Insurance Underwriting Factors
Insurance Underwriting Factors
Insurance underwriting is a term referring to the process of determining risk for potential insuance customers. Each insurance company has its own set of underwriting guidelines.
What is Insurance Underwriting?
When you apply for any insurance — health insurance, auto insurance, property and casualty insurance, life insurance, etc. – you set a process in motion. Every insurance company has an underwriting department that reviews application and evaluates the potential risk an applicant poses. Using actuarial tables and information supplied by you or drawn from other sources they’re legally allowed to access (your credit record, driving record, claims history and Medical Information Bureau file, for example), the underwriter decides whether or not to issue you a policy. If you’re determined to be insurance-worthy, the underwriter next decides how much insurance protection to provide you with, how much to charge you for it and what, if any, exclusions or limitations to place on your policy.
The fundamental job of an insurance underwriter is to protect the insurance company from loss and assure that it stays in business by not selling polices that represent above average risk or undue exposure to risk, or by charging a sufficiently high premium to off-set above average risk and exposure. Obvious examples would include denying car insurance or homeowners insurance to a convicted drunk driver or a convicted arsonist respectively, charging a higher premium for homeowners insurance in hurricane-prone Florida or charging higher life insurance premiums the older a person is. If you’re in a denied or high-risk category, it may not seem fair to you, but sound underwriting practices help keep insurance costs down for applicants who represent a preferred risk.
Insurance Underwriting for Different Companies
Every insurance company has its own standard underwriting guidelines. For some types of high volume insurance, like automobile coverage where policies are fairly standard, the insurance company may use an automated underwriting system to speed up the evaluation of your application and get your policy issued ASAP. For more complicated or highly individualized polices, a more hands-on approach is combined with the software to calculate the risks of insuring you. Insurance underwriters may also rely on Internet databases to check things like your driving record, credit score and age.
Insurance companies and their underwriters have to abide by laws set at the state and, when applicable, federal level. They’re also guided by industry ethical standards. You cannot be turned down for insurance because of your race, national origin, religion, marital status or sexual orientation, for example. Specific conditions and rights will also depend on the type of insurance you’re applying for. A health insurance plan, for example, cannot turn you down based on a family history or breast cancer or genetic disease if you are not diagnosed with breast cancer or that genetic disease when you apply. If you feel your rights have been violated, your first recourse is to contact your state’s insurance commissioner.
Underwriting Factors for Different Types of Insurance
Different types of insurance products have different underwriting considerations too. Here are some examples:
For car insurance, your age, driving history, credit score, years of driving experience, gender, insurance history, claim history, coverage levels, vehicle models might have big impact on your premiums.For health insurance, your age, gender, health condition, smoking history, family medical history are more important factors.For life insurance, your age, gender, health history, types of insurance, marital status, number of children, occupation, income, smoking or drinking hobby weight more on your final quote.
The more you understand how insurance companies determine your insurance rates, the more chance you will have getting the best coverage with the right price.
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Dale Q. Williams, MBA, is a well-respected financial executive whose experience spans from insurance to investment banking. Dale has first hand underwriting experience through working for one of the largest U.S. based insurance carriers, and advisory experience from working for several bulge-bracket and middle-market investment banks. Dale also received his MBA from University of Chicago Booth School of Business, with concentrations in finance and accounting.
