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Field Explanations: Best's Underwriting
Guide
Overview
This documentation provides a basic
explanation of the features and contents of Best's
Underwriting Guide. It is intended to provide an
understanding of the types of information found in the product, the significance
of the various sections found in each classification -- including Best's Hazard Index and the Hazard Index
numbers, Underwriting Comments, Related Classifications, Special Exposures, Risk Description, the narrative or Lines of Liability sections and the Underwriter's Checklist -- as well as
sources and methods used in preparing the classifications.
The Hazard Index, Special Exposures
and Underwriter's Checklist offer an expedient means of
evaluating a risk. An examination of these features may be
sufficient for the experienced underwriter who is familiar with the
classification. However, for the underwriter wishing to have an in-depth
perspective on the classification, the entire report should be read.
Best's Hazard
Index
Best's Hazard Index was developed to
identify the relative degree of risk for the insurance coverages in each
classification. For each line of insurance the number given is an indication of
hazard (Low 1-3, Medium 4-6, High 7-9, and Very High 10). The numbers are based
on a careful review of all the research material we have collected, the opinions
of reviewers who have read and commented on the reports in draft stage, the
opinions of our in- house technical consultants and a review of similar or
related classifications. The Hazard Index numbers may be used to identify lines
of insurance which require further investigation before coverage is written, to
identify the problem areas within a classification or to get a quick feel for
the overall degree of exposure associated with a classification.
Because the degree of exposure for
different lines of insurance for a given classification can vary significantly,
these index numbers cannot be validly added together or combined. Each index
applies only to the specific line of insurance for the class of risk.
The index numbers typically reflect
both frequency and severity of the exposures and reflect the exposures for
average risks or for the majority of risks in the classification. In some
instances, however, the risks in a particular classification are not uniform or
it is more informative to let severity or frequency rather than a balance of the
two dictate the number. The Underwriting Comments are then used to qualify this
number or identify types of risks to which it does and does not apply.
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Underwriting
Comments
Underwriting Comments sometimes
accompany the hazard index number. These comments call attention to major areas
of loss or factors that may modify loss potential. They may also qualify the
Hazard Index number. For example, the 8 assigned to Workers' Compensation in
Fireworks Manufacturing and Exhibiting carries the comment "Severity rather than
frequency." We felt it was important to alert the underwriter to the probable
size of losses with an 8 and an Underwriting Comment to this effect. If we had
balanced the high severity with the very low frequency, this would yield a lower
number which would misrepresent the exposure. The 7 and the Underwriting Comment
"Much lower without displays" assigned to General Liability in Fireworks
Manufacturing and Exhibiting indicates that the number is based on risks with
that manufacture and exhibit fireworks and that risks that do not handle
displays have a lesser exposure.
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Related
Classifications
In addition to the primary process, a
number of subsidiary operations may be involved in the manufacture of a product
or the performance of a service. They present potential sources of loss that
should be considered. Such ancillary activities or allied classes of risk are
listed under Related Classifications to give a quick notice of additional
sources of information available within Best's Underwriting Guide. In addition,
when a related classification is important to the risk under consideration, the
narrative sections of the classification will specifically refer the underwriter
to the related topics. Reviewing those additional topics will give the
underwriter added insight into the risk at hand.
These cross references to related
classifications also make the Underwriting Guide more efficient. For example,
most museums, in addition to displaying artwork and objets d'art, run cafeterias
and gift shops. Rather than reinvent the wheel and repeat some or all of the
relevant information about these ancillary activities within the museums
chapter, the Guide simply refers the interested underwriter to the complete
discussion available in the Gift and Souvenir Shops and the Fast Food
Restaurants chapters.
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Special Exposure
Special Exposures is a list of the
chief hazards that must be considered in evaluating a particular classification.
These exposures may simply be unusual or unique or they may be capable of
producing a large loss.
The exposures are relative -- the
special exposures for a retail classification are minor when compared to those
for a manufacturing operation. The list does, however, help to summarize the
principal underwriting considerations for a classification and give a quick
indication of the nature and severity of the problems the underwriter is likely
to encounter.
Again, the facts of the
classification determine the contents of this section. In some industries
slipping and tripping hazards may be the worst problems encountered; in others,
death by electrocution, falls from heights or asphyxiation may all be
possible.
