Underwriting

Underwriting is the process insurers use to determine the risks of insuring your small business. It involves the insurance company determining whether your firm poses an acceptable risk and, if it does, calculating a fair price for your coverage.

An insurance underwriter is someone who manages the insurance underwriting process. As an insurance company employee, an underwriter represents the insurer, not the customer, in the purchase transaction.

Insurance underwriting is central to all forms of insurance. By definition, insurance involves individuals or businesses transferring their risks to an insurer, which charges a fee to provide financial assistance should a loss occur.

However, before an insurance policy is provided, insurers must understand the nature and scope of the level of risk they’re taking on, which requires underwriting. Underwriting applies to all forms of small business insurance, including:

• General liability insurance
• Business owner’s policy (BOP)
• Umbrella / excess liability insurance
• Workers’ compensation insurance
• Commercial auto insurance

Underwriting in insurance involves assessing the factors that determine a potential customer’s risk profile. The specific factors depend on the type of insurance you’re applying for. These are the most common factors:

• Type of business
• Age of business
• Financial characteristics (size, sales, assets)
• Prior financial behavior (credit score, bankruptcies)
• Condition of property
• Prior insurance claims
• Safety / security systems
• Loss-prevention practices

Once an underwriter understands these factors, he or she will seek to determine whether your company has risk factors affecting your desirability as a purchaser of a specific insurance type. For example:

• If you’re buying general liability insurance, have you been sued before and for what reasons?
• If you’re buying a business owner’s policy, do you have security alarms and is your building’s roof in good condition?
• If you’re seeking insurance for your business vehicles, how many times have you filed accident claims in the past?

The point is, underwriters assess diverse types of customer data to determine whether their company should do business with you and at what price.

If the outcome of the analysis is unfavorable, then the underwriter might offer you options to take some risk “off the table.” For example, the person might suggest amending the coverage by endorsement to prevent you from filing certain kinds of claims. Although this makes the insurance less useful, it might be a better solution than going uninsured.

Insurance underwriters, along with the actuaries who create statistical models of future losses, create the underwriting system that determines to whom an insurer will offer coverage.

Insurance agents and brokers are the field representatives of this system. Duties they perform include:

• Help you understand the types of insurance you might qualify for
• Help you complete an insurance application form
• Help the underwriters interpret information about your firm
• Negotiate with underwriters
• Educate you about the insurance you bought

In one sense, insurance agents (not brokers) do a form of underwriting. When you meet an insurer’s risk requirements, your agent can provide you with immediate insurance coverage, a process called binding.

If you have questions about your eligibility for insurance, contact a licensed Insureon agent.

Insureon helps small business owners compare commercial insurance quotes with one easy online application. Start an application today to protect your business against legal liabilities.