What is Advisory Endorsement
Advisory endorsements are adjustments to the provisions used to create an insurance policy, and which are created by a ratings bureau for distribution to the bureau’s member insurers. An advisory endorsement is not filed with a state insurance commission, and is instead provided to member insurers to file on their own.
BREAKING DOWN Advisory Endorsement
Advisory endorsements serve an important purpose in the policy underwriting process. They can provide clarification as to what type of risks are covered or not covered, can be used to include other parties in the policy, or can provide other important information such as the geographic areas in which coverage applies. The advisory endorsement is used to modify the forms that the policy applicant must fill out, which is then included in the models that the insurer uses when determining the risk associated with providing coverage.
Why Insurers Use Advisory Endorsements
Insurers use advisory endorsements because ratings agencies are often able to devote more research and legal resources to ensuring that insurance policies do not expose companies to excessive risk. Without the use of advisory endorsements, insurers would have to have the resources to examine the risk profiles of their policyholders, and would have to be able to forecast how trends will affect the amount of risk that the insurer should be willing to take on.
For example, car insurance providers want to the probability of their insureds filing a claim, which can be partially based on the probability of them getting in an accident. To determine this risk, the insurer will obviously take into account the number of accidents the driver has been involved in, but there are other factors as well. Gender, age, marital status, occupation and location are also taken into consideration. Rather than creating risk profiles based on these demographics themselves, insurers can use advisory endorsements instead.
Ratings bureaus instruct insurers to consider the advisory endorsements created as guides that can be modified as necessary according to the needs of the individual insurer. Because insurance is regulated by individual states, it is possible that an advisory endorsement will have to be modified to comply with state law.
Insurers use advisory endorsements to modify policies, meaning that an advisory endorsement is considered an attachment to a policy renewal. In some cases no advisory endorsement will exist for a particular type of risk. If this is the case, the insurer will be responsible for developing its own endorsement.