The common distinction between line underwriters and staff underwriters is that line underwriters

UNDERWRITING PROPERTY AND CASUALTY INSURANCE

Knowledge of the insurance products to be offered to customers is essential for any insurance producer. The insurance producer must also understand the underwriting process by which insurance companies determine whether to offer insurance to a particular individual. Your customer may ask you specific questions regarding the underwriting process, and your answers may help that customer decide that your products and services are worthy of his/her investment.

In this chapter we examine the underwriting of property and casualty insurance. Many underwriting practices have been in place for hundreds of years; however, changes to these practices are inevitable. Traditional underwriting practices may continue to appear perfectly logical to an experienced underwriter, but newer laws and regulations are forcing changes to some of those practices as longtime underwriting practices must give way to new concepts.

Major Underwriting Goals

Underwriting of all types is designed to accomplish three major goals.

�  Underwriting helps the company to achieve �underwriting gains.�

�  Underwriting positively contributes to society.

�  Underwriting assists in maintaining a strong, solvent industry which can serve the public in the future.

Each of these goals must be recognized and understood before changes in practices can be successfully adapted to new regulations and pressures.

Underwriting Gains

The first goal of underwriting is to help to achieve underwriting gains.

In stock insurance companies, these gains can be called �profits.� For mutual insurance companies, the gains result in increased dividends or surplus. In all cases, the goal is to be able to show a gain after paying claims and expenses.

Underwriting contributes to these gains by selecting applicants who fit within the parameters of the rates which have been developed. Every rate structure contemplates a certain type or class of risk.

Underwriting has the responsibility of accepting and retaining those properties and exposures which fit the expected pattern. Underwriting gains cannot be achieved by accepting applicants whose probability of loss is greater than that which is anticipated by the rates.

Applying contract provisions which are contemplated by the rate structure, can make a further contribution. Coverage cannot be unduly broadened, exclusions cannot be removed and conditions cannot be waived without jeopardizing the expected underwriting gains.

Rates, contracts and selection are closely related. Improper use of any of these factors can destroy all hope of underwriting gains. If any of the three is inadequate, one or both of the others must be adjusted accordingly, or underwriting losses will occur.

Total responsibility does not fall on the underwriters. Those who promulgate rates and those who draft contracts carry a share of the burden. But in the final analysis, it is the underwriter who must select applicants who fit the rates and contract provisions which have been designed to produce underwriting gains. If artificial restraints are imposed on underwriting, either rate must be increased or contracts restricted; otherwise underwriting gains cannot be realized.

Contribution to Society

Insurance contributes a great deal to society. In fact, it is difficult to imagine how our civilization could exist without insurance. Society benefits from insurance by the reduction in uncertainty which insurance provides. With this lessening of uncertainty, people can buy and furnish houses, establish manufacturing and processing firms, stock warehouses and retail establishments, and conduct the distribution of goods.

If this uncertainty was not reduced, people would not necessarily be willing to embark on these ventures. Perhaps more importantly, lending institutions would not be able to finance these enterprises, so anything beyond a cottage-type of business would be almost impossible. Most of the recent strides in industrial and technological fields would have been unthinkable, and most consumers would not have been able to accumulate the volume of goods which help mark the affluence of society.

Insurance companies supply a good share of the funds which finance long-term investments. The insurance companies� accumulation of capital, which is needed to guarantee the payment of future losses, can be used to promote expansion in home ownership as well as in business and industrial fields.

Another major benefit of insurance is the promotion of competition which results from the stability and reduction of uncertainty which are present in our economy. Small firms can compete with large enterprises because they do not need to accumulate large sums of money to help survive disasters. The protection given through insurance permits every firm to survive both heavy losses to property and claims for liabilities. Thus funds can be used for growth, and society benefits from the resulting competition.

Underwriters are the focal point through which most of the benefits of insurance are supplied to society, as the underwriters arrange to protect almost every conceivable type of loss in a manner which meets society�s needs. When new exposures to loss arise, underwriters develop methods of insuring those exposures.

Two important aims of underwriters are to support activities which will benefit society, and to oppose changes which will tend to restrict these benefits. Underwriters must not only analyze the immediate results of changes but also their long-range effects. Every underwriting action and every underwriting rule or guide should be considered in light of the ultimate effect on society as a whole.

Maintaining a Strong Insurance Industry

The greatest contribution that underwriters can make to their companies and to society is to help maintain a strong and solvent insurance industry.

Underwriting gains, as discussed earlier, are an essential element in maintaining this strength. Another factor is steady, solid growth; this requires an analysis of markets and a selection of applicants who represent a broad, desirable spread. Still another element is an ability to meet the needs of buyers of insurance, for only in this way can insurance companies survive.

In all of these areas underwriting contributes best when it classifies and accepts applicants on the basis of reasonable criteria, equitably applied. A constant objective of underwriting must be to analyze selection standards, change the standards and classifications when conditions require and administer them fairly in daily activities.

Society benefits directly from the existence of strong and stable insurance companies. Only this type of insurer can meet the needs of the public. The future demands of a changing society will place new burdens on the insurance industry.

New energy requirements, advanced technologies, the challenges of space travel, the opportunities for increased leisure activities, the opening of markets in undeveloped lands and all of the other possibilities which will be presented by changing world will require even more insurance protection than is available today. A strong, solvent insurance industry is a necessity if artificial brakes are not to be applied to these many new possibilities for fortune and growth.

Underwriters must develop appropriate analysis of characteristics of applicants in order to find meaningful factors upon which to base underwriting selection. This is the challenge of the future for underwriters. Laws and regulations will impose new rules. But underwriting must survive if a strong insurance industry is to exist. This will require adaptation by underwriters, through the use of revised approaches which will achieve the established objectives.

Individual and Class Underwriting

Underwriters can react in many different ways to newly adopted rules and regulations. If the underwriter does not carefully consider the ultimate consequences of that reaction, the underwriter may react in ways which will damage the underwriter�s reputation. In the long run, the damage will be irrevocable and will affect the entire insurance industry.

Underwriting Individuals

The only really viable alternative is to underwrite by applying the underwriter�s intelligence and knowledge. This will include securing more facts, evaluating applicants as individuals, making objective analyses and taking prompt action in conformity with the laws and regulations.

As a starting point, underwriters must know why certain underwriting rules or guides were used in the past. For example, an applicant�s occupation may frequently be used as one underwriting factor. The applicant�s occupation is not a factor because there is anything inherently wrong with people who are engaged in the particular occupation. They are not wicked, dishonest nor abhorrent. Rather, experience has likely shown that persons in that particular occupation tended to be unstable with respect to location, frequently moving from place to place.

