Insurance underwriting is the process of assessing a business’s risk in insuring a home, car, driver, or a person’s health or life. Determine if it would be profitable for an insurance company to have the opportunity to provide insurance coverage to an individual or business.
After determining the risk involved, the insurer fixes a price and establishes the insurance premium that will be charged in exchange for assuming it.
What is insurance underwriting?
An insurance underwriting company must have a way of deciding how much it will risk by providing coverage and how likely it is that something will go wrong and cause the company to have to pay a claim. For example, a payment is virtually assured if a company is asked to ensure the life of a terminally ill cancer patient.
Note: A company will not take the risk of issuing a policy if the odds of a costly payout are too high.
Concluding what risks are acceptable involves underwriting, a highly sophisticated process involving data, statistics, and guidance provided by actuaries. This information allows underwriters to predict the likelihood of most risks and charge premiums accordingly.
How insurance underwriting works
Underwriters are trained insurance professionals who understand risks and how to prevent them. They have specialized knowledge in risk assessment and use this knowledge to determine if they will insure something or someone, and at what cost.
The insurer reviews all the information provided by your agent and decides if the company is willing to bet on you. The job includes:
- Review specific information to determine what the real risk is
- Determine what type of policy coverage or what perils the insurance company agrees to insure and under what conditions
- Possibly restrict or alter coverage by endorsement
- Seeking proactive solutions that can reduce or eliminate the risk of future insurance claims.
- Possibly negotiate with your agent or broker to find ways to ensure you when the issue isn’t so clear or there are insurance issues.
Note: Much of the subscription is automated. The information can be entered into computer programs in cases where the situation does not have a special circumstance and raises a red flag. The programs are similar to the type of quoting systems you may see when you get an insurance quote online.
An insurer is most likely to become involved in cases where additional intervention or evaluation is required, such as when an insured has made multiple claims, when new policies are issued, or when there are payment problems with the insured.
Insurance underwriters will generally review policies and risk information whenever a situation seems out of the ordinary. It does not necessarily mean that an insurer will never review her case again just because he has already purchased a policy. An insurer can participate whenever there is a change in the terms of insurance or a material change in risk.
Note: The insurer will review the situation to determine if the company is willing to continue the policy on its current terms or will introduce new terms when there is a change in the insurance conditions. New insurance terms may include reduced or limited coverage or increased deductibles.
State law prohibits underwriting decisions based on things like race, income, education, marital status, or ethnicity. Some states also prohibit an insurer from denying an auto policy based solely on credit scores or reports.
Insurers vs Agents/Brokers
An agent or broker sells insurance policies. An underwriter determines if the insurance company should and will sell that coverage. Your agent or broker has to present solid facts and information that convince the insurer that you are a good risk.
Insurance agents usually don’t have the authority to make decisions beyond the basic rules given in the underwriting manual, but an agent can refuse to insure you based on their knowledge of the insurance company’s usual underwriting decisions. They cannot make special arrangements to offer you insurance without the consent of the insurer.
The insurance underwriter protects the business by enforcing underwriting rules and evaluating risks based on this understanding. They can decide beyond basic guidelines about how the company will respond to the risk opportunity. They can make exceptions or alter conditions to make a situation less risky.
Insurers Insurance agents or brokers
Approve or reject the risk of issuing a policy Sell policies and coverage to companies and individuals, but only with the permission of the insurer.
Work for the insurance company Works for both the insurance company and the insured
Examples of insurance underwriting
The easiest way to understand when an insurer can help or might change the insurance company’s decisions about your policy is to look at a few examples.
When a house is not occupied
Think of Elizabeth and John, who bought a new house and decided to sell the old one. The real estate market was tough at the time and they didn’t sell their first home as quickly as they had hoped. They ended up moving before selling it.
They called their insurance agent to inform them that the old house was empty. Their agent informed them that they would need to complete a vacancy questionnaire and provide additional details. The insurer would then review the risk and decide if he would allow the vacancy permit to keep the home insured.
When a house needs repairs
Elizabeth and John’s new home needed a lot of repairs. The insurance company wouldn’t normally insure a house that didn’t have up-to-date electrical wiring, but John and Elizabeth had been customers for a few years and had never filed a claim. They also insured his car with the same company. Your agent decided to refer your case to underwriting.
John and Elizabeth promised to repair the electrical wiring in 30 days. The underwriting department reviewed their profile and decided they were comfortable taking the risk. The insurer informed the agent that they would not cancel the homeowner’s insurance policy due to lack of repairs, but would instead temporarily increase the deductible and give John and Elizabeth 30 days to do the work.
Note: Policy terms may return to a more reasonable deductible after a slight increase when certain conditions are met.
Multiple auto insurance claims
Mary has made three glass claims on her auto insurance policy in five years but has a perfect driving record other than that. The insurance company wants to keep insuring her, but she has to do something to make the risk profitable again. She pays herself $1,400 in glass claims, but Mary pays only $300 a year for glass coverage and she has a $100 deductible.
The subscriber reviews the file and decides to offer new terms to Mary at her renewal. The company agrees to offer you full coverage but will increase her deductible to $500. Alternatively, they offer to renew the policy with limited glass coverage. This is the insurer’s way of minimizing risk while still providing Mary with the other coverage she needs, such as liability and collision.