What Is Insurance Underwriting?

Definition and Examples of Insurance Underwriting

Insurance Underwriting

The Balance / Nicole DeLeon 

Insurance underwriting is the process of evaluating a company's risk in insuring a home, car, driver, or an individual's health or life. It determines whether it would be profitable for an insurance company to take a chance on providing insurance coverage to an individual or business.

After determining the risk involved, the underwriter sets a price and establishes the insurance premium that will be charged in exchange for taking it on.

What Is Insurance Underwriting?

An insurance company must have a way of deciding just how much of a gamble it's taking by providing coverage, and how likely it is that something will go wrong that will cause the company to have to pay out a claim. For example, a payout is virtually assured if a company is being asked to insure the life of a patient with terminal cancer.

A company won't take on the risk of issuing a policy if odds of a costly payout are too high.

Arriving at the conclusion of what risks are acceptable involves underwriting, a highly sophisticated process involving data, statistics, and guidelines provided by actuaries. This information enables 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 whether they'll insure something or someone, and at what cost.

The underwriter reviews all the information your agent provides and decides if the company is willing to gamble on you. The job position includes:

  • Reviewing specific information to determine what the actual risk is
  • Determining what kind of policy coverage or what perils the insurance company agrees to insure and under what conditions
  • Possibly restricting or altering coverage by endorsement
  • Looking for proactive solutions that might reduce or eliminate the risk of future insurance claims
  • Possibly negotiating with your agent or broker to find ways to insure you when the issue isn't so clear-cut or there are insurance issues

A lot of underwriting is automated. Information might be entered into computer programs in cases where the situation doesn't have a special circumstance and wave a red flag. The programs are similar to the kind of quoting systems you might see when you get an online insurance quote.

An underwriter will most likely become involved in cases when intervention or additional assessment is required, such as when an insured individual has made multiple claims, when new policies are issued, or when there are payment issues with the insured.

Insurance underwriters will usually review policies and risk information whenever a situation seems outside the norm. It doesn't necessarily mean that an underwriter will never look at your case again just because you've already contracted for a policy. An underwriter can become involved whenever there's a change in insurance conditions or a material change in risk. 

The underwriter will review the situation to determine if the company is willing to continue the policy on its current terms or if it will present new terms when there's a change in insurance conditions. New insurance terms might include reduced or limited coverage or increased deductibles. 

State laws prohibit underwriting decisions based on issues like race, income, education, marital status, or ethnicity. Some states also prohibit an insurer from declining an auto policy based solely on credit score or reports.

Underwriters vs. Agents/Brokers

An agent or broker sells insurance policies. An underwriter determines whether the insurance company should and will make the sale of that coverage. Your agent or broker has to present solid facts and information that will convince the underwriter that the risk you present is a good one.

The majority of underwriters worked for insurance carriers as of May 2019, according to a 2020 report by the U.S. Bureau of Labor Statistics.

Insurance agents don't typically have decision-making authority beyond the basic rules they're given in the underwriting manual, but an agent might decline to insure you based on his knowledge of the insurance company's usual underwriting decisions. They can't make special arrangements to offer you insurance without the consent of the insurance underwriter.

The insurance underwriter protects the company by enforcing the underwriting rules and assessing risks based on this understanding. They have the ability to decide above and beyond the basic guidelines on how the company will respond to the risk opportunity. They can make exceptions or alter conditions in order to make a situation less risky.

Underwriters Insurance Agents or Brokers
Approves or declines the risk of issuing a policy Sell policies and coverage to companies and individuals, but only with permission from the underwriter
Works for the insurance company Works for both the insurance company and the insured

Examples of Insurance Underwriting

The easiest way to understand when an underwriter can help or might change insurance company decisions about your policy is to look at some examples.

When a Home Isn't Occupied

Consider Elizabeth and John who purchased a new home and decided to sell their old one. The real estate market was difficult at the time and they didn't sell their first home as fast as they'd hoped. They ended up moving out before they'd sold it.

They called their insurance agent to let them know that the old home was empty. Their agent advised them that they would have to fill out a vacancy questionnaire and provide additional details. The underwriter would then review the risk and decide if they would allow the vacancy permit to keep the home insured.

When a Home Needs Repairs

Elizabeth and John's new home needed a lot of repairs. The insurance company would not normally insure a home that did not have updated electrical wiring, but John and Elizabeth had been clients for a few years and they had never made any claims. They also insured their car with the same company. Their agent decided to refer their case to underwriting.

John and Elizabeth promised to repair the electrical wiring within 30 days. The underwriting department reviewed their profile and decided they were comfortable with taking on the risk. The underwriter advised the agent that they would not cancel the home insurance policy due to the lack of repairs, but would instead temporarily increase the deductible and give John and Elizabeth 30 days to get the work done.

Policy terms could go back to a more reasonable deductible after a slight increase when certain conditions have been 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 continue to insure her, but it has to do something to make the risk profitable again. It's paid $1,400 in glass claims, but Mary pays only $300 a year for glass coverage, and she has a $100 deductible.

The underwriter reviews the file and decides to offer new conditions to Mary upon her renewal. The company agrees to offer her full coverage but it will increase her deductible to $500. Alternatively, they offer to renew the policy with limited glass coverage. This is the underwriter's way of minimizing risk while still providing Mary with the other coverage she needs, like liability and collision.

Key Takeaways

  • Insurance underwriting is an assessment of how risky it would be for an insurer to issue coverage to a certain individual or company given that individual's or company's unique circumstances.
  • The process gauges how likely it is that the insured will make a costly claim and whether the insurer will lose money by issuing the policy.
  • Underwriters, agents, and brokers all work for the insurance company, but an agent or broker also has a duty to serve the best interests of the insured.