In this article, we are going to discuss one common term used in insurance circles- 'underwriting'. After going through it, you will have a clear idea about what underwriting is from the insurance point of view, what underwriters do, and how they differ from insurance agents, brokers, and surveyors.

Let’s start with the basics then!

What is Underwriting in insurance?

Underwriting is the process by which insurers assess the risks of insuring a business. It involves the insurance provider deciding whether your company offers an acceptable risk and, if so, determining a reasonable price for your coverage.

Who is an insurance underwriter?

The task of insurance underwriting is taken care of by professionals who analyse risks connected with insuring persons and assets. These professionals are called underwriters. The term underwriting refers to earning compensation for a willingness to pay a potential risk. Insurance underwriters figure out the pricing for accepted insurable risks. They assess the possibility and size of a risk using specialist software and actuarial data. They also provide advice on risk management issues, available coverage for specific people, and risk assessments for existing clients seeking extended coverage.

An insurance underwriter assumes the risk of a future incident and determines the premium to cover the risk of damage. The computed premium serves as a payment for the promise to compensate the insured in the occurrence of damage. The risk is assessed prior to the policy period's expiry and during the renewal time. For example, a home insurance underwriter checks homes or properties for obvious insurance risks. These include things like crumbling sidewalks and deteriorating roofs.

How does the insurance underwriting process work?

Underwriting in insurance is all about determining the risk profile of a potential customer. The particular characteristics vary depending on the type of insurance the customer seeks. The following are the most common factors:

  • Age of the business
  • Type of the business
  • Financial characteristics (such as size, sales or assets)
  • Condition of property
  • Prior financial behaviour
  • Prior insurance claims
  • Loss-prevention practices
  • Safety/security systems

Once an underwriter learns these factors, he will try to assess whether your organization has risk factors that affect your suitability as a buyer of a particular insurance type. As an example:

  • If you are buying a business owner’s policy- Do you have security alarms? Is the roof of your building in good condition?
  • If you are purchasing general liability insurance- Have you ever been sued, and if so, why?
  • If you are looking for insurance for your company vehicles-How many times have you submitted accident claims in the past?

As seen from the example above, underwriters evaluate various forms of customer data to determine whether or not their company should be doing business with you and at what cost. If the study results are unfavourable, the underwriter may offer you choices to take certain risk propositions. For example, he may recommend changing the coverage terms by endorsement to restrict you from lodging certain types of claims. Although this reduces the utility of the insurance, it may be preferable to remaining uninsured.

How is an Underwriter different from a Broker or Insurance Agent

How is an underwriter in insurance different from a broker or insurance agent?

A broker is a qualified insurance professional who legally represents individuals or organisations looking to purchase insurance products. He will collaborate with clients to determine and put forward the most appropriate insurance plan, to cater to the unique coverage requirements of his clients. He will search around to obtain the best plans at the right price, based on the needs of their clients.

An insurance agent represents one or more insurers. The products of the insurers and their insurance policies are distributed by the agent. They may represent a single insurance provider or a number of them. Agents serve as intermediaries or facilitators, supplying information from the insurance business or companies they represent to prospective customers. They have agreements with insurers that outline the types of policies they are permitted to offer and the expected earnings they will receive, from doing so.

On the other hand, the underwriting system that determines who an insurer will sell coverage to is created by insurance underwriters. They do so in collaboration with actuaries who build statistical models of anticipated losses.

Insurance underwriters also work with brokers or insurance agents. He considers all the information provided by your agent. He will then determine whether or not the insurance provider take a chance on you. Your agent or broker must offer a strong case to persuade the underwriter that the risk you are presenting is good.

Agents are normally unable to decide beyond the basic guidelines outlined in the underwriting handbook. However, some agents may decide not to cover you depending on their understanding of their company's underwriting procedures. They cannot make special arrangements to provide you with insurance unless the underwriter approves.

Based on his understanding, the underwriter protects the insurer by enforcing the regulations and assessing risks. They can determine how the insurer will respond to the risk potential beyond the fundamental guidelines. They can also make exceptions or change conditions to make a situation less risky.

How is an underwriter different from a surveyor?

Many people believe that insurance underwriters and surveyors do pretty much the same thing. They do not. Insurance underwriters and surveyors are distinct professions with distinct responsibilities. Let us explore the distinction –

  • Insurance underwriters come into the picture during the issuance of a policy. On the other hand, insurance surveyors are called in when there is a claim.
  • An insurance policy's coverage limits and premium rate are determined by underwriters. However, insurance surveyors determine the amount of a claim that the insurance company would pay.
  • Underwriters assess the risk in an insurance proposal. But, surveyors establish the origin of the claim and the amount of loss incurred.

Both surveyors and insurance underwriters are highly trained professionals in their respective fields and their tasks are indeed very different. Underwriters are involved with insurance issuance, whereas surveyors are focused on policy claims.

An insurance policy can be underwritten by an individual or a group of underwriters, but the policy is only issued after underwriting. Underwriting is required both when the policy is purchased and when it is renewed. When the policy is renewed, the insurance underwriter recalculates the risk and proposes the renewal terms and conditions. Insurance underwriting is a critical phase in the purchasing process, and you should understand what it encompasses.

The footnote:

We hope the discussion above will help you understand what underwriting is from the insurance point of view, what underwriters do and how they differ from insurance agents, brokers and surveyors. We have also discussed other important matters related to underwriting in insurance. For more information related to any topic in insurance, you may contact BimaKavach. Here, you can also get the best recommendation for any insurance product in just 5 minutes.

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