Underwriting Commercial Auto Business

What is Underwriting:

Underwriters use the underwriting process and various supporting underwriting tools to assess both their new and existing business coming up for renewal. An insurer’s overall profitability can depend significantly on the quality of its underwriting. There are three main additional purposes that effective underwriting achieves

1. Guard against adverse selection: An example of adverse selection that happens primarily due to lack of proper underwriting clauses is that some property owners in areas prone to coastal storms purchase windstorms coverage only before a hurricane season, when they expect severe losses. This must be checked with the help of introducing correct clauses in policies covering coastal properties. Another could be high density of coverage in counties with loss history that hasn’t improved over a continuous period.

• Ensure adequate surplus: If an insurer keeps writing more business disregarding the underwriting losses that the business generates, then the capacity of the insurer, measured by comparing insurer’s written premiums to its surplus, decreases below the regulatory allowed limit. This can be checked with the help of fair conditions and deductibles introduced in the insurance contract.

• Enforce guidelines: The right underwriting guidelines must be enforced by producers, MGA’s and varying level of underwriters. Correct deductibles and clauses must be put to ensure the guidelines are not flouted. Some producers are allowed to ‘field underwrite’ the accounts before submission. For this reason, they are also sometimes known as ‘front line underwriters’. For any variations in guidelines, proper supervisory rules should be followed by underwriters. With the current advances in AI/ML technology, machines and software systems are well suited for field underwriting.

Commercial Auto Classes:

While it is understandable that the term ‘commercial auto’ insurance is meant to broadly describe all motor vehicles that are not in private ownership or are being used for commercial gains, it is prudent to categorize commercial insurance representing finer details about the type of liability being covered.

Proposed classifications on the lines those being followed in developed insurance markets could be as follows:

1. Business Auto: Liability arising out of the ownership, maintenance or use of commercial vehicles owned or hired by the named insured. This is an important classification since this kind of coverage would be available only to large commercial organizations which have their own fleet of cars available as well as whose employees regularly hire vehicles for business use. It’s an effective way of differentiating with Truckers and Auto dealers who might also want commercial auto coverage.

• Truckers: Liability arising out of commercial trucking operations and the trucks in the commercial use of the insured entity could be covered in a different categorization. This will enable a separate sub-line for one of the worst classes to underwrite in current Indian insurance scenario, thereby enabling better tracking of underwriting clauses and deductibles made available to the insured’s and tracking the underwriting results.

• Garage Operations & Auto Dealers: This classification offers similar coverage but for a very different business class, that of garages and auto dealers. The exposures that this class faces range from customers’ visits to the premises to the customer as well as employees driving vehicles within premises. In case of dealers also provide repair services, then there could be liability exposures from those operations as well.

Underwriting Commercial Auto (Clauses and Conditions):

Clauses: Variety of clauses could be designed to be used in business auto. Common clauses are as follows:

1. Employees as insureds: This clause will enable the underwriters to clarify that unless this clause is explicitly included, employees of the insured commercial entity while using their own vehicles for insured entity’s behalf, will not be treated as insured in the policy. Underwriters, here, can make a distinction that such vehicles used by the employees must be their own autos and not be hired or rented by the insured entity.

• An employee hired vehicles: This clause ensures that unless such a clause is included explicitly, employees who rent a car in their own name for business purpose are not insured. Since this option does not come into use often, underwriters should be able to identify all the prospective drivers at the beginning of the policy itself.

• Rental Reimbursement: Although this coverage is already present with its flavors in personal auto insurance, it’s very important to stress at the point that the rental reimbursement in case of commercial coverage will not only cover the rental expenses for damage to commercial vehicle as per daily limit and per accident limits, but also is available in case of theft. Since repairs for commercial vehicles do take time, this coverage could be inserted with its own clause of getting triggered only after some period, say 72 hours or so, and the limits be defined in terms on money as well as days

• Aggregate Clause- Since there could be considerable value being insured when subject is a fleet of vehicles underwriters need to limit the account’s catastrophic loss potential by adding an aggregate limit on any one loss at any one location. An aggregate limit clause would pay for all covered losses during the covered policy period. Before doing this, the underwriters should inspect all locations where the insured’s vehicles are kept when they are not in use. If these vehicles are stored inside a building, they should ensure that age and construction type of that lot is taken into consideration.

