What is Insurance Underwriting?

Insurance is based on risk. As a result, it's important for insurance companies to be able to use data and statistics to accurately determine risk. Underwriting is the component of insurance that deals with assessing risk. Underwriting is used to ensure that insurance companies charge the right amount for insurance coverage. If they charge too much, they will lose customers to their competitors who charge less for coverage. On the other hand, if an insurance company charges too little for coverage, they will eventually run out of money after paying for large claims. In addition to helping insurance companies accurately set prices, underwriting is also used to aid in the detection and prevention of fraud.

Insurance underwriting involves four main processes. The first process in insurance underwriting is accepting or rejecting a specific risk. If you were applying for auto insurance, this process would involve evaluating the application you submit against existing risk criteria. The next process is classifying and rating risk. Following the auto insurance example, if your application is accepted, underwriting will then be responsible for classifying how much risk insuring you presents. After classifying your risks, they are then rated. Next, the person responsible for underwriting has to modify a policy form to fit the applicant. The policy you would receive for your auto insurance would reflect any special needs you have or particular risks you present. After all three of those processes are handled for an insurance applicant, the last purpose of underwriting is to minimize a company's long-term losses through retention and reinsurance.

Because of the role that underwriting plays in your ability to obtain an insurance policy to protect yourself, you need to understand how to handle applying for insurance and dealing with the underwriting department. Because it can lead to you be prosecuted for fraud, you should never lie on an insurance application. However, you should carefully think about all of the information you supply on your application and to the company's underwriting department. Once you submit your application, the underwriting department may attempt to contact you to clarify or verify information on your application. If you don't respond to their attempts to contact you, it will most likely delay the processing of your application. Additionally, if you are told by the company that you need to undergo a physical exam, be sure to take care of this as soon as possible to avoid having the processing of your application delayed.

When it comes to evaluating your risk, the underwriting of an insurance company can place you in one of four groups. This first group is that of standard risk. If you are put in this group, it means you have been given their normal rating. The second group is substandard risk. Being put in this group means that you present a higher than average risk to the insurance company. As a result, they will still insure you, but it will be at a higher premium. The third group is preferred risk. Being a part of this group means that you present very little risk to the company, and as a result you can take advantage of a lower premium. Finally, the last group is declined risk. If you are assigned to this group, you will not be accepted by the insurance company as a result of the risk that you present to them.

While insurance underwriting can seem like a way for insurance companies to discriminate against applicants, in reality it's the method that is necessary for insurance companies to ensure that they can continue to provide affordable coverage to qualified applicants.

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