In car insurance
An insurance company sets itself up to operate a common pool which is like contributions, in the form of insurance premium, from many people and pays the losses of the few. The task of underwriter is to manage this pool as effectively and profitable as he can.
Thinking of the role of the underwriter in this way, we could say that he has to:
• Assess the risk which people bring to the pool;
• Decide whether
or not to accept the risk, or How much to accept;
• Determine the terms,
conditions and scope of Cover to be offered;
• Calculate a suitable premium.
There is a great deal of agreement between insurers as to the important factors to be considered when deciding upon the rate to charge for a particular risk. They broadly fall into three categories. The first is the scope of cover required, the second is the frequency with which claims are likely to occur and the third is the severity of a claim if it should occur. Frequency and severity are very important criteria in assessing the level of premium.
Type of Car
You will know from your own experience that there is a wide variety of cars being driven about the public roads in the UK – everything from the very small family saloon car through to the very expensive, customized, high-performance vehicle. Insurers tend to use a points system in order to arrive at a premium-each of the major components is represented by a number of points which are then added together, and the consequent number of points related to a chart of premiums.
There are some exceptions to this general rule about methods of ratings. The most common of these would be the policies offered to particular market segments. Many insurers have special flat rates for those, say, over 50 years of age who meet certain requirements regarding claims history. Nonetheless by far the most common method of rating is the point system.
The point rating is applied to each of the different models and there is a grouping of different types of car according to a variety of factors which will include:
• The cost of the vehicle;
• The cubic capacity of the engine;
• The performance of the vehicle;
• The ease with which repairs may be carried out;
• The attractiveness of thieves;
• The availability of spare parts.
This will give you a picture of the factors relevant for rating purposes in relation to the car itself.
Age of the Driver
Most insurers regard anyone the age of 25 as young. This means that the scale of basic premiums charged become less as the insured gets older. Insurers are able to extract a variety of sophisticated statistics which demonstrate the relative claims costs and frequencies for different groups. These are reflected in the points allocated for this feature.
Rating District
The area in which a policyholder keeps his car and the area in which he uses his car are not always the same. Insurers base their premiums on the district in which the policyholder garages or keeps his car because it is a recognizable factor and it provides a reasonable guide as to the area in which the car is likely to be used. It would be extremely difficult to take account of all the variations in areas in which the policyholder may drive. However, if it is known for instance that a vehicle is used for commuting to London each day, insurers may well wish to apply a loading to the normal rating which would be produced merely by looking at the garage district. A scale of district rates applies. The lowest rated are islands off the coast of Great Britain, for example Anglesey, and the highest rated are cities of London. With the increasing sophistication of rating structures many insurers use the post code as a rating factor and have a significant number of different rating districts.
Cover
The greater the amount of cover, the higher is the premium. Comprehensive cover is more expensive than third party, fire and theft, the same insured.
Use of the Car
At the various heading in the certificate of insurance there is the class of use mentioned. Generally speaking insurers have 3 or 4 classes of use. The first, and generally the least hazardous, is social domestic and pleasure purposes only. Not all insurers have this restricted class of use as their normal minimum. Many include the business use of the policyholder and / or the policyholder’s spouse, although some have these as a second or third class of use. There are, however, restrictions even under this form of cover. It does not allow for commercial traveling. If cover for commercial traveling is required a different class of use is used, and the premium is adjusted accordingly. Each of the classes of use is designed to reflect the likely exposure of the vehicle in terms of the number of miles and amount of time it is on road. It is not an exact science, but it would be extremely unusual for a commercial traveler to drive fewer miles in a year than an individual who was using the vehicle solely for pleasure purposes.
Occupation
There are certain occupations that require specific underwriting action. Some occupations are regarded by certain insurers as rendering the risk undesirable or altogether unacceptable. In this category are those in the armed services, members of the entertainment profession and betting shop proprietors. Certain other occupations require special underwriting considerations. The most notable of these is a person who is engaged in the motor trade.
A standard extension is provided to a normal private car policy that allows the policyholder to drive another motor car or motor cycle not belonging to him (it provides cover for third party risks).
Age of Car
As we have already looked that type of car as being relevant in rating terms. It is also true that the age of the car is a relevant factor. Most insurers allow sometimes quite substantial discounts for cars that are more than, say, seven to ten year old.
It is difficult to be precise in this area because insurers have fixed their discounted figures at different levels and different ages of car.
Rating Summary
It can not be emphasized too strongly that in underwriting an individual risk and deciding upon the rate is necessary to look at all the factors in combination. Individually they may not pose a problem, but taken together they may produce a different picture.
The options available to an underwriter when considering a proposal are as follows:
• To decline the proposal altogether;
• To increase the premium that would normally be Charged or reduce it
if there are specially Favorable features;
• To apply some form of restriction to the cover (An ‘own damage’
excess or a restriction of Cover for those aged under 25 for example)
• To restrict the driving (to the insured only, Or to the insured and
spouse);v • To accept the risk on normal terms.
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