This instability can be a problem to insurers, so caution will historically have been used in determining whether to accept applicants who were engaged in that occupation. The occupation should not have been a firm rule but just a guide (although it is likely that some underwriters always used it as an unacceptable factor).

Suppose that a new law or regulation provides that occupation will be prohibited as a factor in underwriting. The instability of the applicant may still be a problem to the insurer, so the application may still need to be rejected by the underwriter. The reason for the rejection will not be the occupation, but the instability of the applicant�s residency. This instability can be indicated by factors other than occupation and may only be discovered by more intensive investigation by the underwriter.

Occupation cannot be used as a reason for underwriting action, but it can still point out the need for more facts which may make the application unacceptable. If unstable conditions are not found, and other negative factors are not present, the application should be accepted.

The key to better underwriting will be to secure all relevant information about the applicant. No longer will it be enough to find out a few facts, such as occupation, and then take action. Instead, the underwriting process will have to focus on the residency of the applicant and the likelihood for frequent movement.

Both objective and subjective information can be secured by the underwriter, depending upon the circumstances and the management of the insurer.

�  Objective information.

The most reliable data is that received from objective outside sources. Motor vehicle reports and accident information from the file are the most common forms of objective data for vehicle insurance. The condition of the property, photographs, a doctor�s report of physical impairments and the length of driving experience are other examples for various lines.

�  Subjective information.

Purely personal and private information may be used under some circumstances. Ordinarily, this is best if secured from the applicant, not from outside sources. The application, telephone verification and a renewal questionnaire are devices which are used to obtain facts from applicants and policyholders.

Some insurers have used psychologically oriented self-completion questionnaires as investigative tools for new applicants, particularly for personal automobile insurance. Some of these sources may arouse antagonism from applicants or producers, but they are illustrations of the sources that are available to the underwriter.

Right to privacy laws and other restraints imposed by government can restrict the information available to the underwriter. Such laws certainly make the underwriter�s job more difficult and require more innovation to locate permissible data.

Underwriting By Class

As described above, the first step in underwriting requires that the underwriter secure as much relevant information about the individual as is necessary or available. The second step is analysis of that information. There are two different ways of analyzing an insurance application: by class and by individual risk.

Traditionally, personal lines have been subject to class underwriting. This means that classes or groups are identified as being problems and are not written as a general rule. Underwriters recognize that some individuals in each class would be acceptable; however, it would be more expensive to find these individuals through the underwriting process, and there is usually not much information readily available upon which to make the decision. If an exception is made and a loss occurs, criticism may result. On the other hand, there will be no criticism if the applicant is rejected.

Commercial lines more commonly use individual risk underwriting. More complex factors are present, and premiums are high enough to permit more investigation. In most companies, even under individual risk underwriting, certain groups are identified as presenting problems, and these groups may be placed on an unacceptable risk list. Still, exceptions are made for meritorious applicants based on individual characteristics. This pattern is common among larger commercial risks; smaller ones may be handled more on a strict class basis.

This traditional difference between class and individual risk underwriting is disappearing in today�s social and regulatory climate. People no longer tolerate being handled as members of a class without regard to individual characteristics. Many newer laws and regulations are aimed at precisely this factor. Since some physically impaired people are good drivers, it is no longer permissible to reject them simply because other physically impaired people may be problem drivers.

Rather, the rules prohibiting the use of certain characteristics require that each person be considered on the basis of individual factors alone.

The analysis of applicants, under government regulations, must include a study of individual characteristics, not just the group to which the applicant belongs. This does not necessarily involve a great deal more time and expense. Rather, it takes only a little more effort to consider whether the applicant is different, in some relevant way, from the other risks of the same type. If so, the differences must be analyzed.

This type of analysis is new for most underwriters, particularly those handling personal lines. Education, training and frequent audits will be needed to make underwriters more familiar with these processes of analysis.

After obtaining and analyzing information, the third step in underwriting is to make a decision and take action. This can be a perilous part of the process, or it can be a golden opportunity to serve the public and the industry.

The manner in which underwriting guides are written and the way that the reasons for adverse action are stated can be very important. This is the point at which the true intentions of the insurance companies are measured. Underwriters should avoid using words like �location,� �sex,� �age� and �marital status� when rejecting or canceling insurance. These may be factors to be considered in the evaluation, but they cannot be used as the primary reason for rejection. Reasons must be given, and these reasons should be specific.

Underwriters should stop using such general terms as �condition of the property.� The public insists upon knowing why adverse action is taken. The reasons must be clearly explained. Action must be taken promptly. Restrictions place a burden on underwriters to avoid procrastination. Many states prohibit cancellation of new policies after a �discovery period� � usually about 60 days.

Non-renewals are often permitted only if notice is sent to the policyholder well in advance of the expiration date. These rules require prompt and firm action, preventing the delays which previously marked the decision-making process of some underwriters.

In summary, underwriters must avoid the specific use of factors which are prohibited, although these factors may be used as indicators along the path. Applicants and policyholders must often be analyzed as individuals, not as members of a class or group. Actions must be taken promptly, and always in compliance with the laws. Rejection or cancellation may be taken only for relevant reasons, and never because of factors which are prohibited. The reasons must be explained in specific terms.

The previously mentioned approaches are the general approaches which must be followed by underwriters under government restraints. As a first step, management of the company should outline general principles, indicating how underwriting is to be conducted. These principles, which should be stated in broad terms, will give the necessary guidance to underwriters.

It is obvious that compliance with all laws and regulations should be the cornerstone of these principles. General statements are needed as to the degree of investigation to be followed, the method of communicating decisions, and the handling of complaints. Such a statement of principles will supplement the underwriters with knowledge of general approaches to be used and will provide a broad base of guidance for future underwriting.

Specific Underwriting Factors and Practices

Desk underwriters need specific instructions on practices to be followed when they encounter problematic applications. While general statements are helpful, they are inadequate for the day-to-day handling of individual risks.

Statements of general principles must first be developed and adopted by insurance company management. Such statements are needed before desk underwriters can make decisions which follow the wishes of management. Without such statements, underwriters can be expected to continue the old practices which have led to an atmosphere of public criticism of underwriting and demands for change.

In addition to the company�s statement of general principles, underwriters must learn the laws and regulations affecting the insurance being underwritten. Controls must be established to be certain that both new and existing laws and regulations are communicated to all underwriters. Next, supervisors must conduct enough audits to be certain that underwriters are following the statement of principles and all of the applicable laws and regulations.

Much more than this is needed, however, if underwriting is to survive as it is known today. The spirit as well as the letter of laws and regulations must be followed. Most rules have loopholes if someone looks hard enough for them. If underwriters find loopholes in laws or regulations and underwrite on that basis, further restrictions will be adopted by government to close the loopholes.

