Underwriting is a term used by life insurers to describe the process of assessing risk, ensuring that the cost of the cover is proportionate to the risks faced by the individual concerned. People with the same or similar risk pay the same or similar premium rates. The process of underwriting takes place when you submit your application. To assess a person’s risk, life insurers rely on information from a range of sources. If you are applying for a policy that is underwritten, as a minimum you will be asked to complete an application form and a medical questionnaire.
Approximately 93% of applicants that go through the underwriting process will not experience any difficulty and will end up paying the standard premium rates for their life insurance. People who have a higher risk of developing chronic illness or who work in high risk occupations are usually required to complete additional forms and may be asked to pay an extra premium to cover this risk. This only happens to a low proportion of applicants. And an even smaller number may not be eligible for cover at all.
Remember, if you have access to insurance through your super or through your employer, the insurance company may decide not to assess the risks for every individual in the policy. Instead they may spread the risk across everyone in the group. This is called a ‘Group Policy’. Insurance underwriting Insurance underwriters evaluate the risk and exposures of potential clients. They decide how much coverage the client should receive, how much they should pay for it, or whether even to accept the risk and insure them.
Underwriting involves measuring risk exposure and determining the premium that needs to be charged to insure that risk. The function of the underwriter is to protect the company’s book of business from risks that they feel will make a loss and issue insurance policies at a premium that is commensurate with the exposure presented by a risk. Each insurance company has its own set of underwriting guidelines to help the underwriter determine whether or not the company should accept the risk. The information used to evaluate the risk of an applicant for insurance will depend on the type of coverage involved.
For example, in underwriting automobile coverage, an individual’s driving record is critical. [citation needed] As part of the underwriting process for life or health insurance, medical underwriting may be used to examine the applicant’s health status (other factors may be considered as well, such as age & occupation). The factors that insurers use to classify risks should be objective, clearly related to the likely cost of providing coverage, practical to administer, consistent with applicable law, and designed to protect the long-term viability of the insurance program.
[1] The underwriters may either decline the risk or may provide a quotation in which the premiums have been loaded or in which various exclusions have been stipulated, which restrict the circumstances under which a claim would be paid. Depending on the type of insurance product (line of business), insurance companies use automated underwriting systems to encode these rules, and reduce the amount of manual work in processing quotations and policy issuance. This is especially the case for certain simpler life or personal lines (auto, homeowners) insurance.
Some insurance companies, however, rely on agents to underwrite for them. This arrangement allows an insurer to operate in a market closer to its clients without having to establish a physical presence. Underwriting refers to the process that insurance companies use to assess the eligibility of a customer to receive their products. There are different types of underwriting. The two that mainly concern life insurance are medical underwriting and financial underwriting. When applying for life insurance products, the life insured will need to complete an application form.
Most comprehensive products will require the customer to complete a series of questions regarding their health and financial history. Insurance companies will also require information in regards to the applicant’s occupation and any sports and pastimes that they might participate in. Medical underwriting is the process of assessing the applicant’s medical history. For example; if the applicant zdisclosed that they have a history of high blood pressure, the underwriter at the insurance company might request a report from the applicant’s doctor.
Requesting information from the client’s doctor or any relevant medical professional cannot be done without the permission of the applicant. All medical information gathered is strictly confidential and this is only viewed by the individuals who have a direct role in assessing the life insured’s application. Financial underwriting is more commonly used when applying for an income protection policy. The purpose of financial underwritings is to make sure that the cover amount which the customer has applied for reflects their financial situation. This is to avoid people over insuring themselves.
As with medical underwriting, the information that is disclosed on an application is confidential. Once all the information required has been gathered and the underwriters at the insurance company have made their assessment the applicant will receive notification of the assessment which will include the outcome. It’s a common misconception that underwriters are in the business of denying cover for people. It’s the underwriter’s job to assess a person’s situation and then offer the most appropriate cover. Underwriter’s are there to help you, they will not deny anyone cover unless it is warranted.