Insurance underwriting is the process by which an insurance company assesses its risk. It assists an insurance company in determining whether providing coverage to a person or business would be profitable.
Insurance Underwriting Definition and Example
Insurance underwriting is the process by which an insurance company evaluates the risk and profitability of providing a policy to someone. An insurance company must be able to determine how much of a risk it is taking by providing coverage. It also needs to know the likelihood that something will go wrong, requiring it to pay out a claim. This analysis applies to the purchase of a home, a car, a driver, a person’s health, or even their life.
The insurance underwriter determines the insurance premium that will be charged in exchange for taking on this risk after reviewing the risk.
How do businesses determine what level of risk is acceptable? This is where underwriting comes into play. Underwriting is a complex process that involves actuaries’ data, statistics, and guidelines. All of this work assists underwriters in predicting the likelihood of the majority of risks. Then, based on the level of risk, insurance companies can charge premiums.
Assume someone is interested in obtaining a policy from a car insurance company. As part of determining whether to offer them a policy, an insurance underwriter may review their driving record. A driver with a poor driving record may be considered a high-risk customer, in which case the insurance company may decide to insure them but charge a higher premium to compensate.
The Process of Insurance Underwriting
Underwriters are insured professionals who understand risks and how to avoid them. They are well-versed in risk assessment. They use knowledge and skill to determine whether or not to insure something or someone—and at what cost. 1
The underwriter considers all of the information provided by your agent. The company will then decide whether or not to take a chance on you. The job also entails:
- Examining data to identify the risk
- determining the type of policy coverage or perils that the insurance company will insure, and under what conditions
- Possibly altering coverage through an endorsement
- Seeking solutions to reduce the risk of future claims
- Negotiating with your agent or broker to find ways to insure you when problems arise
Analyzing the Situation
When an insured person has made a large number of claims, when new policies are issued, or when there are payment issues, in Insurance Underwriting an underwriter may be called in.
Assume Mary, a driver, has made three glass claims on her car insurance policy in the last five years. Aside from that, she has a perfect driving record. The insurance company wishes to continue insuring her, but it also wishes to make the risk profitable once more. In the last five years, it has paid $1,500 in glass claims, but Mary only pays $300 per year for glass coverage. Her deductible is only one hundred dollars.
After reviewing the file, the underwriter decides to offer new terms to Mary upon her renewal. The company agrees to provide her with full coverage but raises her deductible to $500.
The underwriter also offers another option: they will renew the policy with limited glass coverage. That is how the underwriter reduces risk while still providing Mary with the other coverage she requires, such as liability and collision insurance.
Evaluating Changes as They Occur in Insurance Underwriting
When a situation appears to be out of the ordinary, insurance underwriters will frequently review policies and risk information. Just because you’ve applied for or received a policy doesn’t mean an underwriter will never look at your case again. When there is a change in insurance conditions or a change in risk, an underwriter may become involved.
Collaboration with Brokers or Agents
Insurance policies are sold by an agent or broker. Insurance Underwriting determines whether the insurance company should and will sell the coverage. Your agent or broker must present a strong case to persuade the underwriter that the risk you are presenting is a good one.
Agents are usually unable to make decisions beyond the basic rules outlined in the underwriting manual, but some agents may decide not to insure you based on their knowledge of their company’s underwriting decisions. They cannot make special arrangements to provide you with insurance unless the underwriter approves.
Based on this understanding, the underwriter protects the company by enforcing the rules and assessing risks. They can decide how the company will respond to the risk opportunity beyond the basic guidelines. They can also make exceptions or change conditions to make a situation less dangerous.