Insurance Coverage lawyer, consultant and expert witness, Barry Zalma discusses whether insurance premiums are based upon a calculation of the amount of risk the insurer is asked to take. He explains that securing information about the risk the insurer is asked to take is the first step in any underwriting process. Collection and interpretation of all available information about the risk the underwriter is asked to take is the foundation of the field of underwriting. The underwriter must always be alert for facts that lead him or her to believe that a moral or a physical hazard exists. Weather condition is only one of these facts.
The author also explains that weather conditions are one of many sets of data considered by the underwriter and the actuary. Weather conditions are not, nor could they ever be, the only reason for an underwriting decision. If the underwriter, working with the actuary, finds that the premiums allowed by the state are inadequate to allow the insurer to deal with the risk and make a profit, the prudent underwriter will not accept the risk. If actuarial studies reflect that there is an increase in hazard as a result of weather then premiums must reflect that risk.
The author goes on to note that when insurers were faced with the hazards of frozen pipes and the weight of snow and ice in the 18th Century they dealt with the increased hazard caused by the Little Ice Age by excluding the risks they were not willing to take or by charging increased premium to cover the risk. Similarly, as weather patterns change in the 20th and 21st Centuries premiums and coverage terms change to meet the increase or decrease in risk that result from the changes.
The author states: “It is dangerous in most legal analyses to limit the conclusion to one factual issue. Underwriting insurance requires the analysis of multiple factual issues that can increase or decrease the potential for loss. The underwriter and the actuary want to cover those risks where the insurer can collect sufficient premiums to pay all losses that can be anticipated and to still have enough to make a profit for its stockholders. Insurers cannot allow hysteria over global warming to effect their decisions with regard to a particular risk. They must review all of the potential factors that can effect the risk so that a well run, well built structure, on land above sea level in New Orleans becomes a risk an insurer is willing to take for a reasonable premium while a home in Beverly Hills, well built on stable ground owned by a person who has suffered five fire losses in the last ten years and three theft losses in the last five years, becomes an unacceptable to a prudent underwriter.”