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Evaluating Risk: Understand Commercial Insurance Underwriting

Businesses are a bit like snowflakes: No two are exactly alike. This means there is no quick and easy formula for assessing potential business insurance risk. A commercial insurance underwriter’s job is to assess the risk of providing insurance to a business owner based on that owner’s type of business, business activities, and claims history. It’s a tedious analytic process, and many business owners don’t understand what underwriters are looking at when their businesses are subject to review.

What types of insurance risks do commercial underwriters evaluate?

Commercial insurance underwriters must be versed in many types of insurance as many businesses have multiple coverage needs. The most common are:

  • Liability insurance — This covers business owners for any personal injury or property damage they may cause. If business owners are sued for such injury or damage, liability insurance covers the cost of defending and settling the suit.
  • Property insurance — This covers loss or damage to real or personal property related to insured places of business.
  • Workers’ compensation insurance — This covers on-the-job injuries to business owners or employees, which many states require business owners to have by law.

Within each of these insurance categories are additional available policies very specific to certain types of businesses. A few examples include:

  • Glass insurance — A good option for businesses with glass storefronts, this policy type adds additional protection against broken store windows and plate-glass windows.
  • Malpractice insurance — This category of liability insurance covers losses if third parties sustain injuries directly related to the advice or care of professionals like doctors or dentists.
  • Commercial automobile insurance — For company owners who own and operate vehicles as part of their businesses, commercial auto insurance covers vehicle damage, theft, or loss and provides liability coverage if employees cause damage or injury while driving company vehicles.

The range of commercial insurance needs varies greatly. Thus, underwriters must scrutinize many business facets when assessing potential risk.

How exactly do underwriters assess risk?

Underwriters don’t arbitrarily deem businesses “safe” or “too risky” to insure. Rather, they apply actuarial science, which is a specific type of mathematical and statistical analysis used to assess financial risk. Simply stated, it’s the science of looking at data and analyzing how likely it is a certain outcome may occur. If unfavorable outcomes for the insurer are likely, underwriters may recommend denying coverage or applying higher premiums.

Perhaps the biggest factor underwriters consider in their risk assessments is business type. Picture the “risk list” for a skydiving adventure outfitter versus that of a watch repair shop. The list for each is quite different — and one is likely shorter than the other! Other factors may include a business owner’s previous claim history, credit history, business expertise, company revenue, employee count, and business location.

After collecting and factoring all this data into their analyses, underwriters will notify the insurance company — not the customer — of their judgement. It’s important to remember underwriters work on the insurance company’s behalf, rather than its applicants. Underwriters exist to help insurance company leaders determine if and at what price it’s profitable for the company to take the chance on insuring businesses.

If underwriters work on the insurance company’s behalf, who looks out for applicants?

Insurance underwriters don’t directly interact with those applying for coverage. Rather, insurance brokers or agents are these customers’ faces and voices. A good commercial insurance broker will shop around to many underwriters to find the best terms to suit his or her clients’ needs and situations. For business owners, this means providing brokers with the facts and figures necessary for their brokers to really go to bat for business owners. Thus, a solid relationship with a good broker can make all the difference in whether business owners can purchase commercial insurance and at what cost.