Process of Underwriting in Motor Insurance
Whether or not you can get a cheap auto insurance policy depends largely on the underwriting process. The underwriting represents the starting point of the legal and financial relationship between an insurance provider and the insured. The underwriting process is of utmost importance as the different underwriting factors are evaluated. It determines the risk that you represent for the company.
Broadly speaking and in practice, endorsements are also known as amendments to the policy. If we look very finely then there will be a difference between the amendment and the endorsement. In most markets, they are used interchangeably. In case of conflict between the policy schedule and the endorsement, the endorsement will override the policy schedule. Based on the information provided and the coverage requirements, the underwriter will identify different endorsements for different types of risks. Like if one customer is opting for an additional deductible.
Then the underwriter will incorporate the endorsement pertaining to the voluntary deductible and reduce the premiums accordingly. The insured may request for geographical extension or personal accident benefits to the passenger and the driver. Even for these, the underwriter will price the product and then will incorporate the necessary endorsements. If the new vehicle is purchased by the insured and the same need to be added to the policy. In such a situation the insured will advise the insurance company and they will add the vehicle to the policy by way of endorsement to the policy.
Warranties are also used by the underwriter. A warranty is a text incorporated by the insurer, binding the insured with a promise to the insurer to maintain certain features or refrain from certain features of the risk. It is the important condition of the policy and goes to the heart of the policy. Noncompliance with the warranty may deny the claim. In certain cases, the underwriter may put some warranties to make sure that the insured follows them properly in order to prevent losses.
The underwriter may put a warranty as to the minimum age of the driver or the maintenance of the vehicle. An example of a warranty for an underage driver can be as “It is hereby declared and warranted that the vehicle will not be driven by a driver, who is under the age of 21 years”. This will help the underwriter from the adverse effects of the risk. The underwriter need not worry or contest the insured but make sure that the warranty is complied with and make sure that the risk is as per his rating throughout the policy period.
Once the rating, endorsements, and warranties are finalized then the underwriter will prepare a quotation for covering the risk. The quotation can be verbal or written. The underwriter must make sure that the quotation is done correctly as it will become a part of the contract and should not promise something which cannot be covered under the policy. If the insured accepts the quotation provided by the insurance company or the underwriter then it becomes a contract.
The insured has to pay the premium as agreed. The premium is the consideration of the contract. The insurer will promise to make good the financial loss occurring during the period of insurance due to a covered peril and as per the terms and conditions of the policy.
The Motor Insurance Premium Is Calculated on an Annual Basis
The premium paid is not refundable at the end of the year even if there is no claim during the policy period. The premium is observed as the cost of the promise made by the insurer for one year. Hence the money is not refundable, unlike life insurance.
However, if the insured wants to cancel the policy mid-term then the premium is refunded on a short-period basis. A short period basis means in case of cancellation of the policy the refund of the premium is not proportionate to the number of days left in the policy. The premium charged to the insured is higher than the proportionate premium and the refund premium is lower than the proportionate premium.
If the insurance company decides to cancel the policy of the insured then the insurance company usually provides a pro-rata refund of the premium. In pro-rata refund of premium, in case of cancellation of the policy mid-term, the insured will get the refund of premium on a proportionate basis. The premium charged by the insurer and the premium refunded to the insured is proportionate.
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Monitoring the underwritten risks
The underwriter’s job does not end with the acceptance of the insurance. The process continues and he has to carefully monitor all the risks he has insured. If he finds problems with any of the risks then he should make sure to remedy the situation. If the underwriter finds any risk of having many claims then he should make a thorough inquiry and then make the necessary remedial measures like putting additional warranties or increasing the deductible or even canceling the policy altogether.
The overall goal of an underwriter is to make a reasonable underwriting profit for the organization.