Underwriting is one of the core functions of the insurance company. It is the underwriter, who decides whether a particular risk is acceptable to the company. If he finds the risk is not suitable for underwriting then he will reject the risk. The intention of the underwriter is to avoid adverse selection. Under adverse selection, the probability of loss is not factored in. However, if the underwriter finds the risk as acceptable then he will work-out the premium or rate the risk accordingly and then he will build the terms and conditions suitable to the risk.
There may be a detailed process in between the acceptance and rejection. The Underwriter may find certain risk complicated and may seek additional requirements or guarantees before accepting the risk. We can describe Underwriting as the process of analyzing the risk, determining the premium, other terms, and conditions, monitoring the account post-acceptance.
Motor Underwriting
As with other underwriting processes, motor underwriting is simpler and easy to work out. Motor insurance as the terminology its selves is explicit. We should understand the terminology of the motor, before trying to insure it. Motor vehicle has been described very clearly in most of the countries, the core definition is that it is a self-propelled vehicle running on the motor (machine supplying motive power), and either runs on the tires or chains but does not run on the rails. The traffic law can add up additional parameter for third party mandatory coverage by adding wording such as “used on public roads”. The public liability or third-party liability usually arises only when the vehicle or automobile runs on the public road.
Parameters to underwrite vehicle insurance – Usage of the vehicle
One of the parameters the underwriter uses to underwrite the motor insurance risk is Usage of the Vehicle. The usage of the vehicle is a very important underwriting criterion. If the vehicle is used for commercial purposes then the rating is higher.
Types of cargo
In commercial vehicles also we may have tankers that carry liquid. If the tanker is used to carry water then the exposure to loss is less than compared to a tanker carrying hazardous chemicals or explosive material. Hence the underwriter is particularly concerned about the usage of the vehicle.
Maintenance of the vehicle
The maintenance of the vehicle is also important a well-maintained car is a good risk whereas a badly maintained car poses a moral hazard and may lead to a major loss.
Route that the vehicle usually takes
Similarly, if we look into the passenger-carrying vehicles. If the vehicles are used within the city the chances of accidents are less even if there are accidents the exposure is less compared to the vehicles which are being driven on the countryside as the distances are long and the driver may not get adequate rest and will be forced to drive even during nights and at high speed. This will definitely result in high costs associated with the accidents happening to such vehicles. In this way, it will be very difficult for you to get car insurance first month free. The underwriter will have to examine such situations carefully and rate the risks accordingly.
How the use of the vehicle will affect the cost of insurance?
Even within the same category of vehicles the higher the mileage the higher the depreciation and higher the chances of an accident. A private vehicle that is supposed to be safer can be rated differently based on the usage of the vehicle.
For example, Mr. A has a Toyota Camry, 2014 model and Mr. B also has a Toyota Camry 2014 model both cars are purchased by them on the same date and at the same price. But the kilometer running of Mr. A’s car is 250,000 whereas the kilometer running of the Mr. B’s car is 24,000. The kilometer running can be easily found if we look into the Odometer. On further exploration, it was found that Mr. A is driving to his office which is over 50 kilometers and he is also dropping his wife and kids at their office and schools respectively.
Apart from that, he is from the countryside and he travels weekly to his home town. This definitely will create a bigger exposure to Mr. A than compared to Mr. B, who drives from home to the office and back. On weekends he goes shopping. The usage of Mr. A is almost 10 times more than that of Mr. B. Hence the underwriter will be charging more premium to Mr. A compared to Mr. B or will end up loading more deductible to Mr. A.
The role of the underwriter is to identify the correct usage of the vehicle and incorporate the same in the policy. Any violation of the users can make the policy null and void.
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