1. Discuss your understanding of Underwriter s Risk evaluation. The below summarizes of the evaluation process undertaken by the underwriter when a risk is proposed for insurance. 1. What is the probability of the activities of the insured causing an Insured Eventinjury or damages? 2. If such a thing happens, could the insured be liable in law to a third partytaking into account of where the insured is operating? 3. If so is the remedy damage? 4. If the insured could be liable in damages, who could sue? 5. What is the likelihood of them suing? 6. What are the likely costs of defending such an action or actions? 7. What level of damages could be rewarded? The 7 steps allow us to evaluate the risk from the insured. Step 1 looks at the physical hazards and the steps 2-7, the legal implications. Fate has a great hand to play. For 1
example if in Scenario 1 no one was hurt and the insured s factory was damaged, there would be no liability claims at all. With so much of the risk identification evaluation processes being subjective, it is important that all the possibilities are taken into account. The first stage of risk evaluation for the liability underwriters is assessing the physical hazard and considering the key exposures of the insured. In an ideal situation, the underwriter would visit each location and assess the potential exposure for themselves. This, however, is impractical and the underwriter has to rely on information supplied to them and on their previous experience of similar risks of that type. Underwriting process The underwriting uses the risk evaluation process and then apply the following underwriting process to that analysis. They seek to ascertain: i. How much of this risk is suitable for transfer by insurance does it have an element of fortuitousness? ii. The definition of the extend of the risk transfer : Its limits Its deductibles The cover iii. The premium for the risk transferred Common underwriting information for liability risks There are some standard piece/s of information that is required by all the liability risk. They are:- i. Details of who is seeking insurance Typical questions include the following: The name of the proposer in full The proposer business address These details are required for identification purpose and policy drafting. There is a need for full details of all subsidiaries or other entities, such as joint venture. If the insured is a partnership, the underwriter will want the full names of all partners. The liability policy usually applied to all premises at which the insured s employees are working. Consequently, it may be necessary to seek more information regarding other business locations beyond that of the head office/registered address. ii. Business of the proposer for which insurance is required. 2
This includes details of any work in the UK, offshore or outside the UK and is essential for rating purposes. A full description of the business is required, including a statement of the exact nature of the work or activities undertaken. It is essential that there is an adequate description for the purposes of the policy, as only claims arising out of the business as described, will be the subject of indemnity. General terms such as manufacturer, contractors and engineers are not adequate as these are generic terms potentially involving many and disparate activities. For this reason, a comprehensive description of the business is required, for example, leather goods manufacturer, building contractor and electrical engineer. This is necessary so that the risk is properly rated and the appropriate cover applied. Where a joint venture is to be covered, clarification of the business of the joint venture is necessary. This is because it may not follow precisely the nature of the parent insured. iii. Cover, limits and deductibles required This relates to: The cover and the extensions requested and The limits and excess/deductibles required The underwriter will require risk exposure information, together with details of the risk control measure in place to support the requested cover and limits iv. Previous loss history The past loss experience is an important feature in the assessment of every risk whether the losses were insured or not. It indicates the degree of care the proposer is exercising and the underwriter can compare the experience with similar risks. As excessive number of accidents or several costly claims will usually involve further investigation. A poor record in the past indicates the need for better preventive measure, but past experience is not necessarily a guide to the future. For example, the insured may have ceased production of a product that have previously produced claims, sold a problem subsidiary or instituted stringent risk management procedures. Depending on the business, a number of small accident may be more important to the underwriter than a single major one. This is because their frequency may indicate some abnormality in the physical hazard, a poor moral hazard arising out of unsatisfactory staff relations or simply a lack of or inadequate training. The underwriter can take steps to control the increased exposure such circumstances create. 3
An insurer may also ask a specific question regarding certain types of claim, for example occupational illness (such as repetitive strain injury, deafness, lung diseases) or pollutions and contamination claims. v. Previous insurance history An underwriter is interested in all aspects of previous insurance history. If a previous insurance has involved a declinature or the imposition of special terms, it is essential to find out all the details. A former insurer may have declined the risk or asked for an increased premium because of a poor claim experience, or there may have been an unsatisfactory moral hazard. Where the explanation given by the proposer appears inadequate, it may be necessary to seek information directly from the previous insurers vi. Details of any prosecutions relating to the risk proposed. The vast increase in legislation, regulation and Codes of Practice, particularly in the areas of health and safety, consumer safety, and damage to the environment, means that the frequency of prosecution in many times greater than it was even ten years ago. Insurers are interested in all prosecutions whether successful or not, because they shed light on the regulatory framework in which the proposer/insured operated and this can assist on the risk evaluation process. A positive answer would immediately put the underwriter on enquiry. They should seek full details of the nature of the offence, the consequences of the breach and most importantly, the steps taken to remedy the situation that gave rise to the action, as the basis for further consideration. There may be an indication of poor management or poor supervision and a full survey of the risk may be required. vii. Material Fact The principle of utmost good faith is the foundation upon which insurance contracts are built on. This applies equally to liability insurance. A proposer for liability insurance must disclose to the insurers all material facts about the risk offered that they know or ought to know. The duty of disclosure continues throughout the currency of the policy. Once insurance has been granted, the duty on the insured to advise the insurer of any change in the material facts arises at each renewal. For some liability classes, insurers require a renewal declaration. 4
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