3.2 - Loss Experience

Question 1

Definition - “moral or morale hazard”

Answer 1

• A hazard that is based on the insured’s attitude toward the insured belongings. This hazard exists when the insured no longer cares about the possessions because they are insured

Question 2

The importance of Loss Experience

Answer 2

-record of losses from the past is a critical tool for assessing the exposure to future loss that risk represents
-every application has a space for applicant to describe any loss experience, and something must be written in the space, cannot be left blank, must write “none” if no losses

-past losses can reveal about the subject of insurance - the applicant - as well as the object of insurance - property risk
-EG. fire loss at an auto shop due to improperly stored flammable liquids, this loss would reveal info about the nature of the physical risk
>the inherent threat of fire from the ignition of flammable liquids
>the heightened risk of fire posed by carelessness or inadequate standards of safety and operation
-loss may also reveal about the applicant - attitude about safety that allowed fire to occur.
-reveals likelihood of similar loss might occur in the future if preventative measures are not taken, if no preventative measures taken, presents either a moral or morale hazard on the part of the applicant
-UW’s curiosity must lead them to assemble as a complete a picture as possible not just of past claims, but of past losses

Question 3

Confirming “no losses”

Answer 3

-if an applicant indicates “none” in space for loss experience, insurer’s procedure or UW’s judgement to check industry databases or simple Google search of applicant’s name
-such databases include CGI Canada’s AutoPlus database for automobile claims and policy history, Habitational Insurance Tracking System (HITS) for personal property claims data, and its Commercial Tracking System (CTS) for commercial property claims data
-if “HITS” is found, UW must ensure that it is the same person, even if loss occurred at another location. if same person, UW to ask. If small claim, applicant may have forgot
-for Auto applications, the UW can often access databases from police departments for things like impaired driving charges

Question 4

Denied Claims

Answer 4

-list denied loss
-denied claims must be investigated as well
-denied claims cost the insurer more than a claim never made, since the insurer still incurs expenses in establishing a file and adjusting a claim
-more important, a denied claim might identify a moral hazard in the applicant’s habit of seeking cash from an insurance co for illegitimate claims
-denied claim can also identify physical hazard that could cause legitimate claim if accept risk. UW can ask for proof (receipts) that the damage was repaired or remediated, such as denied claims for mould caused by seepage

Question 5

Loss Experience - Commercial Risks

Answer 5

-harder to gather loss experience from Commercial risks because may not report all losses - EX. sold a location that had a loss so because they don’t own that anymore, don’t report that loss
>even though location is sold, the loss sustained is still important information. Same management as at TOL, likely same procedures unchanged at their other locations, perhaps including new locations replacing the sold one
-UW alert for locations that applicant still owns but has removed from insurance cover - same issue, if any losses unreported from those locations because not “included in the coverage”
-similar situation when no prior coverage, no insurance records indicating loss history, but could have sustained losses that would have been claims had they had coverage - this problem can also occur in personal-lines
-similar if any losses fell below deductible limit and not consider a loss for the insurer and therefore not reported
-presence or absence of insurance does not excuse an applicant from disclosing any losses on a location, neither does whether the applicant does whether the applicant currently holds title to a location

Question 6

Critical Points about Loss Experience

Answer 6

-in seeking out and analyzing a comprehensive loss history for any risk, the UW must always remember two points:
1. Losses are not the same as claims. A loss is significant information for an UW whether the applicant bore the loss or the insurer paid for it as a claim
2. The amount of a loss is less important than the circumstances of a loss. Those circumstances may reveal that mere good luck prevented a smaller loss from being a much larger one

Question 7

Prior Cancellations

Answer 7

-possible for applicant’s coverage to be cancelled by prior insurer as that insurer no longer wanted to write the applicant’s class of business
-applicant may have also been jumping carriers in an effort to improve the terms of coverage - this may cause an UW to decline the risk as there would be no reason to expect to keep the business after its term expires - applicants next search for better terms
-applicant’s record with prior insurers is useful info in the same way a job applicant’s record of employment - allows inferences to be made about the applicant’s stability, creditworthiness, and general character, in short, the moral hazard they may represent
-applicant’s business may be a part of a portfolio transfer the broker is implementing from insurer to insurer - still investigate as portfolio may be a poor one that broker has been unable to transfer in its entirety and trying to transfer risks one-by-one
-broker could be soliciting competing quotes from a number of insurers to prevent other insurers from giving quotes on the risk and as a method to block competing brokers - tactic based on ethical duty of UW to give quote to first broker that brought it to UW. Broker is “Blocking the market”
-good UW will be aware of the conditions of the ins market and be sensitive to the coverages and terms that competing insurers offer on risks like the one being considered
-that knowledge will allow an informed response if a broker is simply inviting the UW to match a competing quote