What Is Insurance Underwriting And How Does It Work?


Insurance underwriting signifies how an insurance company evaluates and assesses its risks. Doing these assessments, helps the company to make concise decisions on profitable ventures as regards coverages provided to individuals and persons. It may be regarding health, cars, homes, life, driver, etc.

Once potential risks have been considered, the underwriter sets the premium that will be charged for taking up such risks.


What Is Insurance Underwriting?

Every insurance company has its way of deciding the amount and kind of risk they are willing to explore while offering coverage to clients. While doing this, they also want to take into consideration the possibility of something going wrong and causing a claim payout. For instance, insuring a cancer patient has a high possibility of a claim payout.


How Does Insurance Underwriting Work

It’s bad business for a company if the company issues a policy when the odds of an expensive payout are way high. Hence, no insurance company wants to dabble in such coverage.

In deciding what risk is acceptable, underwriting is considered.

Underwriting is pretty complex and it involves statistics, data, relevant guidelines provided by actuaries. This helps underwriters foretell the potentials of most risks, and additionally helps the companies charge premiums based on different levels of risks.


Who Is An Underwriter?

Underwriters are highly skilled and equipped people in insurance who know everything about risks and how to avoid them. They are highly trained to assess risks and make use curate the necessary data to know if someone or something is profitable for insurance, and the required cost.

The duty of the underwriter also includes:

  • Determining the risks, coverage, and insurance conditions the company is willing to be involved in.
  • Reviewing necessary information to weigh risks.
  • Negotiating with brokers or agents to uncover methods of insuring an individual when issues arise.
  • Possibly changing coverage through endorsement.
  • Finding ways of cutting down on potential future claim risks.


Beyond the aforementioned, an underwriter may have additional tasks with cases when further assessment is required. For instance, when there are issues regarding payment, when an insured person makes lots of claims, or when there are newly issued policies.

Insurance underwriters have the task of attending to situations that seem unusual by reviewing risk information and policies. They may get involved when a change is made to risks or the conditions of Insuring someone or something.

In cases where a change is made to the insurance conditions, the underwriter makes effort to see if the company would prefer to have a continuation of its policies on present terms or new terms may be presented.

Each state has its different requirements as regards underwriting decisions. They consider income, race, ethnicity, education, or marital status. Some states do not allow an insurer to refuse policy provision primarily because of credit reports or scores.


Underwriters vs. Agents/Brokers

Insurance underwriters help the insurance company make the best decision on coverage sale while an agent or broker sells insurance policies. The agent or broker must be able to provide a concrete defense that shows that you have presented a risk worth taking.

Agents are often limited by the rules provided in the underwriting manual, and some might even decide that they are unable to insure you, especially because of what they know about their company’s underwriting decisions. They always need the underwriter to approve that you will be insured.

The underwriter is responsible for securing the company’s business by assessing risks and enforcing rules. They can make alterations to conditions or make exceptions to make a situation less risky. They can decide above and beyond

Underwriters can either decline or approve the risk of issuing a policy. Agents or brokers, on the other hand, sell policies and coverage to individuals and companies after an underwriter has granted permissions.

The underwriter is wholly committed to the insurance company, while the agent or broker is committed to both the company and the person being insured.

There are situations when an underwriter may make their own decisions about your policy, and the examples below may help you understand.


For instance when a home is not occupied.

Gabriel and Jane decide to acquire a new home and sell out their old apartment. As a result of the condition of the real estate market, the apartment they put out for sale didn’t get sold quickly and they had to move into the new house.

After they notified their insurance agent about the emptiness of their old house, they were informed by their agent that they would need to fill a vacancy questionnaire along with some extra info. The underwriter would consider the risks, and decide if the vacancy permit should be allowed to keep the home insured.


When a home requires repairs

Gabriel and Jane’s house require urgent renovation. The Insurance company will not usually insure a home with no updated wiring, but Gabriel and Jane had been clients for quite a while and have never laid claims. They have additionally had their vehicle insured, and their agent decides to refer their case to an underwriter.

Gabriel and Jane promised that they’ll fix errors in the wiring of the home in 30 days, and the underwriting department became satisfied with their profile after considerable assessment. So, the underwriter advised the agent that the home insurance will not be canceled as a result of the wiring repairs but will temporarily increase the deductible and would permit a 30-day repair target for Gabriel and Jane to fix wiring errors in the house. After a slight increase and meeting certain conditions, the policy terms could return to a more reasonable deductible.


Multiple Auto Insurance Claims

Kylie has made three glass claims on her car insurance policy within five years. Aside from that, she has a perfect driving record. While the insurance company wants to keep her insured, they however have to ensure the risk is profitable. They paid $1,400 in glass claims to Kylie, but she only pays an annual glass coverage amount of $300 while $100 is her deductible. 

The underwriter reviews Kylie’s file and agrees and to give her full coverage while also increasing her deductible to $500.

There is also an alternative option of revealing the policy for Kylie’s but will include limited glass coverage. This will help the underwriter to cut down on risks while also satisfying Kylie’s needs on coverage such as collision and liability insurance.

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