AAIS AGRICULTURAL
OUTPUT PROGRAM UNDERWRITING CONSIDERATIONS
(February 2025)
Underwriting the
American Association of Insurance Services (AAIS) Agricultural Output Program involves
examining several different areas. They begin with broad, general information
and narrow down to specific issues. Various insurance companies may add to
these or emphasize certain areas instead of others.
Ownership or management
is an underwriting component that affects every line of business. This includes
the length of time the risk has been in business and its financial stability.
New businesses have higher failure rates that vary by class. New businesses with
experienced, successful managers have better chances of succeeding than similar
risks that do not have the benefit of such experience.
One of the first areas
underwriting considers is eligibility. Businesses that do not meet the
program’s eligibility requirements must be disqualified and considered under
other commercial insurance coverage forms or policies. Major problems arise
when risks are written on the wrong coverage form or policy. Losses from ineligible
risks generate distorted program and class loss ratios. A given risk’s
eligibility should be verified before it is submitted.
Eligibility is only the first step. The insurance company must also accept the risk based on its underwriting requirements. Not every company writes every eligible risk because it may not have an appetite for a certain class of business. The insurance agent provides information about the risk via the application, loss runs, and other data. Insurance companies may or may not inspect a risk before they write it, and the information the agent discloses about the risk is critical.
Dun and Bradstreet
(D&B) produce different types of
information to analyze a business risk’s financial aspects. This includes
background and public information on the company, its owners and officers,
payment history, and details on late payments, past failures, or bankruptcies.
The amount of information available varies from risk to risk because it is
based on public records and documents, and interviews with the company’s
management and its customers.
Publicly held or large
companies usually disclose significant amounts of relevant information. Smaller
companies, especially Limited Liability Companies (LLCs) and privately-owned
companies, usually provide much less information.
Financial issues can lead to moral and
morale exposures that can destroy an operation.
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Example: The summer has been
brutal. Farley Acres reviews its sales and costs figures and realizes it is
not breaking even. Its owners become desperate. A week later, they report a
highly unusual type of fire that started in the main barn and spread
unchecked to other property. |
Morale hazards are less
obvious than moral hazards. However, they can be more insidious. The named
insured becomes lackadaisical in monitoring potential loss situations.
|
Example: Acme Farms becomes cash-strapped. It cancels its
waste removal firm contract and takes its trash to the landfill “as needed.”
Dust and grease accumulate and become residue. Under-utilized employees
replace the professional cleaning crew. Small losses begin to mount as a
result of the change. |
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Example: Rhonda completely loses interest in her business
after her daughter tells her she will not take it over when Rhonda retires. Devastated
by the news, Rhonda cuts back her
hours. Her employees notice the lack of interest and follow suit. Weeds and
grass go uncut, and trash is not removed. Repairs have not been made. Debris
accumulates. Teenagers discover they can make free use of some of Rhonda’s
storage buildings. A fire breaks out one evening while a group of kids is
having a party. They scatter, and the fire burns unchecked. Such a loss would
be covered, but it is very likely that Rhonda’s coverage would be
non-renewed. |
Major losses can and do occur once the insured is no longer overly concerned
with continuing the business.
After identifying and
evaluating exposures and hazards, the risk’s loss history must be reviewed. This
usually requires at least five years of information. Loss history should
include details on the types of property losses, when they occurred, the peril
that caused the loss, circumstances, amounts paid, and deductibles. It is also
important to determine what the named insured did afterward to reduce the chance that the same loss might happen
again. Loss frequency and loss severity are important issues that must be
considered as part of the overall risk evaluation.
Developing accurate and
complete loss information is important for another reason. It cements the
relationship between the insurance agent, the named insured, and the insurance
company and facilitates establishing an effective and affordable insurance
program. Loss history is also used as part of the property rating formula when
the deductible is less than $5,000. This is another important reason for having
at least five years of accurate and credible loss information.