Complaints and criticisms must be heard and addressed by the insurance industry. When reasonable adaptations to underwriting practices can be made to meet those objections, this should be done. The difficult problem is to separate those comments which are reasonable and logical from those which are not. The application of these principles will not be easy. The reasons for each type of criticism must be understood in order to allow for proper changes to exiting standards.

The following sections list factors used by insurance companies to determine underwriting decisions. These sections describe information regarding each factor and suggest certain recommendations for handling some of the complaints which have been lodged against the insurance industry�s underwriting practices related to these factors.

Loss History

The record of past losses remains as one of the best factors which underwriters can use in the selection process. It is factual, relevant and well accepted as a factor which reasonably separates one risk from another.

At the same time, underwriters must realize that not all losses can be considered as factors. Some losses are perceived by the public as being of types which do not reflect adversely on the individual involved. If the loss was not recent, or if the applicant was not at fault, its importance is diminished or removed.

Accident Record

Automobile underwriters should continue to use accident records as one of the primary underwriting selection tools. When facts are available, most accidents are reliable indicators of desirability and are generally accepted as such.

Modifications in some past rules or guides are needed, however. Underwriters must not consider those types of accidents which do not have a clear relationship to possible future accidents. Also, they must not use the types of accidents which are specifically prohibited by statute or regulation.

Fault

The question of fault is most important. Although statistical studies do not separate accidents by fault, and automobile insurance underwriters, for example, may feel that all accidents indicate a driving pattern, the public generally does not see the relevance of not-at-fault accidents in the underwriting process.

Most underwriters, for some time, have given little weight to the most obvious of the not-at-fault accidents. They disregard those where an applicant was struck while legally parked or while stopped for a traffic signal. In the future, the definition of not-at-fault accidents will likely be expanded.

An applicant who recovers in full from another party is of the firm opinion that no fault should be affixed to his or her behalf. Underwriters should take such factors into account and not consider those accidents where an applicant was not charged with fault.

The determination of fault is not easy, particularly with accidents that occur before risk is insured. Sometimes the determination can be made only by securing a copy of a police report or by contacting the previous insurer. These sources may be expensive and may even be prohibited by law. This leaves the underwriter with no alternative but to accept the description of the accident as given by the applicant, subject to verification by an official motor vehicle accident report, as much as possible.

Modern traffic conditions lead to many accidents where fault is difficult to ascertain. Events happen quickly and each party may feel that the other person was completely at fault. Applicants who feel that they were without fault in an accident will resent being underwritten on the basis of an at-fault accident. This resentment could be translated into legislation which would deny all accident information in the underwriting process.

Underwriters will likely view the value of past accidents as predictors of the future as too great to jeopardize by making arbitrary decisions on some �close calls.� As a result, if fault does not appear to fall on the applicant, the underwriter will generally ignore that accident.

Number of Accidents

Underwriters not only consider every accident, they sometimes decide that one accident in the experience is too many to permit acceptance. Companies attempting to set predetermined standards may state that an applicant is unacceptable if there have been any accidents during the past two or three years. This approach may be too severe for the future. The traffic congestion of today, especially in the larger cities, makes it extremely difficult to avoid an occasional small accident.

A blind spot during a lane change, vision obscured by a wet window in the rain, a sudden change in a traffic signal, an unexpected stoppage of traffic � all can result in accidents. A driver who is usually very careful and who has been accident-free for years may incur one incident of this type. All that is required is a moment�s inattention or carelessness.

It would not be reasonable to refuse insurance to an applicant who has incurred just one loss of this type. Two or more accidents might be; but only one accident, perhaps in many years, does not make a driver a poor risk in the minds of most people.

The solution is to consider more carefully the type of loss rather than just the number. If that one loss occurred shortly after midnight on a Saturday night and was the result of apparent high speed and possible drinking, the underwriter would be justified in being concerned. On the other hand, if the loss happened at 5:15 on a Tuesday evening and was a small rear-end accident on a crowded expressway, it is difficult to maintain that this is a good indication of possible future accidents.

Underwriters must stop playing a �numbers game� and start analyzing the losses. Two or three small accidents scattered over a three-year period may be less indicative of future loss involvement than one recent accident where the circumstances indicate that a driving problem exists.

No known legislation has attempted to control the number or type of accidents which can be considered in underwriting. This situation does not mean that these factors can be disregarded. Abuse of the privilege of considering accidents in the selection process may lead to restrictions.

Automobile underwriting today requires more than a simple statement on the maximum number of accidents permitted during a specified period. Underwriters must secure all pertinent information concerning details of accidents from whatever sources are reasonably available. They then must analyze the losses to see if an indication of a poor driving pattern exists. If it does, underwriting action can be taken with little fear of challenge. But if it does not, there may be severe criticism of action taken solely because the loss is on record. Continuing action of the latter type may lead to restrictive legislation or regulation.

Commercial/Personal Risks

When an individual drives a vehicle as part of his or her job, it raises an additional underwriting issue:  Should accidents occurring as part of the job be included when underwriting a personal automobile policy?  The analysis of individual losses, rather than merely counting the number, will take care of the problem of differentiating between commercial and personal risks in most cases. An applicant, who incurs accidents because of poor driving, whether in a truck or a car, should bear the responsibility under all types of vehicle insurance.

If the underwriter looks at the facts surrounding each loss, most of the pressure to disregard accidents from another line of insurance will disappear. Naturally, where laws prohibit consideration of accidents from another line, such as �emergency vehicles,� there is no opportunity to use such losses in the selection of risks.

Property Losses

Consideration of the degree of fault or responsibility should be a part of the underwriting process on property as well as automobile claims. The type of loss and the circumstances surrounding the loss are clues to the degree to which the applicant could have prevented the loss. Although there is no known legislation on the use of property losses, underwriters should not take advantage of this situation. Reckless disregard of factors causing a loss could lead to restrictions, and these probably will be stricter than those which underwriters would impose on themselves. Thus, isolated losses from factors beyond the control of the applicant should be disregarded or used with care. If conditions have changed, this fact should be part of the analysis. Intelligent underwriting requires nothing less.

At the same time, a pattern of losses may reveal conditions which are likely to lead to future losses. Repeated windstorm or hail losses may indicate that the location of property is in a �pocket� where such losses are common. Repeated crime losses may show that the neighborhood is conducive to those types of losses and that the pattern can be expected to continue.

Normal underwriting practices should continue, but these must be tempered with careful consideration of the circumstances surrounding the loss, not just a tabulation of the number of losses.

Liability Losses

Both personal and commercial liability losses should be handled much the same as property losses. Laws have not yet been enacted to regulate the use of these losses, but unreasonable application of underwriting rules could lead to controls.

