The insurance industry is enormous. Trustworthy Insurance Information Institute reports that in 2019 there were 5,965 US insurance companies with 2.8 million employees. The US Bureau of Labor Statistics reports that 100,050 individuals were employed as insurance underwriters in May of that year.
Here is a closer look at what underwriting is.
What Is Insurance Underwriting?
Underwriting is the process of determining how much risk an insurer takes on when providing an insurance policy. It determines if the insurance company will lose money or make money after selling the policy. The process is a game of statistics, data, and rules set by each carrier.
When you apply for insurance, your broker may tell you that an underwriter must review your file. When you want to purchase insurance, an insurance company will require information about you before giving you a quote.
An insurance underwriter evaluates this information to determine the risk factors involved in providing coverage for whatever you want to insure. If the company believes the risk is too significant, it may deny insurance coverage altogether. In other cases, carriers reserve the right to modify a policy's terms to mitigate their potential losses.
What Does an Insurance Underwriter Do?
They determine whether to provide coverage and at what cost. Their responsibilities include:
- Reviewing information to assess the extent of risk.
- Offering alternatives to conventional policies with endorsements or restricting coverage altogether.
- Looking for practical ways to eliminate, or at least reduce, the risk of subsequent claims.
- Negotiating with brokers and agents to provide coverage when special circumstances arise or traditional coverage is not the right fit.
- Determining appropriate policy coverage, coverage amounts, and covered perils. Sometimes, they grant coverage only under certain conditions.
State law makes it illegal for underwriters of some insurances to consider:
- Race or ethnicity
- Marital status
- Income and employment history
- Certain types of inquiries into your credit or whether you are receiving credit counseling.
Some states also prohibit auto insurance underwriters from making decisions based solely on credit scores or a credit report. Reviewing new applications or complex circumstances often falls to a senior underwriter. They usually have considerable experience in the insurance industry.
Property and casualty underwriters are professionals who review applications and policy renewals for commercial insurance or personal insurance. Their areas of expertise are specific types of risk, such as fire, marine, homes, or autos.
Sometimes, they look at your insurance score. An insurance score analysis is not the same as a credit score analysis. It does not consider the specifics of your financial situation, such as income, tax returns, or child support. But it does factor in your:
- Payment history. Your track record of paying debt or premiums on time.
- Applications for new credit. Evidence that you have sought new lines of credit recently.
- Outstanding debt. Any debt you have currently.
- Duration of credit history. How long you have had credit.
- Mix of credit. Types of credit you have already, such as a car lease, credit card, and mortgage.
An underwriter is not the same as an insurance agent. Insurance agents have no authorization to offer premiums unless the application aligns with the company's underwriting rules. Generally, it is the underwriter who calculates the premiums and eligibility criteria.
Brokers can only follow specific policy stipulations. They cannot negotiate premiums, coverage amounts, or other limitations. However, an insurance agent may have the authority to deny coverage if an applicant cannot be insured.
The US Bureau of Labor Statistics reports that the majority of underwriters work for insurance companies. A smaller percentage serves in other capacities, such as business managers or credit mediators.
Insurance Underwriting Process
The first thing to do when seeking insurance is to fill out and submit an insurance application for review.
In today's digital world, application review takes two forms: automated and manual underwriting. When you fill out an insurance application online and get an instant quote, that's automated underwriting in action. The underwriting software that makes this possible is helpful when there are no special circumstances regarding someone's insurance information.
However, there are some instances when a human intervention (manual underwriting) may be needed to assess an applicant's information. Underwriters will review the data if the application raises red flags or is outside the norm. Here are some scenarios when the carrier may use an underwriter.
- Vacant Homes. A homeowner may move out of a home before selling or using it as a vacation home or rental property. The risk of insuring a potentially vacant home is different from that for a home that you occupy regularly.
An underwriter may want to know the reason for the change to determine whether to continue providing coverage for the home.
- Homes in Need of Extensive Repairs. When people purchase homes that need numerous repairs, their applications may go to underwriting. An extensive need for repairs raises red flags because it may prove too costly for the company to insure the home.
The carrier may be more likely to provide coverage if customers have a track record of not filing many claims. Clients may also have leverage if they bundle two or more different types of insurance.
- Multiple Claims. Underwriting is especially likely in cases when consumers file numerous claims on their car or home insurance. The company will consider whether to cancel coverage or offer new policy terms if a claim exceeds the deductible and premium or if too many claims get filed. Having a perfect driving record may work in the policyholder's favor.
Once an underwriter provides coverage, denies it, or makes adjustments, the broker receives this information and communicates it to the applicant.
If you are denied coverage from a particular company, you can look for insurance through another carrier. Some insurers specialize in providing coverage to people deemed high-risk.
A qualified insurance professional can help you understand the underwriting process and how companies calculate premiums.
Hope that helps!
At your service,