What does underwriting mean in insurance?

Insurance Underwriting is a process by which the insurance companies determine the type of risk that a potential client poses before the company. When you apply for an insurance policy, the insurers do a thorough check based on the information you provide. They also do their own evaluation and allow you coverage after they find you favorable enough. Thus, insurance underwriting is the basic process that every individual has to go through when he purchases an insurance policy.

Where is it applicable?

Any and every insurance application has to go through the underwriting process. However, underwriting finds special significance for certain types of insurance as:

• Life insurance
• Health insurance
• Mortgage insurance
• Property insurance like
• Homeowners' insurance
• Auto insurance

How the process works?

Have a look at the below mention steps to understand how the underwriting process works:

1. The potential client sends in an application to the insurance company with the necessary details.
2. The insurance company sends the application to an underwriter for review.
3. The underwriter verifies the information provided in the application, after scrutinizing previous records, credit history, employment status, monthly income, driving records, photographs of the property that will be insured etc.
4. The underwriter determines the eligibility of the potential client, and accordingly approves or rejects the insurance application. Instead of rejecting an application completely, the underwriters may also approve insurance applications but with specified conditions like lower coverage limits or higher rates etc.
5. After the application is approved, then it is forwarded to the policy processing department, then to the insurance agent and the customer for evaluation. If it's rejected, then the customer and the agent receive the rejection letter.

Why is it so important?

The underwriting process finds special mention since it's important for both the insurer as well as for the insurance applicants.

For the insurers:

• The underwriters maintain a check on the risk factor of the insurance company, i.e. figures out the company's tolerance for risks.
• They ensure the financial stability of the insurance company. They hold the responsibility of reducing the company's expenses and losses for the claims.

For the consumers:

• The underwriters determine whether or not to approve the insurance application of a potential consumer.
• They determine how much of a risk you are, and set the coverage limits and rates on your policy.

Who are the underwriters?

The underwriters are specialized personnel who determine the extent of an individual's risk when they apply for a policy. They review details of an insurance application to determine the accuracy of the information provided. Accordingly, they accept or reject a policy. They also decide on the premium structure for a consumer, if his/her application is approved.

Are there specific standards that have to be maintained?

Usually, each insurance company maintains their specific set of guidelines. The underwriters approve or reject the insurance applications based on the company guidelines or limitations.

Are there any specific eligibility criteria for an underwriter?

Insurance underwriting requires perfect analyzing skills, since an underwriter needs to manage, process and evaluate data. An insurance underwriter must have:

1. A graduation degree, favorably in business or finance
2. Knowledge of accounting
3. Understanding of economics
4. Know-how of the insurance industry
5. Basic computer skills

Thus, it is essential to understand how the underwriting process works in the insurance industry before one tries to insure his valuables. A person with a fair driving record is likely to get auto insurance quickly and at affordable rates than one with a lot of traffic violations on his report. Similarly, life insurance is going to be cheaper for those with healthy habits. Past records apparently influence how the underwriters review your policy application.

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