Have you ever considered what happens when you want to purchase insurance cover? A lot happens in the background before you finally get feedback. The insurance company, broker, or agent look at your combination of factors to determine the risk involved in insuring you. This process is known as underwriting.

What is underwriting?

Over a century ago, Lloyds of London started accepting risk on behalf of sea-going clients in exchange for premiums. It started with sea voyages but went on to cover other businesses.

There was an agreement form containing the risk assessment information of the client. The banks would then sign below/under these details; hence the term “underwriting.”

Underwriting In Detail

Underwriting definition; a process an individual or institution uses to determine whether to take financial risk for a fee. It is a concept in the financial industry where one party agrees to cover all or specific risks for another party or offer financing in exchange for a fee.

The underwriting process works on the premise that there’s a risk involved in loans, insurance, and securities.

  • Loan underwriting: When a bank wants to offer a loan, they will look at the applicant’s financial situation, among other factors, to assess the risk.
  • Securities underwriting: This involves assessing the risk and the appropriate price of particular securities. It might turn out the investment plan is not viable during the underwriting process. This mostly relates to IPOs, where an underwriter works to ensure a company raises enough capital.
  • Insurance underwriting: In the insurance industry, the process involves determining an insurance applicant’s risk.

Underwriting plays a critical role in the financial markets by creating a fair and stable market for financial transactions. The underwriting process eliminates the overall risk of expensive claims or defaults. In such an environment, insurance companies, banks, and investment banks can offer more competitive rates.

Understanding the Insurance Underwriting Process

Insurance underwriting is a process of evaluating the risks of a potential client for insurance purposes based on a variety of factors. This process helps price the insurance provided based on associated risk thus protecting the insurer. Insurance underwriting also helps insurance agents and brokers offer more competitive rates. 

It entails reviewing the applicant’s age and gender, medical information, marital status, lifestyle, financial history, among other issues.  The underwriter uses the data collected to determine the level of risk and decide whether to cover the applicant and also set a fair rate for the coverage.

The underwriting process applies to all forms of personal insurance from life instance, personal liability cover, the homeowner to auto insurance.

It also applies to General Liability, Business owner’s policy (BOP), Umbrella / excess liability, Workers’ compensation, and commercial auto insurance.

When assessing an application, it’s the underwriter’s responsibility to protect the insurance company by ensuring it doesn’t take on too much risk. The underwriter takes specific steps depending on the kind of cover an applicant wants.

For instance, business insurance will require an assessment of the following:

  • Type of business
  • Size, sales, assets
  • Financial history (credit score, bankruptcies)
  • Condition of business property
  • Prior insurance claims
  • Safety/security systems at the premises
  • Loss-prevention practices

It is important to learn more about the specific of underwriting for the type of insurance cover you want to buy.

What Is Medical Underwriting?

This is a process used by insurers to determine if they will offer life or health insurance. It entails the assessment of an applicant’s medical history to decide whether they can offer them a policy. The process also helps insurers determine whether to include pre-existing condition exclusions or set higher premiums.

The Affordable Care Act (ACA)  prevents insurers from denying coverage to an individual due to pre-existing medical conditions. There are ongoing plans to repeal the Act and it’s important to confirm your insurer’s position on the same when applying for health or life insurance.

Here is an example of medical underwriting in life insurance:

  1. Application quality check: This ensures all the information provided is accurate before the underwriting process starts. Some carriers also require a phone interview to confirm all the details.
  2. Paramedical Examination: This is a free medical exam whose results the underwriter receives for the process. The test covers blood tests, body measurements, and a drug test.
  3. Attending physician statement (APS): if there are any red flags from your paramedical exam, the underwriter will request an APS. This is a summary of your medical history from your doctor detailing any existing condition, length of such condition, ongoing treatment, and other details.
  4. The Medical Information Bureau (MIB): Here the underwriter uses this database to check where else you have applied for life insurance cover in the last few months. They will see what other information you might have left out in your current application.
  5. Checking prescriptions: This is common for higher coverage amounts and helps the underwriter confirm all medications you are using.
  6. Motor vehicle report, (MVR): Have you been in an accident? Are there any traffic violations on your record or DUI convictions? All these help assess your risk level.
  7. Determining risk: Underwriters use actuarial tables including the mortality table and body build table. The data from these tables help the underwriter come up with the best rate to offset any risks discovered.
  8. Credit system: At this stage, the underwriter checks anything positive that can improve your coverage rates. For instance, if you’re on medication, this can improve your rates.
  9. Making the determination: The underwriter will approve or decline the application. They will also give a risk classification as preferred, approved standard, approved substandard, or declined.

How Long Does Underwriting Take

The underwriting process involves a lot of checks to ensure the insurer doesn’t take an unnecessary risk. This process also ensures you get a competitive rate. However, these steps mean you will have to wait for three to four weeks on average, before you get confirmation.

For health and life insurance, for instance, there are medical exams and a lot of information to review. The same applies to home insurance and business insurance. Any unusual information on your records such as DUI, criminal convictions, among others will delay the process further.

Final Thoughts

Underwriting is a crucial step in determining whether you will get insurance cover and the rate for such coverage. Whether this is the first time to buy insurance or you want to renew your policy, it’s important to understand how this process works.