Insurance companies protect businesses from financial loss by assuming billions of dollars in risks each year. It is the underwriter’s responsibility to evaluate a business’s risk of loss and decide whether to insure the business and if so, at what price.
Evaluating risks involves considerable research. Information on applications is often supplemented with reports from loss control consultants, medical reports, information from data vendors, and actuarial studies. For example a factory’s application may require an engineering survey, a fire hazard survey or other investigations. The Internet has greatly enhanced the resources available to underwriters doing research on a business. Based on its research, the underwriting department may require the applicant to make changes to improve safety, or decide not to provide coverage.
Setting the price of coverage is known as the “rate making” process. Determining the proper rate is quite complicated, as the risks posed by no two businesses are exactly alike and the total amount of future claims is not known at the time the insurance policy is issued. Rates may be established by one of three methods: manual rating, which results in standard rates for large groups of similar risks; judgment rating, which relies on the skill and experience of the rate maker; and merit rating, in which a standard or manual rate is adjusted based on an evaluation of the risk. The term "manual rating" dates back to days when rates were published in "manuals." Merit rating is used in many commercial lines, manual rating in personal lines. Judgment rating is generally used for large risks or unusual coverages, such as ocean marine.
Technology plays an important role in an underwriter’s job. In addition to using the Internet for research, underwriters use specialized computer applications to manage risks more efficiently and accurately. Depending on the nature of the risk and the complexity of the insurance policy, these systems automatically analyze and rate insurance applications, recommend acceptance or denial of the risk, and adjust the premium rate in accordance with the risk. The greater the risk and complexity of an operation, the more likely that the policy will be specifically tailored to meet the policyholder’s needs. In making all these decisions, underwriters serve as the main link between the insurance company and the insurance broker or agent. Underwriters also work closely with claims personnel. For example, information from claims adjusters, such as a business’s failure to take certain loss control measures, might affect the underwriter’s decision to offer coverage in the future. Many insurance companies employ field underwriters and claims specialists who are assigned to agents in specific localities, giving underwriters first hand knowledge of a company’s business and geographic environment. These field underwriters often work closely with loss control specialists who help evaluate a company.
Most property/casualty underwriters specialize in either commercial or personal lines. In cases where insurance companies provide insurance through a single “package” policy, covering various types of risks, the underwriter must be familiar with different lines of insurance and different types of risks.
When an insured business suffers a covered loss, it submits a claim seeking compensation. Insurance claims departments handle a wide variety of claims for property damage, liability, and bodily injury. Their main role is to investigate the claims, negotiate settlements, and authorize payments to claimants. They must determine whether the customer’s insurance policy covers the loss and how much of the loss should be paid to the claimant, depending on deductibles or retentions, co-payments and other risking sharing provisions in the policy. .
Insurance company claims adjusters plan and schedule the work required to process a claim that would follow a loss, for example, an accident at processing plant or damage to a business property caused by a hurricane. They investigate claims by interviewing the claimant and witnesses, consulting police and hospital records, and inspecting property damage to determine the extent of the insurer’s liability. Adjusters may also consult with accountants, architects, construction workers, engineers, lawyers, physicians and other experts. Most claims are easily settled. When claims are contested, adjusters will work with attorneys and expert witnesses to defend the insurer’s position. When adjusters or examiners suspect fraud, they refer the claim to an investigator specially trained to detect and investigate fraud.
New technology making use of the Internet, digital cameras and sophisticated software have greatly speeded the claims handling process, and improved the quality of adjusters’ estimates. High tech advances have also made it easier for policyholders to submit claims. Customers at many insurers, for example, can submit claims directly to claims professionals via an Internet reporting tool. Prompt reporting allows the insurer to respond quickly to a claim, ensuring that appropriate steps, such as medical attention or securing a building, are taken as soon as possible.
Loss control activities aimed at preventing or reducing the size of losses due to accidents and theft have been integral to the insurance industry as far back as 1752 when Benjamin Franklin, founder of the first U.S. fire insurance company, launched a fire safety campaign to teach property owners how to recognize and remove fire hazards.
Insurance companies, agencies and brokerage firms may provide safety inspection and engineering services as part of the services they offer to industrial and business clients. The insurer’s safety engineer or loss control expert may also be called on by an underwriter to perform a safety audit before an insurance policy is written.
Loss control produces widespread benefits. For instance, a loss control professional's recommendations for controlling fire hazards in a particular factory benefit not only the factory owners, but also protect the financial security of employees and their families by enhancing worker safety. In addition, owners and occupants of adjoining buildings are protected from spreading fires. Businesses, having avoided ruin by fire, continue to contribute taxes and other benefits to their community.
Some insurance companies have established extensive loss control departments to help their clients control losses. For example, one large industrial insurer has established a multimillion dollar research facility to provide its insurance clients and building supply manufacturers with information about how materials—ranging from power turbine housings to applesauce—burn, and how to reduce fire losses. Other companies provide an array of online risk management tools, such as using the Internet to access extensive loss control libraries that can help customers minimize financial losses. The insurance industry also funds loss control organizations to promote product safety. One such organization, Underwriter’s Laboratories, now operates independently.