Personal Lines Unlocked: The Key to Personal Lines Underwriting

This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought.— from a Declaration of Principles jointly adopted by a Committee of the American Bar Association and a Committee of Publishers and Associations.

Copyright © 2009 by

THE NATIONAL UNDERWRITER COMPANY

P.O. Box 14367

Cincinnati, Ohio 45250-0367

All rights reserved.

No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without prior written permission of the publisher.

International Standard Book Number: 978-1-938130-41-0

Library of Congress Control Number: 2008943749

Printed in the United States of America

Table of Contents

Chapter 1: Personal Lines Unlocked

Analysis

Potential Hazards—Homeowners

Flood Areas

Wildfire Areas

Tornado Alley

Condition

Location

Additional Exposures

Attractive Nuisances

Age and Construction

Pets

Property

Driver

Ratio of Drivers to Vehicles

Location

Probability versus Possibility

Tiers

Summary

Chapter 2: Tools

Automobile Reports on Insureds

Photos

Inspections

Company Reports

Homeowners CLUE Reports

Photos

Replacement Cost Estimators

Home Inventories

Inspections

Flood Maps

Company Reports

The Application

The Insured

The Address

Construction

Systems

Fire Rating

Loss History

Deductible

General Questions

Review

Auto

Insured

Address

Vehicle

Vehicle Usage

Drivers

Review

Documentation

Homeowners Documentation

Automobile Documentation

Credit Score

Summary

Chapter 3: Construction

Roof Construction

Asphalt Shingles

Cedar Shakes

Fiber Cement Shingles-Siding

Slate/Tile/Clay

Flat

Built-up

Modified Bitumen

Rubber Membrane

Metal/Tin

Solar

Green

Ancillary Roof Elements

Skylights

Gutters

Copper

Aluminum

Galvanized Steel

Stainless Steel

Vinyl

Wood

Siding and Framing

Structural Insulated Panels

Steel Framing

Wood Framing

Timber Framing

Log

Straw Bale

Adobe/Cob/Rammed Earth/Compressed Earth Block

Geodesic Domes

Chapter 4: Systems

Operating Systems

Types of Wiring

Plumbing

Heating Systems

Alternative Heating Systems

Supplemental Heating

Other Alternatives

Low-E Window Coatings

Bamboo Flooring

Cork Flooring

Other Structures

Summary

Chapter 5: Fine Arts, Collectibles, and the Property Schedule

Fine Arts versus Collectibles

Appraisals

Claim Payments

Categories of Scheduled Items

Jewelry

Furs

Cameras

Camera Basics

Musical Instruments

Silverware

Golfer’s Equipment

Fine Arts

Postage Stamps and Rare and Current Coins

Bicycles

Guns

Collectibles

Summary

Chapter 6: Home Endorsements

Business

Liability Issues

Types of Homeowners Business Pursuits Endorsements

Home-Business Property Considerations

Home-Business Liability Considerations

Medical Payments Exclusions

Additional Coverages

Other Home Business Endorsements

Day Care

Farming

Miscellaneous Vehicles

Liability Coverage

Trusts

Mobilehomes

Assisted Living Care Coverage

Property Remediation for Escaped Liquid Fuel

AAIS Business

Care Provided for Others

Farming

Miscellaneous Vehicles

Snowmobile Liability

Assisted Living Facility

Summary

Chapter 7: Automobile Elements

Vehicle

Sound

Body

Racing Equipment

Lights

Wheels

Driver

Location

Summary

Chapter 8: Automobile Endorsements

Miscellaneous Vehicles

Snowmobiles

Motor Homes

Extended Non-owned Coverage

Mexico Coverage

Joint Ownership Coverage

Trip Interruption Coverage

Trust Coverage

Summary

Appendix A: Home Inventory List

Appendix B: Home Inventory List Short Form

Appendix C: Supplemental Inventory Sheet

Appendix D: Major Components

Appendix E: Roofing Materials

Appendix F: Homeowners Underwriting Checklist

Appendix G: Jewelry Forms

Appendix H: Vehicle Accessories

Appendix I: Racing Restrictions

Appendix J: Racing Penalties

Appendix K: State Statutes Regarding Licensing of Legally Blind Individuals

Appendix L: Automobile Underwriting Checklist

Appendix M: Use of Credit Chart

Resources

Chapter 1: Personal Lines Unlocked

P

ersonal lines underwriting is an art that developed over many years. From the time the first fire policy was written over 100 years ago to the twenty-first century, the nature of the risk needed to be assessed so that a proper rate could be charged. While this sounds straightforward enough, in many cases it is not. Good underwriting is particularly critical in personal lines; an underwriter cannot grant discounts or apply surcharges based on the nature of the risk the way a commercial underwriter can. The rates that apply are the rates that are determined by the actuarial department, the underwriter can accept or reject the business, and that’s it. Therefore, close attention to the risk and its exposures are key to writing good personal lines business.

What makes an account desirable? Is a risk that meets the company guidelines always a good risk? Not always.

