We’ve already looked at what an insurance broker does.
Today we’re looking at the next link in the chain: the insurer.
It’s likely you have an opinion of insurance companies already. They’re pretty hard to avoid. And, let’s be honest, they’re not the most popular kid on the block. Ask around and it won’t take long to find someone with an insurance-related gripe of some sort.
They’re not all bad though and we’re hoping it’ll help knowing a bit more about how they work, and how and why they make the decisions they do. There’s an awful lot going on behind those shiny glass doors y’know …
Every insurance policy starts with an underwriter. They’re like an insurer’s eyes and ears. It’s their job to evaluate each proposal and decide if the insurer should cover it.
Visit an underwriting department and if you don’t hear the word “risk” within five minutes, they’re not doing it right.
Underwriters’ lives revolve around risk. Not in an extreme sports kind of way, but because of something called “risk transfer”.
In simple terms, the insurer takes the financial hit of something going wrong (a car crashing, a building burning down, a professional person being sued) instead of the person or entity directly affected. They do it for money, of course, in the form of a premium paid to them.
That’s after an underwriter has worked out how likely it is that something could go wrong.
Let’s look at professional indemnity insurance. How risky any given ‘thing’ is dictates whether an insurer will cover it and how much they’ll charge if they do.
This risk evaluation process is both complicated and necessary. Insurers have to make sure that what they’re covering doesn’t cost more in claims than they’re paid in premium.
They have to turn a profit too. Insurance is a business and, like it or not, you’re part of it. Any business has to look out for their own interests as well as their customers’ and insurance companies are no different.
So they have to pick and choose their risks. Or specialise in one particular area and get to know those risks inside out.
Even then, every policy is a gamble. But a canny insurer makes sure the odds are stacked in their favour.
For example, they might know that of every 1,000 training consultants’ policies written, 999 will be fine and 1 might have a claim.
To an insurer, those are acceptable numbers and makes covering training consultants worthwhile. It’s a calculated risk.
(It helps training consultants too because low claims = low premiums.)
We’re often asked why we don’t cover occupation X or business activity Y. It’s because the individual insurers we work with have an ‘appetite’ – what they do and don’t like, basically.
If you’ve approached a broker or insurer for professional insurance, it’s likely you’ve had to fill in a proposal form or answer a few questions about what your business does. This is the risk evaluation bit; their appetite in action.
The questions you’re asked relate to the most significant areas of risk the insurer knows you face, and how much work you do in those areas (by £ value). Your answers dictate whether they’ll cover you.
You should be as honest as possible here. Believe it or not, insurers like to know worst-case scenario. They have data from previous types and costs of claims in your industry but there’s always room for something new.
Only then can they write the wordings, clauses, endorsements and other technical bits that cover you. If they don’t know the full extent of what you do they can’t, or won’t, cover it – and are more likely to refuse a claim related to it.
At this early stage, the underwriter is trying to answer these questions:
This process can take anything from a couple of minutes to a couple of months. It depends on the complexity of the potential policy, the underwriter’s familiarity with it and how much information they have. It’s not unusual for them to want to see a contract, your terms and conditions or a job spec, for example.
The premium is calculated using the insurer’s own ‘rating’ system. This splits your annual turnover by business activity and allocates a variable pence value per pound to it, according to how risky each activity is.
It reflects both the overall risk and how much the insurer wants your business, relative to their competitors.
Numbers, however, are only part of it. Businesses are all about people and insurers like to know a bit about you too.
Your experience, qualifications, claims history and such like all play a part, but there’s also something less tangible that insurers look for.
In short, they’re after a ‘professional professional’. Someone who takes their business and the risks it faces seriously. The rationale is that slapdash, irresponsible, short-cut takers are more likely to miss something and end up with a disgruntled, compensation-hungry client. No one wants that.
So it pays to present well and take the insurance application seriously. A proposal form riddled with typos and incorrect figures doesn’t look great. An underwriter won’t throw it out but it’ll certainly raise an eyebrow. Lots of to-ing and fro-ing for more information will delay your quote too.
But once you have it you can assume they’re happy to cover you (further caveats and subjectivities notwithstanding).
And that’s when you can relax, safe in the knowledge you’re covered. Until you have to claim of course.
Which is where we’ll start next time.
Our thanks to Hiscox underwriters Jon Hall and Matt Clayton for their help, insight and tea.