What is Insurance underwriting?

The process of assessing the risks and profitability of offering a policy to an individual or organisation is known as insurance underwriting. Insurance underwriting is a crucial and non-deductible part of every insurance policy be it health insurance, property insurance, insurance related to a business or its goods, marine insurance, life insurance or anything else. It is through insurance underwriting that an insurance company analyses its chances of having to pay the claim or dangers that the insured party might be exposed to. The underwriting also helps the insurance company to decide or put forward and approve the amount of premium. Corporate insurance brokers and insurance companies hire or outsource specialised individuals to conduct the underwriting analysis, make reports and determine the risks. These learned professionals are known as insurance underwriters.

The process of underwriting is a very elaborate and complex affair more so if the amount of insurance is high or the party to be insured is an established organisation, an MNC, etc The underwriting business is conducted based on data collected from various sources, statistics like previous profits or losses incurred by the entity, guidelines as stated by the insurance company, government policies, etc. Based on these, underwriters assess and predict the risks, keeping these risks in view, the insurance companies decide the premium, total sum of the policy, etc.

Depending upon the type of risk, underwriters evaluate every financial aspect of the prospective policyholder. This helps in determining the approximate level of risks involved. Through this, the financial interests of the insurance company, insurance brokers and even the investors and shareholders are protected.

What is Loss Limit?

The loss limit is the limit lesser than the total value of the assets or property at risk. The value of the loss limit is decided by the insurer and stated in the insurance policy based on the risks predicted in the underwriting analysis. The loss limit is set as such that although it is equivalent to the losses as borne by the insured in the occurrence of any unfortunate event, it is not exactly equal to the value of the insured asset or property.

Since reputed insurance companies have a huge clientele spread across various industries, sometimes for very high-value risks, it might not be possible to insure the entire property or asset involved. Therefore, insurance companies set a maximum limit per loss.

This approach of loss limits is put to use usually when the insurer is not able to or is not willing to offer the full coverage amount. This could be various reasons like the involvement of extremely high financial risk, lack of the required credibility of the policyholder, etc. For instance, hazards like earthquakes, floods, earthquakes, etc might be difficult to insure, especially in locations which are prone to these natural calamities. The loss that these might cause cannot be accurately calculated, therefore loss limits are set to protect the interests of the insurance company. Loss limits are also set for reinsurance policies when the reinsurance costs for a full blanket limit are prohibitive.

When loss limits are considered for risk management, although the policyholder has to agree to accept a value lesser than the actual value of the insured entity, there are some perks which are offered to them. The insurer offers benefits like keeping the rate of premium the same during policy renewal, the penalty for underinsuring the goods might also be neglected, etc.

Relationship between Insurance Underwriting and Loss Limits

Insurance underwriting plays an important role in deciding the loss limits for specific insurance policies or all insurance policies related to a particular niche.

Loss limits are set to protect the financial interests of the insurer while also providing the right amount of compensation to the insured which would be sufficient for them to cover up their losses. It requires a thorough analysis of factors like previous records of the party to be insured, tax considerations, geographical characteristics like proximity to calamity-prone areas, asset evaluation, the credibility of the insurer and many more. All of these factors are studied by insurance underwriters, through data study,  research, interrogations, etc. They then make the necessary predictions about the risks involved and based on these predictions the loss limits are set on insurance claims.

Underwriter Considerations for the Calculation of Loss Limits

Loss limits are mostly applied to property insurance policies. There are various factors considered during the property insurance underwriting process, here are a few of them:

●     The type of insurance policy 

Type of policy refers to the kind of coverage it provides and to what extent. Depending on the type of policy the loss limits are decided. The loss limit might vary if you add additional benefits to your policy.

●     Value of the Property and included assets

The value of your assets to be insured along with the property’s value are the two most important factors taken into consideration during the calculation of loss limits. In addition to this, the premium amount also plays a crucial part.

●     The Usage of the Property

Since the usage of the property directly affects the kinds of risks it is exposed to and to what level, it plays an important role both in deciding the premium as well as the loss limits.

●     The environment which surrounds the property

The environment which surrounds the property is an important factor which is taken into consideration during the calculation of loss limits as well as the premium. This is because your property’s location might be prone to risks like natural calamities, security disturbances, etc.

●     Age of the Property

Loss limits might vary based on the age of the property. This is because old buildings are usually more prone to damage and losses as compared to the new ones.

Loss limits are helpful for both the insurer and the insured. While it might help the insurer play safe, it will let the insured avail lower premiums and get loss reimbursements which might help them at least get back on track.

Contact Deinon Insurance Brokers LLC at infra-energy@deinon.ae for the best insurance solutions.

Stay tuned for our next blog in the series on “What will be the underwriter considerations under Industrial All Risk.”