What Is Meaning of Underwriting in Insurance?

Underwriting analyzes the risk of a potential insurance policyholder.

Underwriting in the insurance industry refers to the process used by insurance companies to determine how much of your liability to accept. This measure of risk helps insurance companies make coverage decisions.

Purpose

The underwriting process determines how much insurance to extend to individuals or businesses in such a way that the insurance company can still make a profit.

Risk

The underwriting process forecasts whether you are a high- or low-risk client. This helps explain why high-risk clients pay more to obtain insurance whereas low-risk clients pay less.

Liability

Your benefit in the underwriting process lies in that you share your liabilities with the insurance company. For example, if you insure your car and get into an accident, you may only be liable for a smaller part of the cost of damage instead of the cost of all the damage resulting from the accident.

Process

Generally, there is no uniform process for underwriting in the insurance industry. As a result, each individual insurance company develops its own policies to guide the underwriter in his decisions.

Objectivity

Generally, insurance underwriters are objective in their risk analysis. To further improve objectivity, computer programs help with underwriting decisions.

References

• Investopedia: Is Insurance Underwriting for You?
• Insurelane: What Is Insurance Underwriting... And Why Is It Important?
• U.S. Bureau of Labor Statistics: Nature of the Work

Resources

• Financial Web: The Basics of Underwriting Insurance