When you apply to take out an insurance policy, it’s the underwriter’s job to make sure the insurer has a full understanding of the risks to which the potential policyholder is exposed. 

The underwriter does this by assessing a range of factors about the applicant’s business operations.

After the assessment, the underwriter decides whether to approve the business’s application. 

But first, it’s important to understand the difference between an underwriting agent and an insurer. Underwriting agencies don't insure risks themselves. Rather, they assess risk on behalf of an insurer. 

“An underwriting agent accepts insurance business on behalf of an insurer. They tend to act for  Lloyd’s underwriters or local insurers who do not want to deal with specialised products. Most people would see an underwriting agency and an insurer as the same thing,” says Steadfast Group broker technical manager Michael White.

Using an algorithm means underwriters can consider many more data inputs when assessing risk

What do underwriters assess?

William Legge, general manager of the Underwriting Agencies Council, says there is a number of common data points all underwriters will examine when assessing a small business’ application for cover. These include the location of the business premises and the industry in which it operates.
 
“The industry the business is in is the most important thing. Don’t try to fudge it, because if you do, when it comes time to make a claim, you could find it could be denied if you supply false information,” he advises.

When it comes to making an assessment of the business premises, Legge says underwriters will look at how the building is constructed, the materials used and its location. Some areas, for instance northern Australia, are considered more risky due to the higher propensity for natural disasters such as cyclones and floods damaging the business premises and disrupting its operations compared to other areas. Additionally, the underwriter will consider the potential for the business to be affected by crime, given some areas are more prone to theft than others.

Length of time in business is another salient factor when underwriters assess an insurance application. A rule of thumb is the longer the business has been operating, the lower the risk of the business failing. If it’s a start-up, it’s worth letting the underwriter know if the directors have had prior experience or success in the industry as this may lower the perceived risks.

“It’s a good idea to work with an insurance broker, who can help small businesses navigate the underwriting process. Although much of it is automated, a broker can help put forward the business’ case and let the insurer know of specifics that may change its view on the applicant’s risk profile,” says Legge.

Underlying technology 

White explains underwriters use an algorithm to decide whether to issue a policy and the price for the policy.

“The algorithm determines whether the risk is acceptable based on the responses to a series of questions. If the risk is acceptable, it works out a price for the policy,” he says. 

An algorithm is a software program that draws on data provided by the business applying for an insurance policy to determine how risky it is to provide cover. 

In the past, underwriters manually assessed applications for insurance cover and had more discretion to approve or deny cover. But using an algorithm means underwriters can consider many more data inputs when assessing risk. This means the underwriter is more rigid in its assessment of a policyholder’s risks. This allows insurers to better manage their risks from their perspective, which leads to better priced premiums for some policyholders. The disadvantage from the perspective of the person seeking insurance is that the insurer is much less willing to look at risks which fall outside the strict confines of their algorithms.

“The process now is also more efficient and people get a response to their insurance application within just a few minutes,” White adds.

Underwriting is at the core of the insurance sector. For small businesses, what’s important is to provide accurate and complete information when applying for an insurance policy. That’s the best way to ensure the policy is approved and the premium matches the business’ risk profile. Contact your Steadfast broker to find out more.

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