If you've ever applied for insurance, you’ve probably heard the term “insurance underwriting.” And that may have been as far as your thinking went on that particular topic. After all, you probably wanted to get coverage ASAP so you could go on running your business and worrying about other things.
But underwriters play a big role in deciding whether an insurer will take you on as a customer. So it behooves you to know exactly what underwriters do—and what they look at when making the decision to cover you or not.
Keep reading to learn all about the underwriting process so you can be super prepared when it comes time to get—or update—your insurance coverage.
What is Underwriting in Insurance?
In the insurance industry, underwriting is the process of evaluating, choosing, and pricing customers. All insurance carriers do this, whether they sell life insurance, health insurance, homeowners insurance, commercial property-casualty insurance, or other insurance products.
Underwriting helps insurers remain profitable. To stay in business, insurance companies must collect more money in premiums and investments than they pay in claims. Insurers have a greater chance of earning a profit if they choose customers carefully, avoiding those most likely to have losses.
At an insurance company, underwriting is performed by underwriters. Insurance underwriters evaluate insurance applicants, accept the good ones, and reject the risky ones.
Underwriting is an “inside job” so underwriters rarely interact with customers. While you’ll probably never meet an underwriter, don’t underestimate their importance! When small business owners apply for an insurance policy, underwriters decide who’s offered a policy and who isn’t.
What Do Insurance Underwriters Do?
Underwriters help insurers pick the right customers by doing these things:
- Review insurance applicants for hazards that may lead to losses.
- Choose applicants that meet the company’s underwriting guidelines.
- Calculate or adjust premiums.
- Service policies for existing customers.
- Marketing. Some underwriters are responsible for marketing the insurer’s products to agents and brokers.
How Do Underwriters Assess Applicants?
So you know what an underwriter is, and some of their daily duties. But what do they actually look at when reviewing your application? Let’s find out:
They Look for Hazards at Your Workplace
When an underwriter receives an application, one of the first things they do is assess the business’ hazards. A hazard is a condition that makes losses more likely to happen. Here are some examples:
- Paper supplies stored near a furnace or boiler are a fire hazard.
- Water leaking from a drinking fountain onto the floor is a slip-and-fall hazard.
- A table saw that lacks a blade guard is a workplace hazard.
The hazards underwriters look for depend on the applicant’s business and the type of insurance they’re looking for.
For example, suppose you’re shopping for property and liability insurance for an apartment building you own. A commercial property underwriter will focus on the physical aspects of your building, like its age, condition, location, and the existence or absence of protective devices, such as a sprinkler system. A liability underwriter will look for hazards that could lead to third-party claims, such as missing handrails.
They Look at Your Application and Other Records
Aside from the hazards, an underwriter’s main source of information about insurance applicants is the insurance application itself. Here are some other sources underwriters may use:
- Loss runs and insurance claim reports
- Driving records (for auto insurance)
- Physical inspection reports
- Insurance agent or broker
- Experience rating worksheet (for workers’ comp
- Financial statements
- Business or personal credit report
- Credit score
…Then They Decide If You Should Be Insured
Once they have all the data they need, the underwriter must decide whether your business meets the insurer’s underwriting standards.
If it does, the underwriter will issue a policy with the coverage amounts you’ve requested. If it doesn’t, the underwriter will either decline coverage or offer you an alternative. For instance, if you applied for the insurer’s “top drawer” policy and your business doesn’t qualify for that, the insurer might offer you a lower-tier policy as an alternative.
But what exactly are the guidelines underwriters operate under? What prevents them from just going willy-nilly on who they do and don’t accept? Keep reading to learn all about underwriting guidelines.
What Guidelines Do Underwriters Use?
Like all businesses, insurance companies want to stay solvent. One way they do that is by creating standards for their underwriters to follow when choosing applicants and managing existing customers.
Insurers love data and they collect lots of it about their customers, including their industry, premiums, and financial losses. Insurers analyze the data to learn which types of businesses have been profitable and which ones have not.
They use that information to create guidelines for underwriters and to divide applicants into three categories: acceptable, unacceptable, and acceptable under certain conditions.
An insurance company might, for example, only accept companies that have been in business for three years or more. Or they might deem it unacceptable to cover a specific type of company because it hasn’t been profitable for them in the past.
Whatever they are, these guidelines should be communicated to insurance agents so they spend time on applicants that have a good shot at getting coverage.
How Much Authority Do Underwriters Really Have?
Another way insurers reduce their chance of future losses is giving more authority to experienced underwriters than to newbies. This means that seasoned underwriters can insure riskier businesses and write higher limits of insurance than their less experienced counterparts.
An insurance company might, for example, divide its underwriters into three grades. Grade one underwriters have the least experience while grade three have the most.
Grade One underwriters are authorized to issue liability policies with limits up to $1 million. Grade Two underwriters can issue $2 million policies and Grade Three can issue $3 million policies.
If a customer requests a liability limit that exceeds an underwriter’s authority, the underwriter must get approval from their supervisor before they proceed.
Do Underwriters Calculate Your Premium?
At most insurance companies, rates are determined by actuaries, and premiums are calculated by a computer. An underwriting clerk or a computer inputs data from the application into the insurer’s computer system and the computer determines your appropriate premium.
While most underwriters don’t calculate premiums, they may adjust premiums up or down by adding a deductible, changing a class code, or applying a credit or debit.
Premium credits are rewards for positive behavior or achievements while debits are the reverse. For instance, a liability underwriter might give a business a five percent credit for their safety program, which would reduce their premium from $1,000 to $950.
Underwriters Also Keep Policies Up to Date
Besides writing new business, underwriters maintain policies for existing customers, adding, removing, or changing coverages as needed.
For example, if you tell your insurer that you just bought a second warehouse, an underwriter will issue an endorsement adding the new location to your property policy. Underwriters reevaluate customers annually, checking for changes and making sure customers remain profitable.
Before your policies renew, an underwriter might ask whether you’ve made any changes at your business, such as buying or selling a vehicle. They may also review your premiums, losses, claim reports, and other information to make sure your business still meets the insurer’s underwriting standards.
Insurtech Takes a Load off Underwriters
Underwriting involves many repetitive tasks that can take a lot of time but don’t require much expertise. Nowadays, many insurers are using insurtech to automate those tasks so underwriters can use their time more effectively.
Insurtech (insurance technology) includes things like software systems and artificial intelligence. For example, this technology might transfer the data from a new business’ application to the insurer’s computer system, and ensure the application is complete. If it isn’t, the system can ask the applicant or agent for the information that’s missing.
Or, even more sophisticated:
A computer can actually evaluate an applicant’s level of risk and then direct the high-risk applicants to the underwriting department (for further evaluation) and automatically process the low-risk applicants. It can even issue those applicants a policy and forward them the insurance documents needed.
Still want to learn more about insurtech? We wrote an entire article on it!
Underwriters Keep Insurers Afloat
All insurers practice underwriting. The process determines who’s offered insurance, what coverages are provided, and the price charged for a policy.
Depending on the insurer, underwriting may be performed by human underwriters, by computers, or by a combination of the two. No matter how it’s done, underwriting helps the insurer stay out of the red.