What's the deal with Underwriting?

It is relatively easy for a consumer to obtain life insurance. You simply give the insurance company some personal and family health information, and they give you a quote on your assessed premium and coverage.

While this process is simple for the insured, it takes a fair amount of effort and calculation on the part of the insurer because they need to underwrite the insurance policy.

Underwriting is the process through which an insurance company evaluates the risk of a potential client, and this process allows the company to set premiums and coverage specific to the individual. By inputting a selection of personal variables, such as gender, height, weight, and age, an insurance company can roughly calculate the probability that an individual will collect on the policy.

Why Is Underwriting Important?

The individual taking out the insurance policy often does not get a look behind the scenes of how the policy is designed. Obviously, the insurance adviser’s goal is to generate a profit for the company. This is achieved by writing policies that bring in more money in the form of premiums than will be paid out in benefits to clients.

Of course, insurance companies will lose on certain individuals— they cannot prevent all losses even through extremely strict underwriting guidelines. This is why insurance companies will write tens of thousands of policies; they need to generate a lot of premiums in the aggregate in order to cover a few benefit payouts and still make a profit.

This is where underwriting becomes critical; the insurer must accurately assess the health risk of each individual to ensure that the firm remains profitable. To accomplish this, the insurance adviser will collect personal data about you, your occupation, and your health history to estimate your health risk. The adviser wants to avoid risky clients, while offering policies to those who meet the firm’s guidelines; this results in little or no coverage (and higher premiums) to those deemed potentially unhealthy, while the healthiest of clients will receive lower premiums on the same amount of coverage.

Underwriting Standards

While general underwriting rules remain similar throughout the insurance industry, details are specific to each firm’s underwriting standards. For example, it is accepted that, on average, women live longer than men. Similar general standards exist for things like smoking and weight; tobacco use and obesity increase health risks and, by extensions, the insured’s premiums.

Aside from generally accepted health standards used for underwriting, insurers also have more detailed criteria that are specific to the firm’s underwriting guidelines. These guidelines differ depending on type of life insurance, demographics, geographic location, and the company’s own determination of health risks. Each company assigns a weighting to specific health factors, which explains the difference in premiums among insurance companies.

Common Variables Used In Underwriting

When an insurance adviser underwrites an insurance policy for an individual, it is important for the insurer to estimate the risks presented by the individual’s personal characteristics. Common personal characteristics used in underwriting calculations include:

• Age
• Height
• Weight
• Alcohol/Tobacco/Drug Use
• Personal Medical History
• Family Health History
• Occupation

Evolving Landscape

Due to the improving technological landscape of the medical, mathematical, and science fields, underwriting statistics are constantly evolving. Underwriting processes are becoming more and more automated as these risks become easier to quantify and form into a mathematical model. This is why you can obtain a quick, relatively accurate quote on the web; your information is simply entered into a database and analysed according to the firm’s underwriting standards.

In addition to the improving efficiency of the underwriting process, underwriting guidelines are being changed as more information is discovered concerning personal health risks. One of the ways in which guidelines are changing is in the study of genetic risks: in 2003, the Australian Law Reform Commission urged the insurance industry to adopt regulations controlling the use of genetic information in underwriting.

It is easy to see the importance of underwriting to the insurance industry—no policies could be written if there were not guidelines by which insurers could estimate health risks. This process of evaluating an individual’s health risk to generate an insurance policy is what determines the level of coverage, premiums required, and any exclusions to the policy. This is the key to life insurance underwriting.