Underwriting in insurance refers to the process of evaluating the risk associated with insuring a person or property and setting an appropriate coverage and premium for this. The process also helps to decide whether to insure a person or property at all or not.
Insurance transfers risk from the insured person to the insurer. This makes underwriting an integral part of any application processing. Insurance companies have in-house professional underwriters to do this job. Information required to do underwriting varies depending upon the type of the insurance.
Based on the risk involved, either the insurance company declines the application or accepts it putting its own quotation. This includes the price of the insurance and the terms and conditions for paying the coverage.
Scope
Underwriting is required in almost every branch of insurance but mostly used in
- Property Insurance
- Mortgage Insurance
- Health Insurance
- Life Insurance
Individual policies require more in-depth underwriting than group policies.
Exemptions from Underwriting
Underwriting in insurance always excludes two types of losses, moral hazards and correlated losses. Moral hazard is a situation when an insured person takes less care and causes avoidable losses just because he/she is insured. Insurance covers only those losses that are beyond the control of an insured person.
Correlated losses affect a large number of people at a time (e.g. natural disaster). Covering them all will lead an insurer to bankruptcy.
Modern Underwriting
Nowadays underwriting in insurance has become more automated. Analyzing risks, rating applications, selecting terms and conditions, calculating the coverage and premium amount and final issuance of the policy - everything is done using programmed software. Though, for complex policies, there is no substitute for manual skills.
Conclusion
Insurance underwriting is crucial for minimizing claims. Depending upon how generous or conservative the underwriter is, an insurance company can earn huge profits or incur unnecessary losses.
