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What is insurance underwriting?

Fact-checked with HomeInsurance.com

Ever wonder who decides how much your insurance policy costs? That’s the job of underwriters. Insurance underwriters look at all the factors that affect the level of risk in an insurance policy. 

After considering these factors, an underwriter will assign the level of risk that the policy represents to the provider. That risk determines the cost you pay for your insurance.

In this article, we’ll walk through the central role underwriters play in the insurance industry, as well as what factors underwriters consider when assigning risk to policies for different types of insurance.

Insurance underwriting explained

When a provider agrees to insure new policies, the insurance company is betting that the premiums policyholders pay them will outweigh the cost of the claims the company pays out. 

In a nutshell, the job of the insurance underwriter is to make sure the insurance company is making good bets.

What does an insurance underwriter do?

To figure out how much risk an individual represents, underwriters draw on a range of tools. Nowadays most underwriters rely on special software that uses large databases and statistical analysis to determine risk. 

Underwriters commonly follow strict guidelines on who the provider wants to insure, but there are some judgement calls that underwriters must make themselves, so underwriters need to know the risks associated with their business inside and out.

Many of the individual factors that determine risk change from one kind of insurance to another. Let’s walk through the different kinds of insurance and see how underwriting fits in. 

Life insurance

Life insurance underwriters focus on the health of the individual to find the risk associated with a new insurance policy. These underwriters need to know lots of medical statistics and keep up-to-date on the healthcare industry.

Auto insurance

Auto insurance underwriters focus on the driver and the car to determine the risk in a policy. These underwriters need access to lots of driving data and statistics, which can change quite a bit depending on the city and state.

Homeowners insurance

Home insurance underwriters focus on construction details of the home, as well as the location factors that could damage the home, such as property crime and natural disasters. These underwriters evaluate things like how much risk a garage or a pool adds to the home insurance policy. 

Renters insurance

Renters insurance underwriters must look at the apartment building’s construction, as well as very specific location data, such as the neighborhood where the policy will be used. So these underwriters must have a grasp on potential location and construction risks.

How is an underwriter different from an agent or broker?

In insurance, an underwriter, an agent and a broker are three separate jobs. While agents and brokers play similar roles in the industry, underwriters are very different.

An underwriter determines whether the risk of a policy is acceptable or not, but underwriters do not sell insurance. Agents and brokers are both involved in selling insurance. 

Agents work for the provider and can sell you an insurance policy directly. Brokers work for you and try to find the best policy among different insurers. Brokers usually cannot sell insurance directly to you. They’ll need to work with an insurance agent on your behalf to get you the best policy. 

Works for the insurerWorks for the insurerWorks for the consumer
Does not sell insuranceSells insurance Sells insurance (indirectly)
Determines acceptable risk in a policyDoes not determine riskDoes not determine risk

The insurance underwriting process

The insurance underwriting process relies heavily on statistical analysis to determine the risk of individuals who want to sign up for a policy with an insurance provider. Some of the main factors that underwriters use to determine risk in an insurance policy are:

  • Personal finances 
  • Credit score
  • Location
  • Driving history
  • Health
  • Home construction materials
  • Vehicle type
  • Crime data
  • Weather data 

Not all of these factors play a role in every kind of insurance—and different insurance policies pay more attention to some factors than others. Let’s look at which factors matter the most in each kind of insurance.

Life insurance

The policyholder’s age and health will be the two of the biggest factors underwriters consider in a life insurance policy. Is the person a smoker? Have they had any serious medical conditions in the past? These are the questions an underwriter prioritizes when assigning risk to a life insurance policy. 

Auto insurance

The factors underwriters consider for auto insurance are split between the driver, the car and the location. The driver’s history behind the wheel is a huge factor, as well as the kind of car they’re driving and how safe it is. If the city where the driver lives has a high level of property crime or experiences natural disasters that could damage the car, then the underwriter will have to account for that too. 

Homeowners insurance

Underwriting home insurance is all about understanding the details of the home, like the year it was built and the materials used to build it. Personal factors could also play a role, such as if the homeowner smokes or not. And homes in regions prone to hurricanes or flooding usually see much higher premiums due to the increased risk of providing insurance in these places. 

Renters insurance

When underwriters look at a renters policy, they’ll check the building’s details and any potential hazards that might come from shoddy construction. Just like the other forms of insurance, location plays a significant role in renters insurance—underwriters must take the neighborhood into account, as well as city and state. 

Can an insurance underwriter’s decision be changed?

Agents and brokers don’t have much of a say in the risk a policy poses for an insurance company, but an underwriter does. When it’s a close call to decide whether or not to insure an individual, the underwriter can make that judgement. 

If a policy becomes an issue, such as too many claims are being filed and the provider is losing money, then an underwriter may reverse their earlier decision to take on the policy. In this case, the policyholder would lose their insurance with that provider.

The takeaway

  • Insurance underwriters assign risk to policies.
  • Underwriters use statistical analysis software to help them determine risk.
  • If the risk is too high, the underwriter can deny the policy.
  • Underwriters do not sell insurance.

Every person who signs up for an insurance policy represents a different level of risk for the insurance provider. Underwriting is the art of finding the risk that any given policy represents for the insurers. While there are some judgement calls in underwriting, the company has strict guidelines and statistical methods for determining the risk on individual policies.

Julian Dossett

Julian is a freelance writer for Coverage.com, where he writes about auto and home insurance with an eye toward consumer advocacy. His work has appeared at The Simple Dollar, Bankrate, Reviews.com, Blockchain Beach and MSN.com. He’s currently based in New Mexico.

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