The facts surrounding losses should be analyzed carefully. If there is no pattern, and the loss was beyond the control of a reasonable person, the underwriter should not make the decision on that loss alone. On the other hand, a pattern of loss, or failure to take normal precaution against injury, is valid underwriting criteria.

Recommendations for Improvement

Property and liability losses often are the result of unsafe conditions. Rather than refuse insurance because of these conditions, or raise the premium, it would be better for underwriters to recommend improvements which would reduce future losses.

This approach recognizes a responsibility on the part of underwriters to furnish insurance whenever possible and also to reduce losses and injuries.

Underwriters who analyze losses often are able to see conditions which should be corrected. If these are not obvious, engineers or inspectors can be used to identify unsafe practices, and their reports can be part of the analysis of the cause of the loss. In addition, such reports can be the basis of recommendations for improvement.

The underwriter, wishing to serve the public and avoid undue regulation, must do more than accept or reject applications. An effort must be made to write insurance, tailoring the contract and the rate to the risk. An important part of this approach is to discover areas where conditions can be improved and to recommend action to the applicant.

Additional expense will be incurred by this approach; however, more business will be written and fewer losses may be incurred. More importantly, this approach will help to fulfill the duty of supplying coverage in the most economical fashion to every deserving risk. Universal use of this approach will go a long way toward limiting future adverse legislation and regulation.

Traffic Violations

Underwriters can continue to use traffic violations in selection and rating. This use is subject to specific state laws or regulations which limit the use of certain types of violations by underwriters. Where possible, however, underwriters should use judgment in their consideration of violations. The emphasis should be on those convictions which appear to have some element of future accident predictability.

Equipment violations should be given little weight; on the other hand, they may indicate a careless attitude, an �I-don�t-care� approach to automobile safety. Where this appears to be the case, further investigation is needed to determine the facts. In other cases, equipment violations should be ignored. Each case must be separately evaluated by the underwriter.

Non-Verifiable Record

The term �non-verifiable� driving record relates to the practice of refusing to insure newly licensed drivers because they do not have any past driving record, good or bad.

Rules determining the definition of a �verifiable� record must be applied in a reasonable, nondiscriminatory fashion. The time period must not be excessive; three years is a maximum period in most cases. If used the rule must apply to all applicants and not be used as a screening device for youthful operators.

For example, assume there is a middle-aged couple with a clean accident and conviction record but with only one of them who drives. If the non-driving spouse then gets another car and starts to drive, the non-verifiable rule must be applied, exactly as it would be if the new driver were a youth just starting to drive.

Sources of Information

In determining the record of traffic violations, it is crucial that underwriters use all reliable sources of information. Motor vehicle reports (MVRs) are the best source of information. They must be secured where it is important to see the traffic record. Arrangements should be made to secure MVRs as quickly and inexpensively as possible.

Arrangements can often be made to secure MVR information directly from the computers of the state motor vehicle departments, either directly by the insurer or through a service organization. Prompt information is of great value in effective selection of applicants.

Some traffic violation information, like some accident data, is not always available through an MVR. For example, some traffic courts have adopted the procedure of sending violators to a traffic school. Upon completion of the course, the record of the violation is destroyed. No entry is ever made on the MVR.

This procedure may be effective from the standpoint of law enforcement officials, but it destroys the concept of underwriting on the basis of past driving performance. Underwriters must establish techniques for securing information on all traffic violations as much as possible. Proper questioning on the application is one source. Effective investigation technique is another.

Driving Record

The most significant factor which can be used in underwriting and rating of motor vehicle insurance is the driving record. Traffic violations are the major component of driving records, although accidents are usually included. Almost everyone who agrees that some type of selection and rating differences are justified will concur that the driving record is most critical.

A risk should not be accepted if a driver�s license is suspended or revoked. To supply insurance to such persons is to encourage them to drive in violation of law. When investigation reveals that the license of a driver is not valid, the application should be rejected.

The only exception is a case where it is represented that the person without a license will not drive. If this is verified, the factor can be disregarded. After the license is reinstated, the underwriter should analyze the reason for suspension or revocation and not reject the applicant only because of the previous action by licensing authorities.

Condition of Property

Underwriters have more opportunity to practice individual risk selection on the basis of property condition than on most other factors. By avoiding arbitrary rules and looking at specific risk characteristics, underwriters can improve their selection practices and still avoid the objections of regulators. Both automobile and property lines are subject to underwriting on the basis of property condition.

�  Condition of automobile.

Good underwriting requires consideration of the automobile�s condition. It is important that judgment be applied uniformly and that only relevant conditions be taken into account. Mechanical deficiencies should be handled carefully.

If critical functions are involved, such as brakes or lights, the risk should not be accepted. Public safety, as well as insurance principles, requires that automobiles with serious deficiencies such as the foregoing should not be encouraged to operate on the streets.

The proper underwriting technique is not to merely reject insurance. Such action may cause the owner to drive without insurance or to seek another insurer which may not discover the problem. Rather, the underwriter should point out the deficiency, suggest that it be corrected and offer to write the insurance when correction is made. In this manner, the financial exposures of the public and the owner will be protected, and the insurer will write another policy.

Before this corrective action can be taken, the condition must be identified. If the facts are reported on the application, the underwriter can act immediately. If not, the condition can be determined only by an inspection on a new submission if it is economically feasible to do so.

On existing policies, a claims report may indicate the existence of problems. In either case, it is important that the underwriter secure the facts. Then the alternatives can be considered and one of these should certainly be to recommend correction of the mechanical deficiency as a condition to writing or continuing insurance.

Unrepaired damage can be handled in the same way. Minor damage can be ignored, except perhaps to note its existence so that it is not included again under the settlement of a later loss. More serious damage can be dangerous to pedestrians or occupants. Again, the best procedure is not to reject coverage automatically, but to be certain that the facts are correct and to then recommend correction. If repairs are made, the risk will be satisfactory from that standpoint, and a policy might be saved.

Underwriters should not conclude that, as a class, people who do not correct mechanical defects or repair body damage are undesirable. There may be many reasons why improvements have not been made.

If the specific condition of an individual automobile is poor, insurance should not be written. But if the correction is made, this factor should be disregarded. Underwriting consideration should be given to the actual condition of the vehicle, not the underwriter�s opinion as to why the deficiency was not corrected until an underwriter made a demand.

Altered cars, or those decorated, do not necessarily indicate an undesirable risk. Some operators of these vehicles are inclined to speed and take chances in close situations, but others are good, safe drivers. The fact that a person likes a showy car does not mean that person also drives in a careless fashion. This is a factor which should be checked carefully but then underwritten on the facts of each individual case.

When underwriters of automobile insurance are considering a vehicle�s condition, two rules must be followed. The first is to get the facts, to find out what is actually the case on a specific risk rather than to make assumptions based on experience with the class.

