INSURANCE UNDERWRITING: What Is It and How Does It Work?

Insurance underwriting professionals specialize in risk assessment and prevention. They analyze applications, calculate risk, and determine the pricing and conditions for insurance coverage. In this article, we will discuss the role of an insurance underwriter, the underwriting process and the importance of working with one. Also, we will look into insurance underwriting as a career and what their average salary is.

Insurance Underwriting

Insurance underwriting is the process of evaluating the risks involved in insuring individuals, families, or businesses and determining the pricing and terms for coverage. Underwriters assess various factors and use specialized software and actuarial data to analyze the likelihood as well as the magnitude of a risk. They work closely with other insurance professionals, such as actuaries, brokers, and risk managers, to balance providing competitive rates and maintaining profitability.

What Is the Importance of Insurance Underwriting?

The importance of insurance underwriting is as follows:

Underwriters assess the level of risk associated with providing insurance coverage. They analyze various factors, such as the applicant’s health, age, credit rating, driving history, and lifestyle, to determine the likelihood of a claim being made. Hence, helping insurance companies calculate appropriate premiums and establish pricing for insurable risks.
Effective underwriting helps insurance companies maintain profitability. By accurately assessing risks and setting appropriate premiums, underwriters ensure that the company collects sufficient funds to cover potential claims and operating costs. Therefore, finding the right balance is crucial for the financial health of insurance companies.
Underwriting helps insurance companies mitigate risks by identifying potential hazards and taking appropriate measures. By evaluating risks before the policy period and at the time of renewal, underwriters can recommend policy conditions and coverage that minimize potential liabilities for the insurer.
Insurance underwriting ensures compliance with regulatory requirements. Underwriters assess the eligibility of applicants based on set criteria. By adhering to these criteria, underwriters ensure that insurance policies are issued in compliance with applicable laws and regulations.
Underwriting helps insurance companies stay resilient by adapting to industry changes.

Insurance Underwriting Process

The insurance underwriting process involves several steps and considerations.

#1. Application Evaluation

The underwriting process begins with an evaluation of the insurance application. Firstly, underwriters analyze the personal, financial, and medical details provided to assess the risk of insuring the individual or entity. Then, they review the criteria on the application to determine if it’s possible to offer a policy and calculate the coverage amount. They also set the monthly premium based on the information provided.

#2. Risk Assessment

Underwriters consider numerous factors during the risk assessment process. These factors vary depending on the type of insurance being applied for. Common factors include tobacco use, health conditions, lifestyle choices, and credit health. These factors help underwriters calculate the potential cost of covering the applicant and determine the level of risk they present to the insurance company.

#3. Policy Recommendation

Underwriters recommend the policy type and conditions the insurance company should agree to based on the evaluation and risk assessment. They search for solutions that could reduce the frequency of future claims and negotiate with insurance agents or brokers to find ways to cover the applicant if there are any issues with the application. They also assess the coverage if the applicant has made multiple claims, had trouble making payments, or is taking out a new policy.

#4. Underwriting Process Variations

The underwriting process may vary depending on the type of insurance being applied for. For example, life insurance underwriting involves evaluating health history, age, and gender to determine the health classification and premium. Some insurance companies offer accelerated underwriting options that expedite the process using data tools and algorithms instead of medical exams and lab testing. Traditional underwriting, on the other hand, involves comprehensive medical exams and lab testing but can result in better rates.

#5. Timeframe

The duration of the underwriting process can vary. Typically, it takes 45 to 60 days to complete. However, accelerated underwriting options may only take a few days. The timeframe also depends on the type of underwriting being conducted. Traditional underwriting with comprehensive medical exams and lab testing takes longer, while accelerated underwriting relies on data tools and algorithms. Applicants can speed up the traditional underwriting process by having their medical history and additional documentation ready before applying.

Insurance Underwriting as a Career

Insurance underwriting is a profession that involves evaluating the risks of insuring people, property, and assets. Underwriters determine when insurance applications will be accepted and establish premiums on insurance policies. They also play a crucial role in determining the extent of coverage for insured parties. The job requires thorough, decisive individuals with excellent analytical skills.

Specializations Under Insurance Underwriting

Insurance underwriting is a dynamic field with specializations or sub-specializations within it. These specializations include:

Life insurance underwriting: Underwriters assess the risk of insuring individuals seeking life insurance policies. They evaluate factors such as age, health, and lifestyle to determine an applicant’s appropriate coverage and premiums.
Health insurance underwriting: Health insurance underwriters analyze the risk associated with providing health insurance coverage to individuals or groups. They consider medical history, pre-existing conditions, and lifestyle choices to determine coverage and premiums.
Mortgage insurance underwriting: Underwriters assess the risk of insuring mortgage loans. They evaluate factors such as credit history, income stability, and property value to determine the eligibility and terms of mortgage insurance coverage.
Property insurance underwriting: Underwriters evaluate the risk of insuring properties against damage or loss. They consider location, construction materials, and property value to determine coverage and premiums.
Casualty insurance underwriting: Casualty insurance underwriters assess the risk of insuring against liability and losses related to accidents and injuries. They evaluate industry-specific risks, claims history, and policy limits to determine coverage and premiums.

Skills and Qualifications of an Insurance Underwriter

To become a successful insurance underwriter, you will need a combination of qualifications, skills, and knowledge.