Conditions

Each class can have unique underwritten conditions. Most common are listed below:

1. Business use: Driver exposure and the use of vehicles is always an important consideration for underwriters. In this view, it is important for underwriter to make the distinction between business use of owned autos and non business use. A lot of operations in this classification require employee-drivers to pick up or deliver vehicles, run routine errands and also provide road service to key clients. Dealers might also send the employee drivers to other branch dealerships for vehicles that are not present in their own inventory and could be sold. Once such business uses are classified, the underwriters could make a note that the covered incidents only mention about listed business uses.

• Non business use: Dealers and Garages might allow some of their owned vehicles to be given to key employees for their use outside business hours, on weekends or on a regular basis too. Some uses of these vehicles could be unrelated to business such as use of vehicle to haul furniture while moving to another house. Once underwriters are aware of such regular non business uses, they can identify the loss potentials and agree to include/exclude such uses with the help of clauses.

• Employed drivers: Employees are the most significant liability exposure because they regularly use owned autos for business, non-business tasks. Underwriters could easily obtain driver info since these are employed. Some of the loss exposures by employee drivers could be a demonstration of autos held for sale, towing of break down vehicles, drop off clients. Its rather a safe class of drivers for underwriters to insure.

• Non employed drivers: It’s possible that the business owner’s family members use the vehicles owned by the business for their personal use. Another such exposure could be when the dealer provides vehicles for prominent road shows or for other promotional uses. Underwriters should identify all drivers who are going to use the vehicles given for such activities. By doing so, the underwriter could understand the loss potential and could therefore include clauses and conditions to restrict coverage for some activities which are considered more hazardous.

• Customers’ use of vehicles: This is a rather normal exposure for any auto dealer. That’s because customers almost always test drive autos before making their purchase decision. Since this presents unknown loss exposure for underwriters, a definite route devoid of hazardous roads and intersections for test drive could be imposed by the underwriter. Underwriters can make sure that a clause to review dealer’s procedure for test drives and a review of dealer’s loss experience in this area is added to the policy as a tool that can further assist underwriters in rating.

• Repair work on subcontract: It’s a known fact that specialized repairs for commercial vehicles such as body work or transmission work require significant amount of work at premises that are not owned by the dealer. Since dealers frequently subcontract such work, underwriters must attempt to get as much information that could help them determine the best conditions and clauses for such work. Although difficult to obtain underwriting information for subcontractors, underwriters could still impose a clause to obtain certificates of insurance from all subcontractors that the dealers partner with.

• Insurance to value (ITV): An important point to note is that garage keeper’s coverage is for the exposure of damage to customers’ autos in the insured’s care, custody and control. Therefore it becomes pertinent to note that the liability limits for a particular location are equivalent to the maximum actual total value of vehicles that are normally stored at that location. Introducing this clause will enable the underwriters to make sure that there is no underinsurance and no need for any coinsurance clause to be inserted explicitly to apply a penalty to the insured for failing to do this.

• Key control: Large auto dealers have sophisticated key controls in place to ensure that safeguards are in place to prevent unauthorized access to keys. Underwriting considerations for individual accounts include whether the insured permits customers to leave their cars after the dealership closes via a key drop and the insured’s process for handling customer’s keys during service of their vehicles. Underwriters could also impose conditions such as keys are left in secure area in custody of a designated employee.

• Nature and extent of operations: It’s also important for underwriters to determine the complete nature and mode of operations that the insured undertakes when compared to other dealers. Some example could be that the insured dealer holds on to the customers’ vehicles for a longer duration in the premises for service than other dealers, thereby increasing the likelihood of loss. Another such example is the duration the vehicle is test driven after service or repairs are complete as well as whether the vehicle is driven on public roads. All these are instances that increase the loss exposure for the underwriters and thus give the underwriters an opportunity to add some definite clauses and conditions to reduce such loss exposures.

References –

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• https://www.nationwide.com/business/insurance/auto/
• https://www.insureon.com/small-business-insurance/commercial-auto
• CPCU.org
• Insuranceinstituteofindia.org