DEFINITION
Insurance underwriting is how an insurance company evaluates its risk. It helps an insurance company decide whether taking a chance on providing coverage to a person or business would be profitable.
Definition and Example of Insurance Underwriting
Insurance underwriting is the way an insurance company assesses the risk and profitability of offering a policy to someone. An insurance company must have a way to decide just how much of a gamble it’s taking by providing coverage. It also needs to know the chances that something will go wrong, causing it to have to pay out a claim. This analysis applies to insuring a home, a car, a driver, a person’s health, or even their life.
After looking at the risk involved, the insurance underwriter sets the insurance premium that will be charged in exchange for taking on this risk.
Assessing the Situation
An underwriter may become involved in cases when more assessment is needed, such as when an insured person has made many claims, when new policies are issued, or when there are payment issues.
For example, suppose a driver named Mary has made three glass claims on her car insurance policy in five years. Otherwise, she has a perfect driving record. The insurance company wants to continue to insure her, but it also wants to make the risk profitable again. It has paid $1,500 in glass claims in the past five years, but Mary pays only $300 per year for glass coverage. Her deductible is only $100.
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.
The underwriter also provides another option: They will renew the policy, but it will include limited glass coverage. That is the underwriter’s way to minimize risk while still providing Mary with the other coverage she needs, such as liability and collision insurance.
Evaluating Changes When They Arise
Insurance underwriters will often review policies and risk information whenever a situation seems outside the norm. It doesn’t mean that an underwriter will never look at your case again, just because you’ve already applied for or gotten a policy. An underwriter can become involved whenever there’s a change in insurance conditions or a change in risk.
Working With Brokers or Agents
An agent or broker sells insurance policies. The underwriter decides whether the insurance company should and will make the sale of that coverage. Your agent or broker has to present a solid case that will convince the underwriter that the risk you present is a good one.
Key Takeaways
- Insurance underwriting is how an insurer decides how risky it is to issue coverage to a certain person or business.
- The process looks at how likely it is that the potential insured would make a costly claim and whether the insurer would lose money by issuing the policy.
- An insurance underwriter will step in to review a policy if conditions change and your coverage needs to be re-evaluated.
- Underwriters may work with agents or brokers to create a policy that works for you without being too risky for the company.