INSURANCE UNDERWRITING – PART V

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UNDERWRITING is an important function and is performed each time an insurance application is taken. Its purpose is to determine if applications represent risks acceptable to the insurer to determine whether or not the insurer will issue a policy to an insurance applicant. Underwriting is based on a variety of criteria, established by each insurer and regulated by National Legislation.

Each underwriting decision involves balancing the insurer’s desire to earn premium with the insurer’s ability to cover claims and remain in compliance with financial regulatory requirements while making a profit. We begin by answering the question “What is Underwriting?”

The various types of underwriters are discussed and how their responsibilities differ depending upon the line of insurance they underwrite. Factors in underwriting include key components such as insuring people, property, a business or business operations.

The four basic underwriting decisions, whether to reject an application, issue the application as substandard, issue the application as standard, or issue the application as preferred, are taken up next. Finally, the monitoring of underwriting decisions has to be explained or justified.

Later on, I will examine the Underwriting Process. First, the objective of the underwriting task is described and a close look is taken at the components that must exist for a risk to be acceptable to the insurer.

Then, each underwriting resource is reviewed, starting with the application for various lines of insurance and including consumer reports, medical information, site inspections, other insurance policies held and industry statistics.

It is also important to look at legislation and its impact on underwriting. National regulations dealing with the setting of adequate rates, privacy laws, unfair trade practices, discrimination and required coverages are all examined.

Reinsurance is another component that requires underwriting. The reinsurance industry, treaty reinsurance and facultative (optional) reinsurance all need to be looked at.

Underwriting is the function of evaluating the subject of insurance, whether a person, property, profession, business, or other entity, and determining whether to insure it. The underwriter must apply company standards to each applicant, and, based on these standards, ascertain whether the application represents an acceptable risk.

Underwriting is the foundation of the insurance transaction process. The term underwriter arose out of marine insurance. In the 17th Century, merchants who were willing to take on a portion of the risk for voyages would list the amount of the voyage they were willing to insure and sign their names underneath a contract that detailed the terms of the risk.

These merchants became known as underwriters because they wrote their names under the contract terms. Since that time, the insurance business has evolved and policies are no longer underwritten by individuals who insure risks, but the term underwriter continues to be applied to those who review and select risks to insure.

The factors used during the underwriting process varies some-what based upon the type of insurance being underwritten. If people are being insured, such as under life, health and disability insurance, key factors used in the underwriting process may include: age, sex, health and health history, occupation and occupation history. Financial condition, personal habits such as smoking or drinking alcohol, size of the policy and current insurance in force.

If property is insured, as in homeowners, vehicle, and commercial property insurance, underwriters may review factors such as; Type of the property, value of the property, condition of the property, construction materials used in the property, potential hazards surrounding or within the property. Age of the property, use of the property, security measures and other loss control measures associated with the property. Location of the property, current insurance in force on the property and prior losses associated with the property.

If a business or business operations are being underwritten under insurance such as general liability and professional liability insurance, factors that underwriters will weigh include; Type of business, Size of business, Financial condition of the business, financial condition of owners. Business cycles affecting the business, liability exposures, experience of key employees and owners and past losses experienced by the business.

Underwriting involves examining application forms, supporting documents such as appraisals or bills that verify the value of property, or medical reports that verify the health condition of an individual, looking at insurance maps that provide information relevant to the statistical possibility of certain types of loss, reviewing statistical data applicable to the risk to be insured, reviewing company records regarding the application and evaluating site inspection reports.

Upon a thorough examination of all the data, underwriters then assign rates to the application, or decline to issue a policy if it does not meet underwriting standards. During the entire process, the underwriting department frequently communicates with agents, inspectors, adjusters and other field personnel.

An insurance company may issue policies for many different types of insurance. However, most underwriters perform their responsibilities as specialists. An underwriter may underwrite just property policies, just casualty policies, just personal property policies, just professional liability policies, and so on.

Within the property and casualty field, underwriters often specialise in a particular type of property or casualty coverage. Within this field there may be fire underwriters, homeowners underwriters, motor vehicle insurance underwriters, inland marine underwriters, commercial property underwriters, personal property underwriters, commercial general liability underwriters, professional liability underwriters and workers compensation underwriters, as examples.

These underwriters, whether they perform underwriting tasks for one line of insurance or for many lines, must understand the risks involved with each line of insurance for which they underwrite and the available and practical methods of dealing with these risks. They must also be able to gather and understand the various resources used to evaluate each application and determine whether the applicant meets company underwriting standards.

Such resources may include site inspection reports, business or personal financial statements and reports, and if a business is being insured, statistical reports generated by the industry in which the business falls, as well as statistical reports from the property and casualty insurance industry that are applicable to the risk.

Note: In this column I offer insurance information in general. Do not completely rely on this column to make particular insurance decisions. For specific insurance advice email me at; insuculture@gmail.com

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