about the applicant and other parties with an interest in the insurance coverage.

• The name on an application form might seem to be merely a formality, so that the underwriter will know in what name to have a policy produced should the applicant become an insured. o In commercial lines or business insurance, it can be even more important to investigate the name or names on the application. As well, many business insurance policies are written in the names of corporations rather than people. o Additional (named) insureds are 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 does an additional insured but also more responsibilities. • Mortgagees and other lenders who have agreed to the use of insured property as security for their loans have insurable interests in property insured, in that they may suffer monetary loss should property be damaged or destroyed and borrowers fail to repay their debts. o Credit checks are commonly done for commercial risks. Credit checks are becoming increasingly common for personal risks, too. 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 can also be a source of information and may help the underwriter to gain more insight on the applicant and the risk. From a broker or an agent, the underwriter may well find that a seemingly negative fact about the risk should be considered a positive fact. o Often, a broker or an agent will personally inspect a risk and include a report with the submission to the underwriter

9LO2 (Pt. 2) Explain how external trends impact the underwriter's role

• The relationship between the demand for insurance and the state of the economy is dual in nature. o When the economy is thriving, there may be more merger and acquisition activity. o When the economy deteriorates, more people and businesses find themselves under financial pressure as their incomes drop. In turn, insurers often find that the frequency of claims increases in difficult economic times. o The state of the economy in Canada is affected in large measure by the state of the global economy, perhaps more so than is true of other national economies that depend less heavily on exports than does the Canadian economy. o One of the most obvious examples of law that affects underwriters is the statutory requirement in all provinces and territories that drivers have automobile insurance. o In many ways, insurance reciprocals operate the same way as insurance companies—they issue policies, charge premiums, and pay claims. Participation in a reciprocal is a development in the underwriter's environment that they must be aware of. o There are more extensive statutes governing pollution control and the emergence of environmental regulation as an independent field of law. o The laws that most immediately affect the health and safety of citizens indirectly affect the expenses of insurers. That indirect effect will be felt by underwriters who must take such expenses into account in accepting or rejecting risk and setting premium and other terms for the risks they accept. • Matters of public interest usually comprise more than one element of the underwriter's external environment. Effective underwriters will closely monitor the developments of the global economic spectrum and be ready to adapt their business practices to maintain efficacy.

5LO4 Explain the process for underwriting personal risks.

• To assess the liability exposures posed by an applicant for personal insurance—say, a dwelling owner—a liability underwriter will ask questions about the owner's lifestyle, occupation, and hobbies. • Answers to these questions will help the underwriter to properly assess the risk. o Home Business: Does the applicant run a home-based business, or does the applicant play host to others who do? A dwelling owner may hold gatherings in the home for the purpose of selling kitchenware or candles or cosmetics. o Children: The underwriter should know if the applicant has children at university or college. A student's activities while away at school might cause harm to another for which the applicant might be held liable. o High-Profile Individual: Politicians, authors, athletes, entertainers, and other well-known people can be easy targets for disenchanted constituents or fans or others who might seek damages in lawsuits both frivolous and otherwise. o Hobbies: Does the applicant do volunteer work? This could present an exposure, especially if the applicant volunteers to work with children.

5LO3 Describe the types of exposures an underwriter considers when underwriting a commercial risk.

• Two of the more widely underwritten types of liability exposure are premises liability and products liability. 1. Premises Liability: Premises liability arises out of the risk's use of physical premises, such as a building, the land on which it stands, or both, from an owner, a landlord, or a tenant. • Trespasser: A person who wrongfully enters onto someone else's land with neither the right nor permission to be there. • Licensee: A person who has permission to enter a premises for his or her own purposes. • Contractual Entrant: A person who enters onto premises under a contract with the occupier—for example, a hotel guest or a theatre-goer. • Invitee: A person who is expressly or impliedly invited onto the premises for some purpose involving economic or potential economic benefit to the occupier of the premises. For example, a customer entering a store to make a purchase.

3LO2 Explain why it is important for an underwriter to know about an applicant's loss experience.

• While an applicant's past losses can be revealing about the subject of insurance—the applicant—they can also provide a clearer picture of the object of insurance, that is, the property risk. • The loss may also reveal information about the applicant—perhaps it was the applicant's attitude about safety that allowed the fire to occur. • Assessing all the factors will help the underwriter to decide whether to accept or reject the risk and at what price or other terms he or she might be willing to accept the risk. o Confirming "no losses": If an applicant indicates none in the space for loss experience, the insurer's procedures or the underwriter's own judgment may still lead to checking industry databases or a simple Google search of the applicant's name. o Denied claims: A denied claim costs the insurer more than a claim never made, since the insurer still incurs expenses in establishing a file and adjusting the claim. More important, a denied claim might identify a moral hazard in the applicant's habit of seeking cash from an insurance company for illegitimate claims.

6LO3 Explain how the use of a vehicle will influence the underwriter's judgment.

• Personal Use and Commercial Use: Personal use may be broadly defined as the use of an automobile for pleasure. Automobiles that are put to personal use tend to be private-passenger cars. Examples of personal use include using an automobile to take children to school or to go to the supermarket. Commercial use may be broadly defined as the use of an automobile in the course of commercial activity. o Major Automobile Classes--For rating purposes, automobile risks are usually divided into the following major classes: • Private-passenger vehicles (pleasure, work, and business use) • Commercial vehicle (trucks, delivery autos, and vehicles while being used for ridesharing) • Recreational vehicles (motorcycles, snowmobiles, all-terrain vehicles [ATVs]) • Garage risks (road hazard and dealership risks) • Non-owned automobiles

7LO1 Explain how the price for insurance products is set.

• To understand how much money is sufficient for an insurer, think of that money as filling a bucket, with all required payments to be made by taking money from the bucket. o Premium o Pure premium o Acquisition cost o Commission • An underwriter is an investor of shareholders' capital. o If the shareholders are to receive a return on their capital—value for their investment—then the premium the underwriter charges for exposing the shareholders' capital to risk must include some allowance for profit. o Moreover, poor underwriting results have an impact on the insurer's surplus—that is, the excess of the insurer's assets over the sum of its liabilities and shareholders' capital.

9LO1 (pt. 2) Explain how different internal circumstances impact the underwriter's role.

• When a merger or an acquisition of entities has occurred, it is important to consider the differing corporate cultures. o Where the companies involved in a merger or an acquisition are similar in corporate culture (for example, similar in the classes of business pursued, aggressive or conservative in pursuing and accepting risk and in the terms under which they would accept risk, and similarly centralized or decentralized), the merger may pose relatively few obstacles beyond the purely logistical task of eliminating and combining branch offices and reallocating staff. • Sales or Underwriting: Another aspect of corporate culture for an insurer is the extent to which it is sales-driven or underwriting-driven. That may depend in part on the classes of business an insurer chooses to pursue. • The Parent Culture: Canadian insurers compete in the market with subsidiaries or branch offices of insurers based in the United States, Great Britain, Germany, Switzerland, France, Japan, and several others. The differing economic, political, and social conditions expressed in each country will result in different approaches to insurance.