Insurance is a necessary fact of life, and when you need it, you want it to be sufficient to cover your losses
The underwriting process ensures that the amount of coverage you purchase can adequately cover a claim you make or a claim made against you
If you’ve purchased an insurance policy, you might think the amounts the company provides as coverage are somewhat arbitrary—but they aren’t.
Insurance underwriting is when the insurance company evaluates risk. The company will closely evaluate whatever they’re insuring, whether it’s a person, business, property, or event, and assess the cost the insured should pay to purchase adequate coverage.
Insurance underwriters gather and analyze information to determine the amount of risk involved in the insured entity. Once they’ve conducted a thorough evaluation, the underwriter will decide if the policy application is approved, declined as too risky, or approved with specific conditions or at an adjusted rate. The objective by the underwriter is to ensure that the amount the customer pays in premium is fair, but also appropriate for the insurance company’s assumed level of risk.
The purpose of this process is to maintain the insurance company’s financial stability. The company needs to be able to fulfill its obligation to the insured in the event that a claim is made. If the company poorly assesses risk, it could find itself in a situation where it can’t pay out the amount the insured needs in order to settle a claim.
What factors are considered in the underwriting evaluation?
Applicant information and background
This includes details like their age, gender, occupation, lifestyle, and health history.
Loss history
If the policy is for commercial insurance, an underwriter might review any past losses or claims for a better assessment of their risk profile.
Property and assets
When evaluating a property for insurance coverage, the underwriter will look at its condition, location, and other potential risks.
Risk assessment
This would be modified based on the type of insurance application. An underwriter evaluates the probability of a claim by looking at factors like the individual’s medical history, driving record, their local crime rate, and other concerns.
Actuarial data
Along those same lines, actuarial tables and statistical models can help an underwriter to assess risk, longevity, and calculate premiums.
Coverage and limits
The applicant’s needs and assessed risk combine to create a profile of what the coverage and limits should be.
Can the applicant influence the underwriting process?
Somewhat. For the most part, the information the underwriter uses to build your profile comes from you. The more accurate and complete the information is, the easier the process will be.
Although you, as the applicant, could share information that would influence certain aspects of the underwriting process, the insurance company ultimately uses its own resources to provide your coverage and limits. Not everything will be negotiable, but it’s worth asking if you can be part of the process.
Here are some ways you might influence the underwriting process:
- Provide accurate information. Any misrepresentation or omission of relevant information or details could result in an incorrect decision and that could cause problems with the insurance policy later.
- Mitigate risks. If you’re being evaluated for health insurance, you can take measures like getting regular medical checkups and making healthy lifestyle choices.
- Coverage and deductibles. You can choose the amount of coverage and deductible level, but know that a higher deductible could give you a lower premium.
- Bundle policies. Some insurers will offer a discount to a customer who purchases multiple policies, like home and auto as a single package.
- Negotiate. You could work with the underwriter to attempt to negotiate terms like the premium rate, but this is more likely to be effective for commercial insurance or high-value policies.
- Shop around! You can always request quotes from a variety of insurance companies, because different companies might have different underwriting guidelines and risk tolerance. You might find a company that’s better aligned with your specific needs and risk profile.
You might recall the famous quote by Benjamin Franklin, “nothing is certain except death and taxes.” But he could have added, “… and insurance.” Insurance can be expensive, but it’s crucial if you own a home, car, need medical care, or for various other reasons. The last thing you want to have happen is for a crisis to occur and you’re without the correct amount of insurance to meet your needs.