Property underwriting
starts with C.O.P.E. This stands for Construction, Occupancy,
Protection, and Exposure.
Evaluating the building
or structure’s susceptibility to loss or damage from covered perils is a
critical consideration. Covered perils are extremely broad. This coverage form
applies to more different types of property than most standard property
coverage forms.
Fire is always the
primary consideration. A wood or frame building is more susceptible to a fire
spreading quickly and causing greater damage than a more fire-resistant
building.
Buildings in areas
subject to tornadoes, hurricanes, or high winds should be built to minimize the
damage these perils cause.
Another construction
feature to consider is the structure’s age and the dates when its various
systems, such as the heating system, the roof, plumbing, and electrical systems,
were last updated or replaced. Any of these elements not properly or regularly maintained
can increase the chance a significant loss will occur or may encourage a morale hazard of hoping that a loss will happen
so that it will “pay” for the replacement.
Construction quality is
equally important. Inferior construction that does not meet current building
codes is always a concern. Buildings must have an adequate number of properly
constructed load-bearing walls.
The building's
occupancy and its use are crucial considerations. This includes identifying the
operations conducted on the premises that could initiate or contribute to the
spread of fire. The types of property, contents, processes, chemicals,
flammables, and other combustibles that can add fuel to the fire must be
examined carefully. Consider the following:
Fire is only one
concern with respect to evaluating occupancy. Some operations, particularly
meat related, involve property that is attractive to burglars or are targets
for theft. Some operations have a higher exposure to loss or damage from
vehicles or aircraft, such as being adjacent to a busy highway or an airport.
Certain occupancies, such as alcoholic beverage bottlers and meat processing,
may raise extreme or emotional social responses that increase the potential for
vandalism, burglary, and arson.
Protection falls into
two broad areas. One is public protection. The other is private protection.
1. Public protection
When considering public protection as it relates to fire, the crucial
factors are the
type of public protection available and the fire department’s response time.
Public protection ranges from the volunteer fire department available on an
irregular and unpredictable basis to the fully paid municipal department
available around the clock.
Water supply is another
extremely important component. The source and amount of water, water pressure,
and rate of flow are all important. The current public grading system evaluates
and grades public fire protection on a scale of one to ten, with one being the
best public protection available and ten being no public protection at all. It
is critically important to understand the grading system’s components and the
public protection grade that applies to the risk as part of the overall fire
loss evaluation.
2.
Private protection
Private protection refers to individual risk protective measures
installed to eliminate or reduce loss. Evaluating fire requires examining and
determining several such measures. Some examples are automatic sprinkler systems,
standpipes and hoses, fire suppression systems, water flow alarms, water
storage tanks, fire brigades, and an adequate number of the correct types of
fire extinguishers.
The protection provided
to deter, reduce, or eliminate theft, burglary, and other crime losses must
also be considered. Other issues are the types of safes, burglar alarm systems,
watchpersons, locks, fencing, lighting, and other protective devices to protect
against these kinds of losses.
Evaluating loss
potential from wind and hail requires considering what the named insured has
done to minimize losses to windows, glass, and property in the open.
The
construction, occupancy, and distance of exposing properties near the named insured’s location must
be examined closely. Exposures that have significant potential for fire or
explosion affect the named insured and its ability to secure adequate property
insurance coverage. This is particularly a concern in rural areas that may have
little zoning.
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Example: A retail farm supply store with limited hazards of
its own appears to be an attractive insurance prospect. The underwriter then
notices it is adjacent to an agricultural chemical manufacturing complex. |
The point is underwriting
and risk evaluation must include evaluating the hazards that surrounding exposures
and adjacent operations present. This affects both the building and its owner
or its tenants if the owner leases space to others. A dehydrating facility next
to an agricultural equipment and machinery manufacturer is a much different
risk than a dehydrating facility next to a feed manufacturer or grain milling
operation. Exposure analysis must include evaluating firewalls, fire doors,
construction of both structures, vegetation between the buildings, and
different building heights.
