Parameters in Underwriting Motor Insurance

The underwriter uses several parameters to underwrite vehicle insurance risks. Here we explain three of these parameters:

Insured driver  

The driver is also an important parameter in underwriting. The best car, if driven by a bad driver will result in accidents and losses. Hence the underwriter will take into account a lot of information related to the Driver. 

The age of the driver has a bearing on the loss ratio. The younger drivers are prone to make accidents and cause losses. The younger drivers are more enthusiastic and easier to make bad decisions which will end up in accident and loss. 

Age of the driving license and the years of experience of driving a motor vehicle. A holder of a new driving license is considered a high risk. Apart from this the insured might have obtained a driving license but did not get an opportunity to drive hence the age of driving license may be more but the experience may be less. The underwriter must get detailed information in order to understand the real experience of the driver in driving the vehicle. 

The underwriters should also know whether the driver is suffering from any physical and or mental infirmity, hearing problems or defective vision, or even color blindness. These attributes will have an impact on the accidents. The healthy and physically fit drivers will have more endurance and will cause fewer accidents compared to the person with some of the defects as mentioned above. 

The gender of the driver may also be a criterion for underwriting. Studies have been done on this issue and it has been found that women are much safer drivers compared to men. Once again this is not the major criteria for underwriting. 

Apart from the age of the driver some even consider marital status, which has a bearing on the risk. There is an assumption that most married people tend to stay at home compared to bachelors. This assumption makes married people a safer risk compared to bachelors. 

Driver past accident records also help in making the right underwriting decision. If a driver has more accidents then the chances are that he may be a bad driver or a careless driver. The careless driver reflects a moral hazard. Hence, he should be rated higher and even the deductible can be increased. 

The occupation and educational level of the driver is also important as there are certain occupations that have proven to have bad accident records. Even driver with good education seems to be good drivers. Some insurance companies treat these as important underwriting criteria for motor insurance. 

Convictions of the driver for traffic violations is also an important criterion for evaluating the risk the underwriter is assuming. A person with numerous convictions will be a morale hazard and may cause a loss to the insurance company. The underwriter should be able to probe the detailed information obtained with regard to convictions normally during the last five years. 

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Geographical area of usage

Some insurance companies have differential ratings for different geography. Like a vehicle plying in the city, roads are considered at a higher risk than a vehicle plying in the countryside. Then the underwriters also categorize areas of risk, as the vehicle when used near a sea coast is more prone to rusting and may cause more accident and depreciation than the vehicles which are used in places away from the seaside.

Similarly, some areas are prone to natural disasters like floods. The rating for vehicles coming from such areas may have higher compared to the vehicles coming from other safe areas. There are also areas prone to theft and some areas are considered safer areas. The areas which are prone to theft will invite additional premium and a higher deductible the areas which are considered safer. 

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Insured estimated value or sum insured of the vehicle  

Insured estimated value (IEV) also known as the Insured declared value (IDV) is an important requirement of motor insurance. IEV becomes sum insured under the own damage section of the vehicle. It is required for package policies. This is not required for third party insurance. The rating for the vehicle is based on the IEV and the underwriters usually work out a percentage of the IEV and if the value is low then there is a minimum premium criterion that will take care of low-value cars.

This value is provided by the insured and the insurer will only make a judgment as to the correctness of the value. The declaration of low value will go against the insured. Whereas declaring a higher value than the real price of the vehicle will cause the insured to pay more premium without any benefit. 

For example, if Mr. X wants to insure his car which is worth US$ 100,000 and the underwriter decides to rate it at 4% then the insurer will charge 4% of 100,000 which comes to $ 4,000. The insurer has minimum premium criteria of $1,000. In another case, if Mr. Y wants to insure his car and the IDV or IEV is $ 20,000 and the rate arrived by the underwriter is 4%. Then based on the value the premium should come to US$ 800. But in view of minimum premium criteria, the premium charged to the insured will be $1,000, which is the minimum premium criteria.

Christophe Rude
Christophe Rude
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