The second rule is to apply judgment to each risk based on its individual characteristics, and not because it is a member of a group of risks. As with the driving record, the condition of a specific risk being considered is a critical factor. This applies to the mechanical condition, any un-repaired damage and any showy alterations.

�  Condition of buildings.

The condition of buildings must be carefully underwritten. Deficiencies which present an abnormal degree of risk must be corrected before insurance can be written. On the other hand, underwriters must guard against taking action solely on the basis of outward appearances.

Uncut grass and peeling paint may be indicative of a careless attitude which may also be reflected in frayed wiring and overloaded circuits. These conditions may also indicate a temporary illness of the applicant or a temporary financial reversal, neither, of which has adverse implications from an underwriting standpoint.

The underwriter would be justified to refuse writing insurance where the condition of property is so poor that the chance of loss is materially increased; however, the underwriter would not be justified to reject a risk because the condition of the building does not measure up to the standard of neatness which an underwriter feels is desirable. Neither the property application itself nor a related line such as automobile should be rejected merely because the housekeeping is poor by an underwriter�s standards, provided the condition does not really increase the chance of a loss.

Furthermore, outright rejection is undesirable in cases where the condition of property is so poor that insurance cannot be written. Rather, the underwriter should point out the types of improvements which could be made to achieve acceptability. Reasonable demands for improvements will benefit all parties and are perfectly legitimate. Again, however, the demands must be reasonable and not arbitrary.

Underwriters must recognize that standards of neatness vary by individuals, and only those repairs which actually affect the exposure to losses must be demanded. When problem areas such as poor wiring and other so-called faults of management are identified, the property owner should be notified. This gives the owners an opportunity to correct the problem. Then, if correction is made, the coverage can be written.

This approach accomplishes several things: more business is written, property owners are educated on proper methods of maintaining buildings and public relations are improved. This course of action is much better than merely rejecting the risk, if the condition is one which can be improved.

The facts must be obtained before such decisions can be made. Sometimes the answers on the application are sufficient, particularly if a photograph of property is also available. Other times, an inspection is needed. The producer, a field underwriter or special agent, or an inspection company can perform these inspections. Regardless of the method used, it is essential that the underwriter have the facts available before taking action on the condition of the property.

As a matter of procedure, the facts should be obtained, usually by physical inspection, before rejecting a risk because of poor condition, whether this involves actual unsafe conditions or poor maintenance of the building.

Age of Buildings

The age of a building on its own is not a reliable indication of its desirability as an insurance risk. After a few years, deterioration sets in, but repairs or renovation can offset this. Age may be a preliminary indication that there may be problems with the property. An older home, perhaps one over 25 years of age, certainly should be checked carefully. There may be problems in wiring, overloading of circuits or in the heating system.

On the other hand, each of these potential problems can be corrected. A house can be rewired, new circuits can be added and a new heating system can be installed. With such improvements, a 40-year-old house may be safer than one which is 25 years old. Only proper inspection can determine if these improvements have been made.

The acceptability of a property risk should not be based on its age alone. If it is older, but the critical parts have been modernized and the building has been maintained properly, the age should not be a factor.

Two areas may be affected by the age of a building. One is the rate and the other is the type of coverage being offered.

Rates can vary by the degree of exposure to loss. A 40-year-old house which has not been modernized is ordinarily more susceptible to fire losses than a five-year-old house, and the rates can vary.

Value of Buildings

It is imperative that underwriters determine the approximate value of buildings before writing property insurance. Securing the proper insurance-to-value ratio is the key to the profitable writing of property insurance. By encouraging property owners to insure property for close to its full insurable value, the insurance company increases the overall amount of insurance purchased across its portfolio. As a result, the insurance company is able to offer a lower premium rate to consumers while maintaining higher overall profitability by expanding its customer portfolio.

A coinsurance clause helps to discourage the customer from under-insuring property. The coinsurance clause provides that the insurance company pay a reduced benefit on a claim if the amount of insurance carried by the insured is less than a required amount stated in the policy. This amount may be 100% of the replacement value of the property or some lesser percentage.

Under many homeowners policies, insurance companies require that the property is insured for no less than 80% of the replacement cost. As a result, underwriters will not write a policy for less than 80% of the replacement cost. This may present a problem for low-income applicants who cannot afford the premium on 80% of the replacement cost of the property. This underwriting guideline has come under criticism from parties who believe that the insurance company is arbitrarily denying coverage to low income consumers.

As a result of the impact on profits, underwriters do not want to write a policy for less than 80% of replacement cost. At the same time, there is strong pressure to offer homeowners coverage to all people who desire that coverage, as the practice is viewed as unfair discrimination toward low income consumers. As an answer to this criticism, the insurance industry has worked to develop a homeowners policy that does not contain the replacement cost provision; instead, structures can be insured for actual cash value.

An actual cash value homeowners insurance policy includes basic coverage of fire, extended coverage, vandalism and malicious mischief, burglary or crime coverage, and liability coverage. The policy provides replacement cost coverage on partial losses up to the actual cash value of the covered property.

Even under an actual cash value policy, there still may be a conflict between the insurer and the consumer regarding the minimum amounts of insurance which must be written. Reasonable minimum amounts must be agreed upon because minimum amounts of premium are needed to cover expenses, and there is a point below which property is simply uninsurable other than in a specialty market.

A strong tendency exists for underwriters to keep pushing the minimum amount of insurance upward. As building costs increase, the cut-off point for desirability rises; values rise with building costs.

Some people feel that special handling should be taken with owners of small or low-valued homes so as to be accommodated in the regular market. Underwriters should resist the tendency to set ever-increasing minimum values and should try to offer insurance to most risks. Rates and minimum premiums may need to be raised if the statistics justify this action, but acceptability should not be affected. The value of a building, above a reasonable minimum, should not be a factor in underwriting. The risk should be eligible, and acceptability should be based on other factors.

Just as the underwriter tries to avoid under-insurance, they must also avoid over-insurance in order to reduce or eliminate the temptation for arson. This can be accomplished only by an inspection of every structure on which there is any suspicion that the amount of insurance requested is in excess of the value.

Occupancy of Buildings

Underwriters are justified in considering the occupancy of buildings in determining whether to write a policy, provided the considerations are based on fact and are not arbitrary.

Dwelling risks with commercial types of occupancies present different characteristics than those with only residential occupants. Some of these business pursuits may have little impact on desirability, but others can substantially increase the chance of loss.

Underwriters who have identified the differences and who feel that some exposures are greater than appropriate can consider these occupancies as unacceptable. Little criticism can be expected by the underwriter if the rules are based on objective factors. However, a preferable course of action would be to accept the risk and charge a higher premium if this can be accomplished.

