We’ve already looked at what an insurance broker does.
Now 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 doesn’t take long to find someone with an insurance-related gripe of some sort.
But they’re not all bad. There’s an awful lot going on behind those faceless office fronts, y’know.
Time to lift the lid.
Every new insurance policy starts with an underwriter. 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 someone say “risk” within five minutes, they’re not doing it right.
Because underwriters’ lives revolve around risk. Not in an extreme sports kind of way, but because of something called ‘risk transfer’.
In simple terms, risk transfer means 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 this for money by charging a premium.
It’s the underwriter’s job to calculate how likely it is that something could go wrong.
How risky any given ‘thing’ is dictates whether an insurer will cover it and also guides 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.
And they have to make a profit too. Insurance is a business and, like it or not, you’re part of it. Every business has to look out for its own interests as well as its customers’ and insurance companies are no different.
So they have to be circumspect and pick and choose their risks. Or specialise in one particular area and get to know those risks inside out.
Even then, to a certain extent, every policy is a gamble. A canny insurer just makes sure the odds are stacked in its favour.
Here’s a fairly typical professional indemnity insurance risk as an example:
An insurer’s stats tell them that if it writes 1,000 training consultants’ policies, 997 will be fine and three might have a claim. Of those three claims, one might end in a payout. History tells it that payouts for training consultant claims are relatively low.
Even though it knows there could be claims, the insurer reckons that the overall figures are low enough to make covering training consultants worthwhile. It’s a calculated risk.
As an aside, 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 every insurer we work with has 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 (usually split 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:
- Is there a risk?
- Am I comfortable with that risk?
- Is this a risk I can cover?
- Is this a person/business I want to cover? (We’ll come back to this.)
- Can I cover it at a reasonable and/or competitive premium?
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 too, 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 questionable tea.