There is more to underwriting than simply meeting the company’s basic eligibility requirements. A good underwriter or producer will seriously look at the risk presented and review it to be sure there aren’t hidden issues or hazards that would make the risk less desirable than it appears at first glance.

A desirable risk is one that goes beyond the company’s basic acceptable guidelines. Key factors in determining a desirable risk are:

•  Quality of construction/make of vehicle

•  Type of construction/model of vehicle

•  Age of property

•  Condition of property

•  Experience/claims history of the applicant

•  Length of residency in one area/reasons for moving

These elements will be discussed in detail as we discuss coverages.

There are varying degrees of desirability among applicants; a married couple, each forty-five years old, with newer cars, no violations or accidents, and a five-year-old home in the suburbs is pretty much the ideal risk. Now look at a young couple, each twenty-two years old, with an older model car, no violations or accidents, and an apartment in the tough part of town. Are these risks the same? None of the drivers have any accidents or violations, so what makes one more desirable than the other? The older couple has more driving experience, and is settled, can afford a house in a safer part of town so the risk of the vehicles being stolen or the house broken into are less. While the two young people have no accidents, they are in a more dangerous part of town, have an older vehicle that may be more prone to breakdowns (and hence towing claims) and the apartment is at higher risk of being burglarized. The risks are not the same, even though on the surface they appear to be equal.

Other variables factor in –for example, the young couple may be children of long-term insureds the agent knows well, and the agent may know that they are responsible, cautious, and were always good students. The older couple, while appearing more stable, may be overextended and paying the premium on time could be an issue. Or they could have an unfenced swimming pool in a neighborhood with lots of children.

Analysis

The process of analysis allows you to determine whether the risk is truly desirable. The entire risk has to be reviewed, not just the categories that the company outlines in its underwriting standards as acceptable business. The true nature of the risk and whether it will benefit or harm the agency and the company in the long run must be determined. This is why many companies require photos of the dwellings before writing a policy. Photos often expose problem areas that need to be resolved. Many homes that haven’t been looked at when the application is submitted end up being rejected, cancelled, or nonrenewed because an inspection reveals such problems as trees growing out of the gutters, paint has been scraped off the house and the insured intends to repaint it over the next two years, or the steps are missing bricks.

Producers are frontline underwriters; they make the determination as to which applicant is submitted to which carrier, if at all. The better the producer’s submissions are, the more successful her business.

An underwriter’s favorite question is why? Why is information missing from the application, why is the applicant changing companies or agents, why is the applicant being nonrenewed, why is the applicant asking for certain coverages and limits, why is the applicant not asking for certain coverage? As more and more companies allow producers to submit applications online, and in some cases immediately generate policies, the producer needs to think like an underwriter and ask the why questions.

A checklist is provided later to help in reviewing applicants. See Appendices F&L. One way of walking through a potential application is as follows:

1.  Have the applicant complete the application FULLY.

2.  Review the application with the applicant and ask about any missing information—missing information can be a simple oversight or an attempt to hide something.

3.  Review the information provided for any red flags before the applicant leaves and ask for follow up information. (red flags will be discussed later.)

4.  Review for coverage issues; are the coverage limits appropriate for the exposure?

5.  Pay attention to the applicant’s behavior: is the applicant forthcoming with information, or does he seem evasive when answering the questions? If you decide to write the account you may want to alert underwriting that the applicant may not have told you everything.

6.  Gather required underwriting documents.

7.  Review the underwriting documents for accuracy and consistency.

Having said that, states have various rules about what a producer can and cannot do and when business can or cannot be turned down. These rules will not be discussed here—just remember that you must comply with state regulations and company requirements. It is impossible to cover all requirements in one resource.

So other than gut feeling, how do you objectively and effectively analyze a risk to determine whether or not it is something you want to add to your book of business? Start at the beginning.

Analysis is the process of separating a whole into its parts. In underwriting, you are looking at the parts to determine potential risks, the likelihood of loss from those risks, and possible size of loss from those risks. You will not find a perfect answer. Many variables are unknown and some things just happen. A tornado can appear anywhere without warning. So you want to look at the risk and its parts to determine the quality of the risk overall. A brand new house with a manicured lawn is obviously less susceptible to certain types of loss than a 30-year-old home with an old roof, worn gutters, and overgrown shrubs. A driver with a speeding ticket that is a two-and-a-half years old is less of a concern than a driver with a speeding ticket received one month ago. The middle ground is where it gets difficult; some parts of a risk may be fine, while others are questionable or a concern.

Potential Hazards—Homeowners

Once you’ve determined that the risk may be eligible for the company you want to place it with, the first step in analyzing a risk is to look at potential hazards. There are environmental hazards—flood, wildfire, or tornado zones. Whether the insured has taken steps to mitigate or prevent losses from these events is important—an insured who pays attention to environmental elements is less likely to have a loss and becomes a more desirable risk. While there are local codes and ordinances in some of these areas an older home may not be up to code. And there may not be codes for some exposures that just make sense. In an area prone to hail, a home with lots of windows and skylights is almost certain to have losses.

