Cracking the code Featured

12:35pm EDT June 28, 2006
“Congratulations! We are pleased to inform you that your application has been accepted,” reads your new insurance policy. Between your application and acceptance, a complex process called underwriting takes place. It determines the amount of risk associated with insuring people and businesses.

“Risk exposure is measured in terms of the chance of loss involving property, liability, people and net income,” says Steve Blankenship, manager of the Underwriting Practices Group at Westfield Insurance. “The underwriting process allows an insurance company to determine the type and amount of coverage to offer, as well as the amount of premium to charge for insuring the risk.”

Smart Business spoke with Blankenship about the reasons for underwriting myths and the facts about some common misconceptions.

Why do underwriting myths exist?
First, many people do not realize the financial risk that insurance companies accept with even the smallest policies. When you consider the broad nature of coverage contained in many insurance policies, including property and liability coverage, an insurance company commits well in excess of $1 million to cover even a home and auto or a small business. This level of financial commitment is made to thousands of policyholders by a single insurance company and provides extremely valuable protection and peace of mind for its customers.

I also believe there is a common misperception that insurance companies earn enormous profits. In recent history, there have been only two years — 1978 and 2004 — in which the insurance industry made a profit from its underwriting operations.

Do insurance companies operate in an uncontrolled environment with little or no regulatory oversight?
No. The insurance industry is heavily regulated at the state level. Regulation controls the rates that insurance companies must use to develop and charge premiums. Rates, as well as coverage forms and underwriting guidelines, are filed with each state in which an insurance company conducts business. States also oversee the financial stability of insurance carriers to ensure they have the ability to pay claims.

Do insurance companies want to pay claims?
Insurance companies, like any other business, want to earn a profit. This means they want to collect sufficient premium payments to cover claims and expenses. Insurance companies control claims through sound underwriting decisions and claims management. However, this does not mean they do not want to pay claims.

An insurance policy is nothing more than a promise to pay by the insurance company. When a loss occurs, the company strives to pay claims promptly and fairly based on the coverage purchased by the policyholder. In other words, claims handling is an opportunity for the insurance company to shine by following through on the promise to pay.

Do insurance companies’ underwriting and claims departments work independently of each other?
No. Both are involved in a process aimed at providing insurance coverage to a policyholder. Claims settlement should be a validation of the coverage provided by the underwriter through the insurance contract, or policy. Following analysis of the risk, the underwriter proposes an offer of coverage to the agent, who in turn accepts the offer and proposes it to the customer. These first few steps culminate in the customer’s acceptance and purchase of an insurance policy. At every step, each party is acknowledging understanding and acceptance of the coverage.

Knowing these steps have taken place, the claims representative can adjust a claim and be confident that the insurance policy reflects the coverage intended and understood by all parties involved in the contract process. In other words, the claims settlement should reflect coverage that was clearly presented and accepted at each step of the process.

Do all policyholders with a particular insurance company pay a standard insurance premium?
It is true that policyholders in the same business class, such as grocery stores, electrical contractors or auto repair shops, start with the same base rate from the same insurance company. However, several factors affect the coverage an insurance company is willing to provide and the amount of premium it will charge.

Examples of these factors are location and construction of a building, prior claims/loss history, quality of management, amount of sale or payroll, the number of employees, and the type of equipment used in the operation.

Do policyholders have any control over their insurance protection and how much they pay for it?

Some factors (like location and construction of buildings) cannot be easily controlled. But the policyholder can influence many aspects of the risk assessment. These variables can impact the type or amount of coverage provided, as well as the cost of coverage.

Examples include hiring practices; job site safety; employee training; good record-keeping; financial stability and overall financial responsibility; fleet maintenance; accident prevention and investigation; and pre-screening prospective drivers by reviewing driving records.

STEVE BLANKENSHIP, CIC, CRM, is manager of the Underwriting Practices Group at Westfield Insurance. Reach him at (330) 887-8417 or For more information, visit