Home Insurance What is insurance underwriting? How it works

What is insurance underwriting? How it works


Through a process known as insurance underwriting, policy providers can assess risks and determine an applicant’s eligibility for coverage. For this purpose, they employ professionals who can provide accurate results. In the financial world, we refer to these specialists as underwriters, and their role is to help insurance companies avoid unnecessary loss.

Insurance underwriting encompasses information evaluation, protection of the company’s interest, and risk assessment. Therefore, underwriters have to communicate their findings to insurers for sound decision-making.


Policy provider aside, the process of underwriting in insurance also concerns intending policyholders. This is because the outcome of the process determines whether they are eligible to access coverage with any company.


For this reason, this blog post will explore underwriting as an integral aspect of insurance.

How does insurance underwriting work?

As a policy provider, it’s essential to get information about individuals, businesses, or investments before accepting to provide them with insurance. When risks are identified, there’s a need to classify them before a conclusion is reached.

After reviewing tons of applications, underwriters communicate their eligibility status to insurers to help make informed decisions. These applications may be classified under preferred, approved standard, declined, or approved substandard groups.

Preferred candidates usually have very low risks and may be charged less, while those classified as standard usually have average risks. Insurers may outrightly reject applicants with a high-risk profile or increase their premium to match their investment risk.


Also Read:  Uninsurable risks – Definition and types

The entire vetting process must be carried out meticulously because missing out on relevant details can lead to dire issues in the future. When necessary, underwriting software is used to examine the risks clients may transfer to the company.

Other times risk managers, actuaries, and brokers work together with underwriters to determine risks and ensure insurance companies enjoy profit.


Components of insurance underwriting

Here are some steps in the insurance underwriting process. They’re essential for weeding out risky applications and stabilizing policy providers’ financials.

  • Risk assessment: To weigh risks, underwriters will consider external factors that may affect the type of insurance applicants seek. For instance, applicants for property insurance will have their location and construction type checked to determine their eligibility and premium rates.
  • Policy pricing: Insurance companies don’t always react to risky applicants with rejection. They can decide to increase premium rates to match their risk level
  • Risk selection: The major aim of underwriting is to weigh risks and help make informed decisions. When all the details are available to policy providers, they can now choose the burden to bear. Oftentimes, they refuse to take on risks that will expose them to financial loss or choose to increase premium prices when necessary.
  • Actuarial analysis: Most times, underwriters can employ actuaries who determine the cost of future claims by studying statistical models of potential risks. After calculating, the risks likely to occur, they decide the premium rate for each situation or outrightly reject an application.
  • Underwriting guidelines: Every insurance company has a standard that affects the outcome of an underwriting process. This means applicants have to meet certain requirements to qualify for coverage. Having this guide is essential for underwriters to make sound decisions always.
  • Mitigation of risks: The services of underwriters do not end with risk evaluation, most times it extends to risk mitigation. In other words, they also have to suggest measures to reduce companies’ exposure to potential losses.
  • Continuous monitoring: Many insurance companies think underwriting is only relevant during the screening of applicants. However, policyholders should be assessed periodically in case new risks that can alter the policy agreement develop


Finally, insurance companies reserve the right to reject applications that pose high potential risks. During the evaluation process, they must abide by anti-discrimination laws.



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