Insurance Underwriting Information
While the importance of insurance underwriting may go easily overlooked by the typical consumer, insurance companies depend greatly on underwriting decisions for several reasons. A clear understanding of the purpose and logic behind underwriting is important for both the insurance company and the individual applying for insurance.
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Definition of Insurance Underwriting
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FinWeb.com defines insurance underwriting as “the process of classification, rating, and selection of risks.” Insurance companies use this process to determine whether or not they are willing to accept an applicant, and at what cost. By comparing the risk presented by each individual with the cost of insurance premiums, companies are able to insure the largest number of people possible while still offering competitive prices.
What Underwriters Do
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Insurance underwriters examine detailed information on each applicant to determine what level of risk he presents. The underwriter bases this decision on a wide range of factors, from both the applicant and outside sources. If a certain individual poses a higher than average risk, the underwriter may recommend that the company charge a higher premium. Applicants with particularly high risk factors may be turned down altogether.
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Information Underwriters Use
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The information underwriters base their decisions on varies according to the type of insurance the applicant is seeking. For health and life insurance, they look at the individual’s gender, age, occupation, lifestyle, general health, pre-existing conditions, and family history. For auto insurance, underwriters examine the individual’s driving record, age and claims history, along with detailed information about the make and model of the car. Homeowner’s insurance depends mostly on the location, construction and occupancy of the home.
Importance of Underwriting for Insurance Companies
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If a company’s underwriters accept more risk than the company can afford, the business risks going bankrupt. However, if insurance staff members become too strict about their underwriting decisions, the company will lose customers and therefore lose money as well.
Importance of Underwriting for Applicants
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Insurance applicants should also understand the crucial role underwriting plays. Customers must be painstakingly careful to avoid mistakes on their insurance applications as these may result in costly underwriting decisions or rejection of coverage altogether. However, if an applicant disagrees with an underwriting decision, an insurance agent may be able to contest the decision.
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References
- Bureau of Labor Statistics: Insurance Underwriters
- Financial Web: The Basics of Underwriting Insurance
- College Grad: Career Information--Insurance Underwriters
- Insure Lane: What Is Insurance Underwriting...And Why Is It Important?
- DCU StreetWise: Factors That Affect Your Eligibility for Insurance and Its Cost
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