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.

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.

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.

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.

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.

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.

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.

Subject to Change.