An underwriting of the interruption risk peculiar to consequential loss insurance is important. the insurance wish to ascertain the full extent of possible interruption to the business in order to give the best possible service to the insured and at the same time to ensure that their own interests are protected. the extent to which a business may be interrupted through inability of customers to receive goods owing to damage at the customers premises is yet another feature on interdependency.
PHYSICAL AND MORAL HAZARDS
In economic theory, a moral hazard is a situation where a party will have a tendency to take risks because the costs that could incur will not be felt by the party taking the risk. In other words, it is a tendency to be more willing to take a risk, knowing that the potential costs or burdens of taking such risk will be borne, in whole or in part, by others. A moral hazard may occur where the actions of one party may change to the detriment of another after a financial transaction has taken place. Moral hazard arises because an individual or institution does not take the full consequences and responsibilities of its actions, and therefore has a tendency to act less carefully than it otherwise would, leaving another party to hold some responsibility for the consequences of those actions.
THE INSURED
A correct realization of interruption hazards by the insured is necessary to enable home to select the length of the maximum indemnity period the insured may decide to request cover against the risk of interruption to his business by reason of fire at premises of suppliers or of customers all three the sum insured the indemnity period and the premises insured govern the amount of the premium payable.
THE INSURERS
The insurers gain knowledge of the interruption hazards if advice has been request in the arrangement of the sum to be insured the indemnity period an the premises to be covered. the probably proportion of sum insured on gross profit or proportion of turnover which is likely to be derived from the suppliers or enable insurers to consider the appropriate rate to be charge for the additional risk. the knowledge gained by the insurer affects the decision on the amount that can be accepted on the risk an the amount that can be retained and knowledge as already mentioned affects the rate to be charged foe extensions.
UNDERWRITERS
A financial professional that evaluates the risks of insuring a particular person or asset and uses that information to set premium pricing for insurance policies. Insurance underwriters are employed by insurance companies to help price life insurance, health insurance, property/casualty insurance and homeowners insurance, among others.
Underwriters use computer programs and actuarial data to determine the likelihood and magnitude of a payout over the life of the policy. Higher-risk individuals and assets will have to pay more in premiums to receive the same level of protection as a (perceived) lower-risk person or asset.
ILLUSTRATION
A branch manager telephones to head office to say that a large firm manufacturing light metal goods on whose fire insurances the company have held the lead for many years. it is later found that the firm in view of their being engaged in export trade with a corresponding high priority rating for governmental assistance in the event of fire. with full information on the interruption risk, the underwriter estimates the maximum loss expectancy in respect of an insurance with a twelve months indemnity period . the extent to which the business is seasonal influences the extent to which the maximum possible loss may be expected to diminish with shorter indemnity periods.
RATING
it is necessary to note that in underwriting of this business regard is paid to the material hazards both physical and moral and that thereafter special attention is given to the interruption hazards. in the general system of rating the basis adopted is the full average fire rate on the contents of the process blocks of the viewpoint of the fire insurers for business premises indemnity period selected by the insured . for business premises where no manufacturing process is carried on the basis rate shall be the average fire rate of the contents of the whole premises.
PROFIT RATE
The rate of annual insurance shall not be less than the following percentage of the rate for the perils to be covered. although in a business running fairly evenly throughout the amount payable will in the event of loss not exceed approximately one half of the sum insured on gross profit. the extent of interruption during the early months following fire is likely to be far greater than during the early months. if there is extensive interruption there may be savings in standing charges which may not be minimize the interruption are having their charges which may not be possible for shorter interruption . if the general expectation that loss of gross profit will progressively diminish as the date of the fire recedes.
BASIS RATE
The basis rate for consequential loss resulting from destruction of or damage to property by the standard perils shall be not less than the full average fire rate of the items covering the contents of the process blocks of the premises occupied by the insured for the purpose of the business to which the consequential loss insurance applies except where otherwise provided. for other business premises where no manufacturing process is carried on the basis rate shall be the average fire rate of the contents of the whole premises.
SPRINKLERED BUILDINGS
Where reductions are allowed in the fire rate in respect of sprinkle red buildings the same are allowed when calculating the consequential loss basis rate . the sprinkler discount under fire policies is made in recognition of the fact that an efficient installation will extinguish or at least confine an out break of fire even though damage to machinery an destocks may result from the discharge of water.
STOCKS INSURED UNDER DECLARATION POLICIES
for this propose when concerned stocks are insured on declaration basis in the process block the sum insured shall be seemed to be 75 percent of the maximum sum insured an dthe premium be calculated by applying the tariff rate to the sum insured so ascertained.
SHORT PERIOD INSURANCE
short period rates are charged for insurance cancelled before the full period of the policy has expired expect where replaced by another policy. the new insurance is for a smaller sum insured then the return of premium under the cancelled policy is subject to retention of premium on a short period basis. in respect of the sum representing the difference between the sum insured under the old policy an dthe policy by which it is replaced.
THE PROPOSAL FORM
insurers usually require the completion of a proposal form for class of business. nearly all information that is eventually needed for drafting the policy I contained in the form . no standard form of proposal is in use. but the questions do not differ materially.
the following are questions in a typical proposal form.
1) Name of proposer- the full name of the individual or firm should be inserted. if the undertaking is a limited liability company this should be made clear.
2) address in full –merely the private address of the individual or the registered address of a company should be hare.
3) premises-all the premises where the proposer carries on his business should be included the premises which are occupied an used by proposer
4) business-the proposer should give comprehensive description of the activities of the business. it is the earning of the business which is the subject matter of the insurance.
5) gross profit –there I on need for the proposer to give separate figures for net profit or standing charges from the limited on wages, if wages to all employees are not to be included the gross figure only is required. when consequential loss insurance was first undertaken proposers were required to give separate figures naturally they were often found to be averse to disclosing the amount of net profit earned and this practice was probably one of the reasons for the slow growth of consequential loss insurance.
6) wages
As rule proposal forms now provided for the insurance if wages as a separate item or items either on the dual wages basis or for a reduced indemnity period on either an annual or period basis retrenchment compensation can also covered by separate item.
7) indemnity periods- the maximum indemnity period should be decided by the proposer himself this requires careful consideration the rates for shorter indemnity periods are less than those for twelve months periods an dare naturally more attraction to the proposer . for this reason and for no others inspectors or agents should not complete [proposal forms on behalf of proposers.
8) extensions-extensions to cover loss of profit consequent upon fire elsewhere than at premises occupied by the proposer may be incorporated in insurance , the proposal should indicate all the perils other than the standard perils of fire and lightning that are covered by the corresponding fire policy.
9) standing charges-interest on debentures loans or mortgages directors fees, rents, rates and taxes .the proposal form contains the request that the proposer should delete those which are not applicable and insert others which he may wish to insure. all those charges which will still have to be paid although the business is interrupted or interrupted or interfered with should be insured.
10) existing insurance-If the proposer has previously had a normal consequential loss policy with another company it may be advisable to ascertain from that company whether they had declined the insurance or had asked for an increased premium to contained it. the proposal form, it is seldom that all the necessary information Is given as particulars are restricted to the contents only, the proposer can hardly be expected to workout extensive premium calculations where there is more than one rate in order to answer the question.
DECLARATION
the proposal form ends with a declaration which will probably be worded as abovesome insurers ask whether the proposer requires the turnover or output basis adopted. nearly all instances are on the turnover basis, so that is is better for a specific request to be made to the insurers if a special basis such as output or productive wages is required.
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