Underwriting

By Lia Kopin-Green
/
July 11, 2022

What is Underwriting?

During underwriting, an insurance company determines whether to accept a risk and, if so, how much coverage it will provide and at what rate. As part of the process, the underwriter will analyze the risk to help calculate the premium for the insurance policy. Underwriting helps an insurance company determine whether providing coverage to an individual or company will be profitable. Ultimately, if the chances of a costly payout are too high, an insurance company probably won’t issue a policy.

Underwriting is performed by professionals known as underwriters that are specialized in risk assessment. Their primary responsibility is to decide which insurance policies they should offer prospective clients. Actuaries aid in the underwriting process by providing underwriters with complex data, statistics, and guidelines.

Key Takeaways

  • Underwriting is the process through which an insurance company decides whether to accept a risk and if so, how much it will provide and at what rate.
  • Using actuarial data and complex risk assessment formulas, underwriters decide whether a policyholder is a suitable candidate for insurance.
  • An insurance underwriter will review a policy if conditions change and coverage need to be re-evaluated.

Medical Underwriting

Medical underwriting is used to decide if an insurance company will accept a health insurance applicant based on their overall health and pre-existing conditions. However, since the Affordable Care Act was enacted in 2010, insurers are limited in their ability to determine coverage and premiums based on an individual’s pre-existing conditions. Other factors such as your age, gender, weight, and whether you smoke may be considered during medical underwriting. Additionally, some serious conditions may make you ineligible for health insurance altogether, such as Alzheimer's disease and Type 1 diabetes.

Medical underwriters may also request a medical examination or information about your medical history from your current healthcare provider.

Homeowner Insurance Underwriting

Certain guidelines may be used by underwriters to assess which homes to insure and at what cost. A home's age and location will likely be examined by an underwriter. If your home is older than 50 years old, it might be excluded from the insurance policy due to the high risk of damage.

Insurers could also avoid insuring apartments located in buildings with known electricity or water issues. In addition, underwriters may consider factors that could lead to lawsuits against policyholders. A balcony without a railing, rotting wooden floorboards, or even an aggressive pet could be red flags to a homeowner’s insurance underwriter.

Auto Insurance Underwriting

Auto insurance underwriters consider a variety of factors when setting eligibility and premiums. There is a greater chance of costly claims for vehicles with few safety features and powerful engines compared to less sporty models, so individuals with higher-risk vehicles might end up paying higher premiums. A car insurance underwriter may also take a look at a driver’s accident history and driving record. Insurers may charge a higher premium if a driver has received too many tickets or has been in several car accidents.

Bottom Line

Underwriting is a careful process that plays a huge role in establishing how much you will end up paying for your insurance as well as the profitability of an insurance company. In fact, Warren Buffet has emphasized the importance of underwriting's role in the success of his company, Berkshire Hathaway.

If you want to learn more about underwriting or need assistance in finding the best insurance plan for your circumstances and needs, get in touch with an experienced insurance attorney ASAP.

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