Many insureds may not be aware of other preventive measures. As a producer you can advise potential insureds that precautions are important and necessary to prevent losses to their property. As producer/underwriter, you want to look at properties in these areas with an eye towards what the applicant has done to prevent or mitigate loss, if anything. The following paragraph examines a few hazards.

Flood Areas

While it’s natural to think of Florida, the Gulf of Mexico states, and parts of the Eastern Seaboard as the natural flood areas because of hurricanes, don’t overlook areas near rivers, lakes, dams, or even creeks that can overflow with heavy rains. These areas pose a different risk than those in hurricane-prone areas. In areas prone to hurricanes, wind is a large factor, as are airborne objects that become projectiles. With river flooding there may be no wind, just lots of water and mud.

Does the insured have a basement and what is in it? In any flood-prone area, the insured should have as many things as possible that are susceptible to water damage off the lower floor. Anything that can absorb water will; the chances of mold growth and damage increase proportionally. If the insured is at the bottom of a hill, property needs to be higher up off the floor, including fixtures such as the furnace or gas heaters, etc.

In hurricane-prone areas there are a few different concerns because wind becomes an issue along with the water. The dwelling should be able to be quickly secured in a storm event. Are storm shutters present, how close are trees to the dwelling, and what is their condition? Trees that aren’t healthy will blow down more easily than sturdy trees. If the yard is full of items that can become airborne, it is necessary to be able to relocate or secure them swiftly. It’s one thing to move the lawn chairs and the umbrella, but the insured shouldn’t need half a day to clean up the yard before an impending storm. Remember, items on the ground can also pose liability hazards, so a generally neat yard presents a more desirable risk.

Wildfire Areas

The California wildfires of 2007 and 2003 highlight just how dangerous these areas are- living close to nature can be beautiful, but also very dangerous. In these areas construction is important as wood structures and roofs will serve to fuel the fire. Recommendations on how to make a home and yard more fire resistive include clearing flammables away from the house within a 30-foot perimeter, including vegetation. Shrubs should be kept away from the sides of the house, and all dead and highly flammable vegetation should be removed. Remove tree limbs within fifteen feet of the ground. Grills should be kept away from the house, and bark mulch should not be used. The circumference of from thirty to one hundred feet from the house is a second area, and the most flammable vegetation should be removed from this sector. As wildfires tend to occur in the southwest, succulents are strongly recommended there. Plants that quickly dry out act as kindling. Flame retardant paints are also available and can help prevent a fire from spreading. These websites provide more information on preventative measures: www.flamestop.com, www.painttoprotect.com.

Tornado Alley

Tornadoes are particularly difficult to address because of the suddenness of the event. While hurricanes typically are predicted with some advance warning, a tornado often appears out of a random thunderstorm with no warning. In areas prone to tornadoes the yard should be kept clear of anything that can become a flying projectile. The insured will not have time to clear the yard in advance of a suddenly arising tornado. The construction should be up to code with the roof properly secured. Hail is also common in the same areas, so remember to consider windows and skylights.

Condition

Condition of property is another important factor in desirability. Is the property maintained and well kept, or does it need attention? Remember to look for liability hazards as well. Property loss is not the only concern. Are there cracked windows, peeling paint, or holes in the yard. With condition you’re looking at a matter of degree; one cracked window in an otherwise well kept house is not a big problem. But if many windows are cracked, one of the gutters has fallen off, and the fence leans, then the potential for loss is much greater. Each of these conditions alone could be acceptable given the situation and the insured’s plans for repair. Concern should heighten when they exist together.

Condition can also indicate the potential for morale hazards; an insured who maintains the property is less likely to have a claim than an insured who doesn’t maintain the property. Well maintained property is less likely to have certain types of losses. Also, liability claims are more likely at a poorly kept residence. Railings or steps could fail, uneven ground could lead to falls, broken fences could let animals run loose, etc.

This is why many, many carriers want photos of the outside of the property. They want to see the condition of the property before granting coverage. An old picture of the house with snow on the roof that’s presented to the company in May indicates that the producer didn’t see the property. Some underwriting departments have gone so far as to have a wall of shame, where underwriters will hang some of the most offensive pictures of homes they’ve received from inspectors; trees growing out of the gutters, a house marked danger, do not enter and other such situations are why companies are so insistent about photos.

Interior condition is also a factor; if papers are piled three feet high all over the house, you have potential fire, insect, mold, and rodent issues. Duct tape around a pipe is most always a bad sign, as are broken tiles/floorboards. When looking at either the interior or exterior of the home, at issue is whether or not the problem areas are cosmetic or fundamental to the workings of the house; if the insured is in the middle of painting a room or building a cabinet, items related to those activities are temporary in nature and don’t indicate faulty maintenance. A bucket half full of water under the kitchen sink is a different story, as is a board placed over stairs for a makeshift handicapped ramp that is not attached in any way. While the ramp may not lead to a