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Underwriting - Underwhat?

While insurance might seem complicated in practice, in theory, it’s actually pretty simple: Customers pay insurance companies a small amount of money (called a premium) to protect themselves against the possibility that something might go wrong and end up costing a lot of money to fix.

With insurance, if something does go wrong (say, for example, you’re involved in a car accident, you’re admitted to hospital or your house is broken into), insurance kicks in and, depending on the terms of your policy, your insurer will pay some or all of the costs associated with fixing what went wrong. 

So, how does underwriting fit into all of this? Well, underwriting pretty much underpins insurance! 

What, exactly, is underwriting?

First and foremost, underwriting involves assessing a variety of risks to determine whether or not to provide insurance. If it’s likely you’ll make a claim on your insurance policy and how often you might do that help underwriters determine whether to insure you. For example, if you have a history of reckless driving and keep driving into the mailbox, you might be too big a risk for an insurer to take on and so they may choose not to insure you. 

Once it’s determined that the risk is okay, insurers then use underwriting to determine the conditions of an insurance policy, what premium to charge, how much to pay in the event of a claim and under what circumstances an insurer will pay back the customer. 

Why is underwriting important? 

The decisions underwriters make are critical to the success of an insurance company. 

If underwriters decide to insure individuals and companies who pose too big a risk, then insurers will pay out too many claims to keep the business, well, in business! On the flipside, if underwriters continually refuse to provide insurance, then insurers won’t make enough money through the collection of premiums to stay in business either.

What do underwriters actually do? 

On a typical day, underwriters spend a lot of time collecting information, evaluating risks and making decisions. Good underwriters have a fair bit of engagement with people, including brokers and the people they’re insuring. 

When a customer makes an application for insurance, underwriters analyse their application and attempt to learn as much information about the customer as possible, including the information the customer has provided, as well as information from other sources if necessary, in order to fill in any gaps in the information they have. For example, sometimes underwriters might examine the medical records or financial history of the person seeking insurance.

Once they have all the information they need, underwriters use software programs to receive recommendations on whether to provide insurance, and then underwriters make the ultimate decision on whether to offer insurance, and if so, for how much and under what conditions. For each type of insurance, underwriters will analyse a range of different risk factors to come to these decisions. For example, with car insurance, underwriters will take into account a person’s age, their driving history, their gender, the condition and age of the car, and where the car is kept overnight. 


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