Underwriting, Rating, and Loss Prevention
Underwriting the property risk
The underwriter evaluates construction, occupancy, protection (public and private fire protection), exposure, and housekeeping - the classic COPE framework. Rating considers fire protection class, building age, sprinkler systems, and claims history. Loss prevention includes sprinklers, alarms, housekeeping, and maintenance programs, and is rewarded through credits.
Key concepts
- COPE: Construction, Occupancy, Protection, Exposure.
- Protection class reflects the quality of fire department response and water supply.
- Moral and morale hazard: moral hazard is intentional (fraud, arson); morale hazard is indifference (poor housekeeping).
- Reinsurance and treaty versus facultative arrangements manage capacity.
- Risk retention and deductibles align the insured's incentives with loss prevention.
Traps to watch
- A sprinkler credit is lost if the system is not maintained or is shut off without notice.
- A high protection class number means poorer protection, not better.
- Vacancy and unoccupancy increase hazard and can suspend coverage.
Rule of thumb
When rating a risk, always run COPE in order and note any condition that increases or decreases hazard before applying credits.
Worked example
A wood-frame restaurant with a cooking operation, no sprinklers, and a poor water supply rates poorly: combustible construction, high-hazard occupancy, weak protection, and nearby exposure. Adding a sprinkler system and a monitored alarm improves the protection factor and earns credits, reducing the premium and the likelihood of a total loss.