Tenant-occupied dwellings may well require different rates than owner-occupied dwellings. As for acceptability, there may be reasons for refusing to write a policy on tenant-occupied property; for example, if theft losses on such occupancies are higher than justified by the rates typically used to handle the exposure.

The problem with underwriting rules regarding types of occupancy is that they may appear to actually be based on other factors, such as the location of the neighborhood in which the property is located. Still, rules regarding type of occupancy generally are satisfactory if based on actual experience and if applied uniformly to all such risks.

Vacancy can be a problem in both personal and commercial risks. Extended vacancy of a building can lead to deterioration, vandalism and a temptation for arson. Underwriters are justified in rejecting applications for insurance where extended vacancy exists at a property.

This action is even permitted by state regulatory plans where very few underwriting criteria are allowed in order to protect high-risk insurance consumers and high-risk properties. However, this rule must be tempered with reason, and no declination is justified if the vacancy is for a limited time only between changes of occupants.

Commercial risks must be written on the basis of occupancy. Nevertheless, this should just be the starting point. Almost all occupancies can be improved by the use of protective measures. The blanket listing of occupancies as being unacceptable, without consideration of the individual risk characteristics, can only lead to criticism and more regulation.

It would be much better for underwriters to try to find a means of accepting every applicant rather than to exclude some risks by type of occupancy alone. This approach means that more inspections will be needed along with a careful preparation of recommendations and verification that they have been completed.

If reasonable and necessary improvements are not made, the underwriter will not be forced to accept the risk. But if substantial compliance with recommendations is verified, the risk should be accepted. Rates may need to vary by occupancy, but the insurance should be made available.

The use of protective devices can be encouraged by underwriters. Underwriters should require alarms, dead bolts, barred windows or other devices where these devices will improve borderline risks.

Underwriters should consider the actual occupancy of each applicant and the problems associated with that commercial occupancy. Inspections may be required to secure all of the necessary information, although detailed information may already be available from local insurance services offices which hire inspectors and engineers for that purpose.

Recommendations for improvements should be made, but only where needed and never on an indiscriminate basis. The conditions and hazards of each risk should be analyzed, and the insurance should be written if a means could be found to do so. Only in this way will underwriters discharge their duties to both the public and to their companies.

Neighborhood

Insurance practices based on risk location must change. If revisions are not made voluntarily, they will be mandated by government decree. Both risk selection and rating will be affected. The unethical practice of underwriting discrimination based upon risk location is referred to as �redlining.�  More specifically, redlining has been referred to as a practice which results in significant fair or unfair geographic discrimination in terms of rates, extent of coverage or availability of coverage.

Whatever reasons underwriters use to explain subjective selection based on geographic location, the public and the regulators simply will not tolerate the practice. Selection must be based on the characteristics of the risk itself, not the neighborhood.

This approach must also extend to the evaluation of producers to be employed by insurance companies. A company should not refuse to appoint a producer because of the latter�s office location or the location of his or her customers. Existing producers should not be terminated or restricted because of location either.

Age of Insured

Underwriters have long felt that since accident frequency of youthful drivers, as a class, is considerably above the average, special attention should be given to all members of that class. Young people have been driving only a relatively short time; too brief a period to have established their own patterns. Individuals may have good driving records, but this may stem from their limited access to an automobile and to careful driving because they know they are being watched. The only safe approach is to limit acceptability of the class members and to charge higher rates to all of them until they have reached enough maturity to establish their own driving patterns.

Elderly drivers have been viewed in much the same fashion as youthful operators. They are mature and have demonstrated their method of driving, but some loss of ability is common as a person ages.

Again, the uncertainty concerning the class is present. Knowing that some persons lose some of their driving ability above age 68 or 70, underwriters tend to reject all such applicants. In some instances this practice has continued even while actuaries have determined that elderly drivers are better than the average driver, and reduced rates have replaced the former surcharges.

Individuals in both of the aforementioned groups argue that they should be evaluated on their own performance. They resent being grouped with other drivers of similar ages, some of who have poor driving records.

Sex

Underwriters have been having difficulty in adjusting to the concept of ignoring sex in both selection and rating.

Statistics have seemed to support different rates and selection patterns by sex, particularly in youths. Even though some later statistics appear to erase many of the differences, these statistics are not yet concrete enough to convince underwriters to change voluntarily.

Where statistics are credible and irrefutable, insurers may be able to use different classifications for a time, although this may disappear in the near future. Where data is not so certain, underwriters should probably drop all consideration of these factors; any continuation under these circumstances will only lead to further laws and regulations with respect to underwriting.

Marital Status

Marital status virtually has been eliminated as an underwriting factor. This factor is expressly prohibited in many states. In addition, single, separated, widowed and divorced persons represent such a large share of the market that the industry has determined that any underwriting rejections based solely on marital statuses would cause considerable harm to the insurance policy sales.

Occupation

The occupation of the applicant is not considered to be a valid selection factor. Its use is prohibited in some states. In other states, the trend is the same, and most observers agree that a reasonable approach to underwriting requires that occupation not be used as a selection device.

This is not to say that occupation must be completely ignored.

It might be a clue to other factors which should lead to rejection of the application. The occupation may indicate a risk which needs to be investigated in certain respects in order to determine acceptability. The characteristics of the individual applicant should be the guide, not the occupational group in which the applicant falls. If some occupations are marked by certain undesirable traits in many cases, the individuals who bear those traits may need to be rejected.

On the other hand, those who do not show those traits should not be rejected simply because they work in that occupation. Specific examples, using traditional groups, illustrate the practices which should be used.

�  Travel.

There is no doubt, that some people who travel extensively are more exposed to theft and loss than normal. This increased exposure can be caused by the merchandise carried, the type of transportation used, the geographic area traveled, the type of living quarters used while traveling and the attitude of the applicant toward protecting property.

If an applicant has a history of losses because of these characteristics, the application may need to be rejected, or limited in perils or by deductibles, because of those losses. In such cases, the underwriting action is taken because of loss history, not the occupation itself.

An applicant who travels in the course of work but who has not had any such losses is apparently not subject to these adverse traits exhibited by others. A good loss history can be due to many factors. If such is the case, an individual should not be rejected on the basis of the occupational hazards.

Each individual applicant should be underwritten on other aspects of loss exposures, not just the fact that travel is an inherent part of the occupation.

�  Transients.

Exactly the same type of approach should be used during the underwriting of applicants whose occupations are historically considered to be held by transients. Many of these people are in the restaurant, hotel and other such service based industries and may drift from job to job, but many others are just as steady as office workers.

Most of the potential underwriting problems of people in these occupations can be specifically identified. Excessive usages of alcohol or drugs, high incomes that attract lawsuits and poor premium payment records are major concerns. Each of these may be justification for taking underwriting action.

When a person in one of these transient-type occupations is found to present a specific problem, action should be taken on that basis. On the other hand, if an individual applicant does not present these problems, action should not be taken solely because of occupation. The emphasis should be on the individual characteristics of the applicant, not on the general characteristics of the group in that occupation.

�  Other factors.

The same type of handling is desirable on applicants in other occupations. Military, students, ministers and other groups which concern some underwriters, can include both acceptable and unacceptable risks. The underwriter should get the facts about the specific qualities of each applicant and make a decision on that basis, not on the occupation itself.

Illegal activities are the exception. No government agency would require the writing of insurance on known illegal activities. Where the facts show that the applicant is engaged in such activities as smuggling or maintaining a house of ill repute, rejection is the only reasonable course of action.

Stability

An applicant�s �stability� is not a reliable underwriting factor without further clarification of the term. Factors which indicate stability or instability must be used carefully, as some may be prohibited by law or common practice as underwriting factors. Some of these are discussed in other sections, such as marital status and occupation. Other factors which are sometimes applied are the period of time on the job or in the area, the number of jobs or addresses during recent years (such as five years) and transient types of living quarters (hotels or motels, for example).

Underwriters can use such factors if they can prove that the chance of loss is increased in such cases. Some companies may have statistics on policyholders with hotel or post office box addresses. With adequate proof of an impact on losses, such rules can be used.

Without statistical proof, underwriters should not use these stability factors as primary selection rules. However, information on these items can be gathered because they might point to other types of problems.

Tenants may offer particular problems. The loss ratio on tenants� homeowner policies may be worse than for policies which insure the dwelling as well as contents and personal liability. If certain groups of tenants can be identified as being worse than the average, such as those who have lived in four or more locations during the past five years, this could be used as a selection factor. In the absence of such specific statistics, rate adjustments are a more logical solution than merely assuming that all tenants are unstable.

Commercial underwriters could justify the use of a years-in-business rule for acceptability, based on statistics showing failures and bankruptcies. Such an arbitrary rule, particularly if it is longer than one year, will restrict sales and may be considered unreasonable. It would be preferable to use this as a guide, but to look at the work history and experience of the applicant in making the final decision.

Social Maladjustment

The involvement of applicants with such social agencies as welfare and public health clinics may be statistically proven to increase loss frequencies. However, this factor should never be used as a sole reason for taking underwriting action. As with other factors, this type of involvement may indicate other problems.

When such is the case, action may be required because of these other factors. Underwriters should disregard any apparent social maladjustment in applicants, especially if this is indicated by contacts with social agencies, unless other adverse factors are present.

Attitude

Underwriters are interested in every factor that may affect the chances of loss involving applicants and policyholders. Thus, underwriters could be expected to use study results which show that certain �attitudinal characteristics� have been present in a large number of fatal accidents. The use of these characteristics has not been prohibited. At the same time, underwriters should be aware that abuses of a factor such as this could lead to restrictions.

Underwriters wanting to use the attitude of the applicant as a selection tool will have difficulty in securing accurate information. An investigation report is virtually the only source which can be used to underwrite prospective new clients. With these reports, there is always the danger of a personality clash between the investigator and the applicant or a set of circumstances which the investigator might read incorrectly.

A neighbor may bear a grudge toward a person and will accuse that person of belligerence or argumentativeness. Caution must be exercised in using information secured from a single source when it involves a factor of this type.

Information on existing policyholders may be secured from claims reports. This may be the best source to learn about attitude because it is at the time of a loss that verbal accusations, negativism, belligerence and similar traits are most likely to be revealed. The potential problem of a personality clash is present here too, so care must be taken in using this information.

When adverse attitudes have been verified, underwriters may take action on that basis. They must realize that such a decision is subject to challenge and perhaps reversal by a regulator. On a case-by-case basis though, this factor may be very relevant and defensible.

Too much use of this factor can lead to problems. Taking action on borderline cases, or without proper verification, could cause regulations to be imposed. Therefore, this characteristic should be employed only in serious cases, and then only with other types of problems which indicate the desirability of underwriting actions.

Criminal Record

Underwriters who become aware of an applicant�s criminal record must give serious consideration to this factor. Certain types of past criminal activity, combined with the temptations and opportunities of many lines of insurance, could substantially increase the chances of loss. On the other hand, other types of past criminal activity may have no relationship to the exposures of a particular line of insurance. Where this is the case, no underwriting action is justified.

The individual circumstances of each case are extremely important. The date of the crime may govern; a conviction for car theft by a youth may not be relevant to the exposures when that person has grown to middle age.

The type of crime may be important; assault and battery may be no problem for fire insurance but critical to automobile insurance. A record of petty theft or shoplifting may not concern an automobile underwriter but may be very important to a commercial underwriter.

In every case, the underwriter must secure all of the relevant factors when a criminal record is discovered. This factor may justify a rejection. Many cases, however, will not be affected by this factor, and no action is warranted. Where circumstances do not call for underwriting attention, a setting aside of this information will both help sales and assist in keeping outside restrictions to a minimum.

Mental Incompetence

Underwriters cannot ignore evidence of mental incompetence of applicants. This condition can be very serious, particularly while driving a car. The pressures of driving, or even of living under many conditions, are great enough for normal people without adding the extra factor of mental instability.

This condition is difficult to measure. There are many degrees of incompetence. Some people can respond to treatment, resulting in complete recovery. A blanket approach is not valid.

The facts of each case must be obtained. When they indicate a non-harmful degree of incompetence, or a full recovery, the factor may be ignored. When the facts indicate potential problems, careful consideration must be given.

All of the available facts about each such case must be analyzed. The decision must be based on these facts, whether to accept or reject. When care is taken, and the decision is based on a careful weighing of the facts, underwriters can expect support for their actions, rather than criticism.

Physical Impairments

Studies have shown that physically handicapped drivers are generally no worse than average drivers. In many cases, they are better.

In the face of these indications, underwriters must abandon their long-held impression that driving problems are expected when insuring applicants with physical impairments. Where laws prohibit the use of these factors in the selection of risks, naturally these laws must be followed. In other states, judgment must be used, but with consideration of each individual case, not a blanket refusal to write such applicants.

The only line of property/liability insurance in which the physical condition of the applicant has been used by underwriters is automobile insurance, both personal and commercial. The problem, then, is to determine those characteristics which actually affect driving ability. Different types of disabilities can offer different types of concerns for underwriters.

�  Orthopedics.

The orthopedic group includes those physically handicapped persons who do not have   use of one or more extremities because of loss, paralysis or serious deformity. The underwriter may need to secure and verify additional information about these disabled drivers.

�  Medical.

