Underwriting Capacity is the maximum amount of risk that an insurance company is willing to underwrite. Insurance companies use this to make sure that they are able to cover their customers’ claims without risking insolvency.
Underwriting Capacity Limits
An insurance company’s underwriting capacity would reflect their ability to manage risk. A higher capacity indicates a greater ability to cover risks, while a lower capacity suggests the opposite. However, regulators prevent insurance companies from underwriting an unlimited number of policies by placing a limit. Additionally, insurance companies themselves would usually set restrictions on policy writing within a certain area to protect themselves. As a result, insurance companies could sometimes reject applications if the risk is too high, or they already have too many of the same risks existing in a same area. Risks that are concentrated in a single area are commonly known as "risk pools".
What Influences Underwriting Capacity
· Market Conditions – When market rates are high, insurers may want to increase their capacity to maximize profits. When rates are low, insurers will decrease their capacity to lower chances of being exposed to risk.
· Regulatory Requirements – Regulators apply restrictions on the maximum amount of risk an insurer can take based on their capital and reserves. This protects the consumer while making sure the insurer can stay financially stable.
· Reinsurance – If an insurer can transfer more risks to reinsurers, that means they would be able to underwrite more policies. This would allow a higher underwriting capacity.
What We Can Do About It
At this time in California, underwriting capacity concerns exist to mitigate risk. The only way we can "get around" it, is to ensure that you commit to binding the policy as soon as you are ready to move forward. By submitting the bind order early, you are able to "secure your spot" in the underwriting pool of hazards. Even if your effective date is in the future, if you submit your bind order early, you are able to ensure that you still have a policy in place when that effective date comes.
However, remember to read the fine print in the policy, as some insurers have a minimum earned premium as soon as you submit the bind order. Other carriers, however, will allow you to "flat cancel" a policy, which means you get 100% of the outstanding premium due refunded back to you as long as you have not used a single day of the premium yet. This means, as long as you request the cancellation before the effective date, you will get all of your premium back.