The geographic location of the risk and any increase in hazards are
important factors to consider when evaluating and underwriting the risk. A few common examples
are:
Property values must be
adequate. Property not insured to value causes several problems:
Despite properly
classifying the risk, pricing is always inadequate if the insurance limit is
inadequate. If the property rate is 1.00 (per 100), and the building value is
$1,000,000, then the correct premium is $10,000. However, if the building is
undervalued the carrier will not receive an appropriate rate for risk.
For example, if a limit
of $750,000 is used for the $1,000,000 building, then the premium is already
25% deficient.
If property not insured
to value sustains a total loss, the named insured cannot resume normal
operations quite as quickly. Financing the difference could be the difference
between resuming operations and remaining closed.
News spreads quickly
when the required limit to resume operations is insufficient. In these
situations, the named insured may seek financial contribution from the agent,
claiming that they provided incorrect advice. The named insured typically
informs friends and business associates about the issue as well. Additionally,
the insurance company may decide to review the agent’s book of business.
After assessing the
presented risk, the underwriter will decide if the requested deductible aligns
with the exposures. If the requested deductible is deemed inadequate, the
underwriter may offer a higher deductible to consider the risk.
Underwriting controls
pricing and attention to detail is required. The underwriter must properly
classify and evaluate every aspect of the named insured’s operations. They
assign numerical points that accumulate and determine the appropriate premium
to charge.
The difference in
pricing in this program is that every risk is initially “perfect.” The
underwriter then assigns points for any deficiencies. This is much different
from the traditional rating, which contemplates the average risk. Rather than
providing credits for above-average risks, the process requires the judgment of how far a given risk is from being
perfect.
The AG 0100 coverage
form offers numerous additional, supplemental, and optional coverages, in
addition to coverage extensions. Underwriters evaluate each risk to understand
and determine its coverage needs. One risk may have little or no need for these
coverages while another may need one or more of them.
There are many
endorsements available that can enhance this coverage form's already extensive
coverage.
Related Article: AG 0100–Agribusiness
Property and Income Coverage Part Available Endorsements and Their Uses
Underwriting time
element coverage starts with assessing direct damage to commercial property
exposures. The specific analysis for time element should focus on the factors
that determine how long an operation is either shut down or running at less
than optimal capacity.
Related Articles:
Time Element Coverage Underwriting Considerations
CP 15 15–Business Income
Report/Worksheet
Key characteristics for
dwelling underwriting include the building's construction, age, replacement
cost, and market value (or the price at which the named insured purchased it).
Additionally, it's important to consider the types of security and safety devices
installed, the number of family units and residents, the public protection
class, and the types of heating and cooling systems. Information about any
remodeling or renovations, roof type, and general housekeeping practices should
also be taken into account.
Other important
considerations are custom dwelling features, special or unusual equipment (elevators
or wheelchair lifts), and expensive
property. Otherwise, acceptable dwellings with very high or very low values may
be problematic for some insurance
companies because they fall outside their rating norm. However, they may
accommodate some dwellings with very low values if they do not have undesirable
characteristics, such as being in a substandard
condition or at an isolated, unprotected location.
However, different
characteristics should be considered as a whole to determine overall
eligibility. Higher-value homes with adequate security and public protection
(along with high deductibles) may be acceptable. A new home with a small square
foot area may be acceptable. A 20-year-old home with a moderate value and size
may be undesirable because it is in a remote location and is heated entirely by
portable kerosene heaters.
Dwelling characteristics
that fall outside of one underwriting parameter may be balanced by other
considerations.
These factors are all
necessary to determine both rating and underwriting criteria. Each insurance
company sets its own underwriting guidelines for the type of dwelling and
household personal property it is willing to insure.
This coverage form has
nearly everything most insureds could possibly want. While it places much of
the burden on the insurance company and removes it from the insured, it might
not always be the right choice. When addressing this issue, the following points
should be considered: