Underwriting in Insurance

What is underwriting in insurance?

Underwriting in insurance is the process through which an insurer evaluates the likelihood and potential cost of a future claim before providing insurance coverage. An insurer collects relevant information about the person, group, property, or business being insured. It then uses this information to assess the level of risk involved.

Based on this assessment, the insurer may decide:

• Whether to provide insurance coverage
• What premium should be charged
• What coverage limits should apply
• Whether specific terms or conditions are required
• Whether additional information or documentation is needed

What is an insurance underwriter?

An insurance underwriter is a professional who evaluates insurance risks on behalf of an insurer. Their role is to understand the risk associated with an application and determine whether it fits within the insurer's underwriting guidelines.

An underwriter may:

• Review application information
• Analyze risk factors
• Review claims or relevant historical information
• Request additional information when required
• Assess the proposed coverage
• Determine appropriate policy terms within their authority
• Support premium and risk decisions
• Review renewals and changes to existing policies

The underwriter's role is different from that of an insurance broker.

An insurance broker primarily helps customers understand and purchase insurance products, while an underwriter works for the insurer to evaluate and accept risks according to the insurer's underwriting framework.

Why is underwriting important in insurance?

Insurance works by pooling risks. Policyholders pay premiums, and insurers use these premiums to pay eligible claims. For this model to work sustainably, insurers need to understand the risks they are taking on.

Underwriting helps insurers:

1. Assess risk

The insurer evaluates the likelihood and potential severity of future claims.

2. Price the policy appropriately

The level of risk can influence the premium charged for the coverage.

3. Determine suitable policy terms

Depending on the product and applicable regulations, underwriting may influence coverage limits, conditions, or other policy terms.

4. Maintain a sustainable insurance portfolio

If insurers consistently underestimate risk, claims may become significantly higher than expected. Underwriting helps insurers make informed decisions when accepting and pricing risks.

5. Reduce adverse selection

Adverse selection occurs when people or groups with a higher likelihood of making claims are more likely to seek or select higher levels of insurance coverage.

How does underwriting work in insurance?

The underwriting process can vary depending on the type of insurance and the insurer. However, it generally follows a series of steps.

Step 1: The applicant provides information

The process starts when an individual, company, or group applies for insurance.

Depending on the type of policy, the insurer may collect information such as:

• Age and demographic details
• Medical history
• Previous claims
• Occupation
• Business information
• Existing insurance coverage
• Desired sum insured
• Previous policy details

Step 2: The insurer evaluates the information

The insurer reviews the information provided to understand the potential risk. For example, in health insurance, the insurer may examine relevant medical information and previous claims experience. For commercial insurance, the insurer may look at factors related to the business, its operations, assets, and exposure to risk.

Step 3: Risk is classified

The insurer determines how the risk compares with its underwriting guidelines and expected claims experience. The risk assessment may involve several factors rather than one single characteristic.

Step 4: The insurer determines the policy terms

Based on the assessment, the insurer determines the terms on which it is willing to provide coverage.This can include the premium, coverage amount, and other applicable conditions.

Step 5: The insurer makes an underwriting decision

The insurer may approve the proposal, request additional information, or offer coverage with applicable terms. Once the proposal is accepted and the required process is completed, the policy can be issued.

How does underwriting work in health insurance?

Health insurance underwriting is the process of assessing the health-related risk associated with providing insurance coverage. The exact underwriting process depends on the type of health insurance, the insurer, the product, and the applicable rules.

For an individual health insurance policy, the insurer may consider information such as:

• Age
• Medical history
• Existing health conditions
• Previous hospitalization
• Previous claims
• Lifestyle-related information where relevant
• Coverage amount requested
• Other information required by the insurer

What factors do health insurers consider during underwriting?

There is no single factor that determines the underwriting outcome. Insurers typically consider multiple pieces of information.

Age

Age can be an important factor in health insurance because healthcare requirements and the likelihood of certain medical conditions can vary across age groups.

Medical history

Medical history can help insurers understand an individual's existing or previous health conditions and potential healthcare needs.

Previous claims

For group policies, past claims experience can provide useful information about how the group's healthcare coverage has been utilised. However, previous claims are not necessarily an indication of what future claims will be. They are one of several factors that may be considered.

Group size

In group health insurance, the number of covered employees and dependents can influence how the insurer assesses the overall risk of the group.

Industry and occupation

The nature of the work performed by employees can be relevant to risk assessment, depending on the insurance product and coverage.

Sum insured

A higher sum insured means the insurer may have greater potential exposure when eligible claims arise. Therefore, the requested coverage amount can form part of the underwriting assessment.

Dependent coverage

If employees can cover spouses, children, parents, or other eligible dependents, the composition of the insured population can affect the overall risk profile.

Types of underwriting in insurance

There are different ways underwriting can be carried out depending on the insurance product and the nature of the risk.

1. Medical underwriting

Medical underwriting involves assessing health-related information to understand the potential risk associated with providing health or life insurance coverage. It can involve reviewing information such as medical history, health declarations, medical reports, or other information required by the insurer. Medical underwriting is more relevant to products where an individual's health status is an important component of risk assessment.

2. Financial underwriting

Financial underwriting evaluates financial information to determine whether the requested level of insurance is appropriate for the applicant's financial circumstances. It is particularly relevant in certain life insurance and other products where the amount of coverage has a financial relationship with the policyholder's income, assets, or financial requirements.

3. Individual underwriting

Individual underwriting evaluates the risk associated with a particular person or policyholder. For example, an insurer may assess an individual's age, medical history, coverage requirements, and other relevant information before issuing a policy.

4. Group underwriting

Group underwriting evaluates the overall risk associated with a defined group. It is commonly relevant to employer-sponsored insurance such as group health insurance. Instead of assessing every employee entirely independently, the insurer looks at the characteristics of the group as a whole.

5. Manual underwriting

Manual underwriting involves a human underwriter reviewing the available information and making an assessment based on the insurer's underwriting guidelines. It can be useful when a case is complex or requires additional judgement.

6. Automated underwriting

Automated underwriting uses technology and predefined rules to assess risk and make or support underwriting decisions. It can make the process faster and more consistent, particularly when dealing with large volumes of relatively standard applications.

Underwriting in group health insurance

For HR teams, underwriting becomes particularly important when purchasing or renewing group health insurance. Suppose a company is renewing its group medical insurance policy. The insurer may review information about the existing policy, including:

• Number of employees covered
• Number of dependents
• Age profile
• Claims experience
• Claims frequency
• Large or high-value claims
• Changes in the covered population
• Current sum insured
• Benefits and coverage structure

The insurer then uses this information to understand the group's risk profile for the upcoming policy period. This is one reason why group health insurance premiums can change at renewal. If the insurer's assessment indicates that the expected risk has changed significantly, the insurer may revise the renewal terms, subject to applicable regulations and the terms of the policy.

What happens after underwriting?

Once the insurer completes its assessment, several outcomes are possible depending on the product and circumstances.

The application is accepted

The insurer agrees to provide coverage based on the proposed terms.

Additional information is requested

The insurer may require more information before it can complete its assessment.

Coverage is offered with specific terms

Depending on the insurance product and applicable rules, the insurer may offer coverage subject to certain conditions or limitations.

The application is not accepted

In some circumstances, the insurer may decide that the proposed risk does not meet its underwriting criteria. The exact options available to an insurer depend on the type of insurance, product terms, underwriting guidelines, and applicable regulations.