After looking at the risk involved, the insurance underwriter sets the insurance premium that will be charged in exchange for taking on this risk. How do companies decide what is an acceptable level of risk? That’s where underwriting comes in. Underwriting is a complex process that involves data, statistics, and guidelines provided by actuaries. All of this work helps underwriters predict the likelihood of most risks. Then, insurance companies can charge premiums based on the level of risk. For example, suppose someone is inquiring with a car insurance company about obtaining a policy. An insurance underwriter may evaluate their driving record as part of the process of determining whether to offer them a policy. A driver with a poor driving record could be seen as a high-risk customer, and the insurance company might decide to insure them but charge a higher premium to compensate.
How Insurance Underwriting Works
Underwriters are trained insurance professionals who understand risks and how to prevent them. They have special knowledge of risk assessment. They use skill and information to decide whether they’ll insure something or someone—and at what cost. The underwriter looks at all the information your agent provides. Then, they decide whether the company is willing to gamble on you. The job also includes:
Reviewing information to find the risk Determining what kind of policy coverage or what perils the insurance company agrees to insure, and under what conditions Possibly changing coverage by endorsement Looking for solutions that might reduce the risk of future claims Possibly negotiating with your agent or broker to find ways to insure you when there are issues
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. Agents aren’t usually able to make decisions beyond the basic rules they’re given in the underwriting manual, but some agents might decide that they’re not able to insure you, based on the knowledge they have about their company’s underwriting decisions. They can’t make special arrangements to offer you insurance without the underwriter’s approval. The underwriter protects the company by enforcing the rules and assessing risks based on this understanding. They can decide, above and beyond the basic guidelines, how the company will respond to the risk opportunity. They can also make exceptions or alter conditions in order to make a situation less risky.
