Underwriting Practice and Procedures

Underwriting is the process of determining whether an insured is an acceptable risk, and if so, at what rate the insured will be accepted. Insurers cannot accept every applicant. An insurer has a responsibility to its current policyholders to make sure that it will be able to meet all the contractual obligations of its existing policies. If the insurance company issues policies on applicants that represent risks that are uninsurable or risks that require premiums higher than the insurer may charge can cover, the insurer’s ability to meet its contractual obligations is jeopardized. On the other hand, a for-profit insurer wants to make money and to increase its number of policyholders. No insurer wants to reject applicants unnecessarily. All these factors must be taken into consideration in the underwriting process. An insurer is also regulated by the states in which it does business. The states expect the insurer to establish reasonable, non-discriminatory standards for accepting insured. Regulation is another important factor in the underwriting process; most of the risks are tariff governed.

It is very important for you to understand the underwriting process to help you avoid needless frustration.

After you apply for life insurance, the company is going to look at different criteria to decide if they are going to accept your application for coverage.

Several of the major factors the underwriter will review are your driving history, prescription history, family health history, usage of alcohol, height and weight and of course any prior medical issues or surgeries.

If you elect to purchase a life insurance policy requiring a free medical exam all the exam results will be reviewed prior to an underwriting decision.

The underwriting process is an essential part of any insurance application.

When an individual applies for insurance coverage, he or she is essentially asking the insurance company to take on the potential risk of having to pay a claim in the future.

In many cases, life insurance claims can be quite high.

Therefore, it is critical to the financial long-term health of the insurance company to not take on too great a risk when taking into consideration an applicant for life insurance coverage.

Underwriting services are provided by some large financial institutions, such as banks, or insurance or investment houses, whereby they guarantee payment in case of damage or financial loss and accept the financial risk for liability arising from such guarantee. An underwriting arrangement may be created in a number of situations including insurance, issues of security in a public offering, and bank lending, among others. The person or institution that agrees to sell a minimum number of securities of the company for commission is called the Underwriter.

The name derives from the Lloyd’s of London insurance market. Financial bankers, who would accept some of the risk on a given venture (historically a sea voyage with associated risks of shipwreck) in exchange for a premium, would literally write their names under the risk information that was written on a Lloyd’s slip created for this purpose.

Underwriting Process

In order for the insurance companies to make profit and charge the appropriate rate for an insured, they undergo the underwriting process. Underwriting is the process in which an insurance company determines if an applicant is eligible for insurance and the rate they should charge if the applicant is eligible. In simpler words, it is a process of risk classification. The purpose of insurance underwriting is to spread risk among a pool of insured in a way that is both profitable for the insurer and fair to the customer. Insurance companies need to make a profit like many other businesses. Therefore, it doesn’t make sense if they sell insurance for everyone who applies for it. They may not want to charge an excessive high rate to the customer and also it is not good for them to charge the same premium to every policyholder. “Underwriting enables the company to weed out certain applicants and to charge the remaining applicants premiums that are commensurate with their level of risk” (Conrad, Clark, Goodwin, Morse & Kane, 2011).

The underwriting process consist of evaluating several sources of an applicant and the use of complex pricing models developed by actuaries that help the insurance companies set prices.

Underwriters use underwriting guidelines based on mortality statistics that are calculated by actuaries. All insurance products involve some degree of underwriting. For life insurance, the underwriter looks at data like your health and medical history as well as lifestyle information like your hobbies and financial ability.

There are broadly two parts to underwriting:

1) Financial underwriting: It helps the underwriter to make sure the amount you’re purchasing is in line with your family’s and your needs.

2) Medical underwriting: Here, the underwriters determine how much of a risk you are to insure by evaluating factors that may affect your mortality.

Step 1: Application Quality Check

Your application is first gone through to make sure the information provided is complete and correct. Therefore, it is important you fill your proposal form carefully and completely. Unless the missing information is related to your medical history, a minor change required in an application does not typically slow down the underwriting process. After this, your application goes into the official underwriting process. Each of the following checks can increase the turnaround time, but it is worth it to get you the right premium price you will need to pay over the policy term.

Step2: Medical Examination

This step involves looking thoroughly at the results of your paramedical exam, conducted only if required for health proof. This medical test is a simple checkup with the doctor recommended by the insurance company. After the medical examination, the results are sent to the underwriter for evaluation. The information used by the underwriter is mainly of three types – basic measurements, your blood test and drug test. Basic measurements include regular metrics like height, weight, blood pressure. Blood test can get a lot of information on potential health risks such as heart disease, stroke, diabetes, and blood-borne illnesses, among others. Finally, a urine test for a full drug panel will alert the underwriter to the use of drugs, smoking and alcohol consumption.

Step 3: Final Application Rating

Once the underwriting process is complete and all your medical and financial background have been checked, you are either made a counter offer suggesting the changes basis you policy evaluation, or you are proudly offered the life insurance policy. Depending upon your acceptance or rejection of the new policy term, your policy is then issued. The whole process can take anywhere between three to eight weeks. After this, all that’s left to be done is to confirm the premium rate, sign the policy to put it in force to keep your family protected.

While not every applicant will require a detailed medical examination, underwriters may sometimes request an inspection report, or independent information on the applicant’s financial situation and lifestyle. The premium that you have to pay for your life insurance policy depends majorly on this evaluation done basis factors like your age, your medical history, gender, lifestyle, and job. However, you must remember that a life insurance policy should not be bought on the basis of lower premiums.