Underwriting is a process that an insurance company employs in order to assess a potential client’s eligibility for coverage. Underwriters are responsible for evaluating the risks associated with insuring clients. Using the risk and exposure data they gather, underwriters determine the coverage the client needs and how much they will pay for it. The underwriter will also decide if the client is too much of a risk to insure and whether the company can accept that risk. His role in the insurance company is to protect the company from risks that will make a loss.
What is the Purpose of Underwriting?
Underwriting is an absolute necessity in the insurance application process. Underwriting enables the insurance company to properly classify clients into appropriate risk classes. It also serves to protect the insurance company from clients who misrepresent themselves fraudulently. Since clients are classified into their appropriate risk class, insurance companies are able to keep their premiums down and provide a majority of their clients with affordable insurance premiums.
The insurance risk class a client is assigned to is determined by a variety of factors. Risk classes are composed of individuals and companies with similar characteristics. These risk classes include the following:
Preferred – Clients in this class typically enjoy lower rates because the underwriter has determined that they have a better than average risk.
Standard – Clients in the standard class are usually charged the standard rate for meeting the typical risk requirements.
Rated – This class generally represents clients who have an above average risk. They are usually charged higher rates for premiums than clients in the preferred or standard classes.
Postponed – Clients are put in the postponed class temporarily until more information can be obtained, a predetermined time has passed or until factors that had a bearing on the underwriting decision have changed. When one of these occurs, the underwriter reevaluates the client and decides if they can be classified in the preferred, standard or rated risk class.
Declined – Clients who are declined are those who pose an uninsurable risk. Once clients have been declined coverage, they typically have to wait at least two years before reapplying for insurance coverage through the company where they were denied.
The Underwriting Process
The underwriting guidelines differ for each insurance company, but the process is essentially the same for each of them. The steps for the underwriting process are outlined below.
Collect Information – Information collection is the first step of the underwriting process. The underwriter requires knowledge of several key pieces of information in order to properly evaluate the potential client. This information will vary depending on the type of insurance policy for which the client is applying.
For example, when an individual is applying for automobile insurance, the underwriter will collect information such as the VIN numbers for the cars being insured, Motor Vehicle Reports for the potential client, loss histories from the potential client’s previous insurance company and any other information that may apply.
Analyze Information – After the required information is gathered, the underwriter begins the process of analyzing each piece of information. He or she follows the specific underwriting guidelines that the insurance company sets forth. These guidelines are used to evaluate all information that is gathered.
There are different levels of authority among underwriters. If the underwriter determines after her analysis that a decision needs to be made by an underwriter who has more authority, the information will be passed onto that particular underwriter.
The purpose of analyzing the gathered information is to predict the amount of risk a potential client will pose for the insurance company. Using the auto insurance example above, a client who has a clean driving record and good credit is generally preferable to someone who has had several driving infractions or automobile accidents.
Identify Options – After the information has been analyzed, the underwriter works to identify the options available for potential clients. These options are related to the type of risk class to which potential clients are assigned. The options are as follows:
- Approve the issuing of a policy by accepting the insurance application.
- Deny the request for coverage.
- Accept the application but attach conditions for coverage.
If the underwriter approves the application, it will be forwarded to the applicable policy processing department for completion. If the application is denied, a rejection letter will be issued to the agent and client. If modifications need to be made, the application will be sent back to the insurance agent who will review it with the potential client.
Factors That Can Prolong the Process
The time it takes for an underwriting to be completed can vary widely depending on a number of factors. For cases with few requirements, the entire process may take as little as a day or two. For more complicated cases, the process can take much longer.
One of the factors that prolongs the underwriting process the most is trouble verifying the information provided by the applicant. Applicants can avoid this by providing as much information and documentation as possible. Because the underwriter will not have to spend time looking for this information, the process can be sped up considerably.
Underwriting is vital for providing the insurance company a way to access the risks of potential clients. This process protects the company from taking on clients who are prone to a large amount of incidents for which the insurance company will be responsible for covering. Underwriting ultimately benefits both the insurance company and the clients it insures by keeping premiums at a minimum and lowering the risk of loss.