DEFINITION OF ‘ADVISORY ENDORSEMENT’
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.
INVESTOPEDIA EXPLAINS ‘ADVISORY ENDORSEMENT’
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 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.
Insurers use advisor endorsements because ratings agencies are often able to devote more research and legal resources to ensuring that insurance policies do not expose companies to too much 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.
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 in order 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.