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Risk Description, Process or
Service, and Materials and Equipment
The Risk Description -- along with
the list of Materials and Equipment and the explanation of the Process or
Service -- provides a profile of the industry to familiarize the underwriter
with the nature of the business he or she is considering. The Risk Description
section provides an overview of the industry in question. This includes a
definition of the industry or the parameters used to define the industry in the
Guide. On occasion, the Guide's definition is narrower or wider than that used
by the industry itself or by ISO Commercial Lines Manual. For example, the Guide
discusses Hotels, Motels and Conference Centers in one report, but breaks out
Chiropractors Offices, Dentists Offices, Health Maintenance Organizations,
Optometrists Offices, Podiatrists Offices and Surgical Centers (Outpatient) into
separate reports even though the latter carry the same ISO code.
The Risk Description also contains a
summary of what typical insureds in this classification do, the social and
economic factors and changes that affect the classification, changes in
technology that can significantly change the number and types of hazards
involved, geographic distribution, typical patterns of ownership, size of the
risk (including, where relevant, revenue, volume produced or number of
employees), and laws and regulations applicable to the risk. If any factors are
not typical of all risks in the classification or if there is a minority of
risks that do not fit the pattern or a typical risk, this will be noted here and
addressed in the narrative/"Line of Insurance" sections.
The Process or Service section walks
the underwriter though the operations or methods of production used by risks in
the classification. This step-by-step explanation can familiarize the
underwriter with terminology and techniques that are discussed later in the
report and that have a direct bearing on the exposures. It also facilitates
communication with the applicant and gives the underwriter a better
understanding of information provided by the applicant. Similarly, awareness of
the types of Materials and Equipment used is extremely important and may help to
identify areas of special concern.
Although a Materials and Equipment
section is included in each report, the Process or Service section is sometimes
wrapped into the Risk Description. This occurs when the process or service is so
straightforward (e.g., in retail operations) that it does not require a lengthy,
separate explanation.
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Narrative/Lines of Liability
Sections
These sections, each devoted to a
separate line of insurance that is applicable to the classification, analyze the
various aspects of a classification and how they affect loss potential. Lines of
insurance covered include Automobile Liability, Automobile Physical Damage,
General Liability: Premises and Operations, Product Liability and Completed
Operations, Professional Liability, Environmental Impairment Liability, Workers'
Compensation, Crime, Fire and E.C.: Property, Business Interruption, Inland
Marine, Boiler & Machinery, Liquor Liability, Ocean Marine (Hull and
Protection & Indemnity), Aircraft Liability and Aircraft Physical Damage and
others. Obviously, not all lines of insurance are relevant to all
classifications.
Each section identifies the facts as
they pertain to a particular classification and a particular line of insurance
(e.g., vehicles and use, typical building construction or layout, number or
visitors to the premises). If there is not a uniform pattern of exposure
throughout the industry in question, or if there is more than one predominant
pattern, that fact will be noted and patterns found among a minority of risks in
the industry will be discussed as well. Each section also describes and
evaluates typical and possible hazards and exposures, makes loss control
recommendations, and notes positive and negative underwriting signs (i.e., signs
of good and bad risks). Wherever possible, the Guide will note industry loss
patterns or history, "typical" and/or most costly claims, and relevant case
history.
In essence, each classification
identifies a spectrum of exposures, from good to bad, against which the
underwriter can compare a given applicant. Some industries present so few or
such minor hazards that an operation that appears to be relatively safe
operation may nevertheless be a "bad" risk compared to others in the class;
other industries are so inherently dangerous that an excellent operation
employing state-of-the-art safety and loss control measures may still present a
significant chance of loss. The spectrum approach is important to give the
underwriter a realistic context in which to evaluate an individual risk and to
understand whether the hazards can or should be modified.
Because each report is created
separately with the assumption that it may be the first or only report
consulted, a thorough discussion is offered. As a result, the user, when reading
through several classifications, may sense a redundancy in some of the hazard
analysis or underwriting and loss control recommendations (e.g, an evaluation of
the number, type, age and condition of all vehicles or elimination of tripping
and falling hazards). The focus of each report, nonetheless, is on what is
unique to the classification, rather than what is common to all
underwriting.
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Underwriter's
Checklist
Finally, the Underwriter's Checklist
poses questions that the underwriter should be able answer before he or she
underwrites a risk. The questions are designed to help the underwriter determine
the facts of the risk and the principal hazards and exposures and recommended
loss control measures.
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Subject to Change.
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