Underwriting in insurance is the method used to choose the persons and objects covered in a policy. The persons/objects to be insured, the amount of insurance premiums, the sum of the coverage, and the persons/objects not accepted to be insured are the subjects accomplished in underwriting. It as well involves the assessment of risks associated in a plan. Thus, the exposures and risks of prospective clients are properly evaluated.
The one who does the underwriting job is labeled as the insurance underwriter. The main role of an insurance underwriter is to “write” or acquire business to provide money to the insurance company. They likewise serve to secure the company from risks that are likely to result in loss. Thus, their primary job is to create the insurance policies.
The underwriting guidelines vary for each insurance company. These become the basis for the insurance underwriter in establishing policies. The coverage type is the main foundation in the formulation of risk evaluation for an applicant. For instance, a critical aspect in the coverage for automobile insurance is the driver’s driving record, while for health or life insurance is the person’s health status, occupation, and age. Other factors may include the applicant’s dangerous hobbies that are most likely to result to death or illness. Generally, individuals are classified as standard risk or substandard risk. Individual health or life insurance requires more underwriting analysis than group policies.
Insurance underwriters can make use of inspection reports, policy applications, medical examinations and history, data from the insurance agent, and from the Medical Information Bureau, as resources in supplying necessary facts in the process of risk determination.
Insurance underwriters must take in objective, cost relevant, practical, and law consistent factors in the classification of risks, as well as aspects intended for the protection of the insurance program’s long term practicability. They as well have the option to reject the risk or supply quotations loaded with the premium or with stipulated exclusions, which prohibit the situations wherein a claim should be compensated. Insurance companies normally employ systems in underwriting for encoding such rules, to arrive at the reduction of manual work amounts in the dealing out of quotations and the issuance of policies. This particularly applies to homeowners or automobile insurance.
To illustrate the role of underwriting, assume Mr. X went to an insurance company or insurance agent to obtain a car insurance policy. He then described that he has been in jail 5 times due to careless driving, and likewise admitted that he has been driving with the absence of a license for the last 3 years. Here, the insurance company or agent can restrict the admission of Mr. X because his previous transgressions may be included in the company’s forbidden circumstances for the insured, as specified by the company’s insurance underwriting department.
The major protection provided by insurance underwriters is against very poor risks or adverse selection, and those individuals with fraudulent objective. An insured risk or cluster of risks, or individuals, that are more expected to result to a loss than the average group, can produce adverse selection.
Underwriting is also pursued in real estate, forensic, and sponsorship activities.