All you need to know about underwriting in insurance

What is insurance underwriting?

In an insurance company, underwriting is a process that helps evaluate and quantify the risk of insuring a person or an asset. Based on this, the insurer decides whether it would be financially feasible for it to offer the customer an insurance plan or not. This risk assessment also helps price the insurance policy, that is, determine the premium that the policyholder will need to pay.

The risk evaluation takes into account various relevant factors, depending on the type of insurance, be it life, health, home, motor, travel, crop, cyber, among others.

For instance, while considering a customer’s proposal for health insurance, the insurer will consider facts like his lifestyle, medical history, genetic predisposition, age, pre-existing diseases, among others, to decide whether it is worth taking on the risk of insuring him. If it is not financially feasible for the company to take on the applicant with a high risk profile, it will deny the policy to him. If the risk is low, it will offer him a plan and determine the premium that he must pay based on the underwriting calculations.

Why is it important?

The very sustenance of an insurance company and its resource pool depends on this exercise. If the company takes on unsustainable risks or offers very low premiums, it will not be able to continue operations. Underwriting also helps arrive at a fair price for the product, in this case, an insurance plan.

Besides insurance, underwriting is undertaken by various financial institutions, such as mortgage and investment companies to assess whether they can take on the risk of offering a product or loan for a fee.

Steps in the process of underwriting

Review of application
The underwriter conducts an initial review with the help of supporting documents to assess whether the application can be accepted.
Risk assessment
He then analyses the information and makes calculations using various data analysis tools to quantify the risk.
Pricing
Based on the risk assessment, further calculations help arrive at the product’s pricing or premium.
Decision-making
If the risk is acceptable and premium is suitable, the plan is offered to the customer. If not, it is denied.