Physical impairments which might be called �medical� or �seizures� include heart ailments, diabetes, and epilepsy. Although studies have not been detailed on each of these, indications are that these persons generally have better driving records than the average. This means that underwriters are not justified in automatically rejecting applicants having these conditions. At the same time, underwriting is concerned with individual applicants, and some persons having these impairments may be subject to driving problems. Doctor statements can be particularly helpful to the underwriter in these cases.

�  Hearing impairments.

There are many types and degrees of hearing impairments. Most people with hearing impairments can hear traffic noises, often with the use of hearing aids, even though many of them cannot distinguish words. It is this ability to hear traffic sources that is crucial to automobile underwriters.

Studies conducted in some states have indicated that people with impaired hearing are better drivers than the average. Other studies have arrived at the opposite conclusion. There is only one-way to for the underwriter to reconcile these conflicting reports; underwrite on an individual basis. Undoubtedly, some hearing impaired people are excellent drivers while others have poor driving records. This is the same as for any other group. A blanket rule for all members of a group simply does not fit.

�  Impaired sight.

Different degrees of impaired sight also are found in the population. Many drivers wear glasses and most of these drivers enjoy adequate correction to permit normal living.

Fire insurance, health insurance and other lines probably should not apply underwriting selection because of total or partial blindness, unless actual experience indicated that such action is justified. Some states have adopted laws or regulations which refer to the �physically handicapped� or the �partially sighted.� These terms would apply to impaired sight unless specifically excluded.

Where these controls are in effect, underwriters must not use these factors in the selection process, of course. In other states, each individual applicant should be considered on the merits of the case. Serious impairment of sight could be justification for refusing to write automobile insurance, but it seldom would be justified on other lines.

If the impairments are not serious, the applicant should be accepted.

Alcohol and Drugs

Underwriters are justified in being concerned about the use of alcohol and drugs by drivers. Studies have indicated that usage is increasing and is a contributing factor in accidents. Alcohol is estimated to be involved in roughly one-half of all highway fatalities, according to various surveys conducted by the National Safety Council and others.

Drugs are being identified as a factor in an ever-increasing number of accidents. The picture is not yet clear as to the volume of cases involving only drugs or those involving both alcohol and drugs.

Foreign Born

The national origin or ancestry of an applicant should not be a cause for rejection. Both laws and the present climate prohibit taking underwriting action because of this factor.

Most applications for insurance no longer request information on national origin or ancestry. Seldom do they request answers concerning the ability of the applicant to read, speak or understand English. In spite of suspected underwriting problems because of these deficiencies, the information simply is not available on most new submissions.

However, these facts will come to the attention of underwriters in some cases.

Producers concerned about a language deficiency might add comments to applications. Often, a claim will reveal the problem, and the adjuster may point this out to the underwriter. Where language or comprehension difficulty is discovered, the underwriter should not take action solely on that fact. This is prohibited in many states and would be criticized in others.

At the same time, this information does not need to be ignored. Further investigation might be conducted to determine if there are other potential problems. Some persons with language difficulties may be found to have poor driving records, whether related to this factor or not. Other problems may also be found and the combination of borderline items may be enough to justify declination or cancellation.

Underwriting action should never be taken solely because of the national origin or ancestry of an individual. This factor can be used as one item in the total picture, and may point to other deficiencies which would require action.

Related Business

Underwriters should no longer require the purchase of other policies with the same company before a requested coverage is written. The economies in investigation and underwriting expenses, and the desire for a more profitable coverage to offset an unprofitable one, simply cannot be justified. Each line should be priced so that it can stand on its own.

Current underwriting standards discourage requiring an applicant to purchase additional policies as a condition to approval. Regulators agree that potential insureds have a right to purchase the coverage�s they desire, from the companies they desire, without any requirements of related business by the insurer. The requirement may be aimed only at efficiency, but it comes across poorly to applicants.

Prior Insurance

Underwriters are taught to secure as much information as possible in order to select applicants intelligently. One item of information which was used regularly was the name of the prior insurer, if any. This practice could continue if its only purpose was to verify the accident record from the prior insurer.

While some insinuations have been made about �exchanges of privileged information� and some underwriters feel that the Fair Credit Reporting Act (including related state laws) may prohibit this practice, this is probably a valid source of reliable information.

Unfortunately, it is difficult for underwriters to ignore other facts which reach them. If the prior insurer is a substandard writer, an underwriter may find it difficult to overlook this. If no insurance is reported to have been carried, it is a natural tendency to wonder if something is being hidden. This related use of the information that arouses suspicions among regulators.

Underwriters have only two possible paths of action in such cases. Use the name of the prior insurer only as a means of securing facts about the losses which have occurred and disregard all other possible uses of the information. Underwriters should not even request data about the prior insurer.

Prior Cancellation

In the previous section, it was indicated that underwriters might want to continue to secure specific information concerning a prior insurer. Regardless of most information, it is obvious that no action should be taken solely because of a previous rejection or cancellation.

Severe criticism will result from underwriting decisions based solely on the actions of others. Underwriting rules are presumed to be different by company. One of the quickest ways to arouse antagonism is to reject or cancel coverage solely because another underwriter took similar action.

This does not mean, however, that an underwriter should ignore the actions of prior insurers. In fact, this may be the most valuable item of information which is secured by finding out about the previous insurer. This factor is one of the best examples of how �balanced underwriting� can be practiced. The secret is how underwriters use the information that a prior insurer had obtained to reject or cancel the coverage.

The wrong course is to automatically reject the applicant. Not only will this bring down the wrath of regulators, it may also cause the rejection of some business which would be perfectly acceptable since insurers aim at different sectors of the market.

The right course is to use the fact of a prior cancellation as another warning flag. A smart underwriter will immediately start to secure more information about the applicant. Such investigation may reveal a poor driving record or other such factors which would be adequate cause for rejection.

This last factor to be discussed, the rejection or cancellation by a prior insurer, is a good illustration of how underwriters can continue to select risks under the watchful eye of govern-mental regulators. Factors which have caused concern to underwriters in the past, need not be ignored. However, they should not lead to a blind reaction based on past practices.

Rather, these factors can point out the need for the securing of more facts before accepting an applicant. Then, based on complete information, a decision can be made which complies with the laws and regulations and still senses the needs of the company and the public.

Conclusion

As an insurance producer, you are likely to be asked significant questions by your customers regarding the underwriting process and the likelihood of your customer obtaining a policy. The preceding description of the multitude of issues involving property and casualty underwriting should help you identify many of the concerns which can be expected from customers. Underwriting will continue to evolve in a manner which balances fairness with the profit-taking nature of the business of insurance.

What is a staff underwriter?

What is line underwriter?

Which one of the following is primarily a responsibility of staff underwriters?

When evaluating an application what three decision options are available to an underwriter?