Insurance Underwriter Skills

Analytical Skills: Insurance underwriters must analyze statistical and commercial data to assess risks and make informed decisions. They evaluate insurance applications, assess clients’ backgrounds and financial status, and determine underwriting alternatives.
Communication Skills: Underwriters must effectively communicate their analysis and decisions to clients, colleagues, insurance agents, and other financial professionals. Clear communication is essential for explaining policy terms, negotiating with brokers and clients, and providing risk management advice.
Computer Skills: Insurance underwriters use specialized computer packages and software to analyze statistical data and assess risks. They may work with spreadsheets, databases, or analytical tools like SPSS. Proficiency in using these tools is crucial for efficient risk assessment and decision-making.
Math Skills: While computers can perform calculations quickly, underwriters should have strong math skills to verify the information and ensure accuracy. A solid foundation in mathematics is important for analyzing financial data, evaluating risks, and determining coverage terms.
Attention to Detail: Underwriters must pay close attention to details when reviewing insurance applications, assessing clients’ backgrounds, and analyzing data. They must identify potential risks, evaluate policy provisions, and ensure insurance laws and regulations compliance.
Risk Analysis: Insurance underwriters are responsible for assessing the risks associated with insurance policies. They evaluate the likelihood of claims being made based on statistical data, actuarial information, customer details, and other relevant factors. Analyzing risks and balancing them against potential rewards is crucial for successful underwriting.
Decision-Making Skills: Underwriters decide whether to accept or reject insurance applications, determine coverage terms, and set premiums. They need to use their analytical skills, knowledge of insurance policies, and risk assessment abilities to make sound and informed decisions.

Qualifications and training requirements for insurance underwriters:

Qualifications

While there is no specific degree for underwriting, some employers prefer candidates with a bachelor’s degree in a related field like accounting, finance, economics, law, management, or business studies. Relevant experience gained through internships or vacation work can also be beneficial. Some specialized areas of underwriting, such as life assurance, may require specific knowledge or degrees in medical, scientific, technical, or engineering fields.

Professional Certifications

While not always required, obtaining professional certifications can enhance your career prospects as an underwriter. Certifications such as Chartered Life Underwriter (CLU), Chartered Property Casualty Underwriter (CPCU), or Associate in Commercial Underwriting (ACU) can demonstrate your expertise and commitment to the field. These certifications provide additional risk management, insurance planning, and commercial underwriting knowledge and skills.

On-the-Job Training

Once hired, underwriters typically receive on-the-job training from senior underwriters. This training includes learning about common risk factors, underwriting applications and gaining experience in analyzing risks and making underwriting decisions. As you gain more experience, you can work independently and take on more responsibility.

Life Insurance Underwriting

Life insurance underwriting is a process that every applicant who applies for insurance coverage needs to go through. It helps determine whether an applicant is insurable, at what amount, and at what cost to the applicant.

Life insurance underwriting evaluates an applicant’s risk profile by considering age, gender, current health, medical history, occupation, hobbies, lifestyle habits, and more to determine a fair premium for the applicant’s risk profile.

The underwriting process for life insurance can take two to eight weeks for policies requiring a medical exam or even longer for more complicated cases. However, some insurers offer accelerated underwriting for no-medical exam policies with quick or same-day approval. The duration of the life insurance underwriting process generally depends on the applicant’s application answers, health, occupation, and lifestyle. Therefore, the more information the underwriter needs to determine a rate, the longer it can take.

Insurance Underwriting Salary

The national average salary for insurance underwriting professionals is $69,553 /year. However, an insurance underwriter’s salary ranges between $39,000 and $107,500 annually.

Cities with the highest salary range for insurance underwriting professionals in the US

Federal Way, WA $76,411
Santa Clara, CA $75,061
San Francisco, CA $74,851
Summitview, WA $74,423
Washington, DC $73,343

What Do Insurance Underwriters Look For?

What insurance underwriters look for during assessments is as follows:

Financial Information

Underwriters evaluate the financials of each applicant to assess the level of risk they present and the likelihood of losing money. This includes examining income, employment status, credit history, and assets used as collateral. For example, when underwriting a loan, the underwriter assesses the borrower’s ability to repay the loan as agreed or the presence of enough collateral in case of default. Similarly, underwriters consider an applicant’s financial stability and assets for insurance policies to determine the risk and coverage needed.

Risk Factors

Underwriters analyze various risk factors to determine the likelihood of claims and the potential cost to the insurer. These factors vary depending on the type of coverage. For example:

For automobile insurance, underwriters consider driving records, the type of vehicle, and accident history.
Underwriters may review medical history, occupation, and risky activities for life insurance.
For homeowners insurance, underwriters assess property conditions, hazards, and claims history.
For business insurance, underwriters evaluate factors such as the industry, business income, and potential liabilities.
External factors such as market conditions and regulatory requirements.

Underwriting Guidelines

Each insurance company has its own underwriting guidelines that help underwriters determine whether to accept the risk. These guidelines provide criteria and rules for evaluating applicants and setting premiums. For example, underwriters may refer to an applicant’s credit rating, occupation, or other factors specified in the guidelines. Automated underwriting systems are often used to encode these rules and streamline the underwriting process.

Risk Reduction Solutions

Underwriters may suggest risk reduction solutions to minimize the frequency or severity of future claims. This could also involve recommending safety measures or risk mitigation strategies to the insured. By reducing the risk, underwriters can better protect the company’s book of business and potentially offer more favourable terms to the applicant.

Is Underwriting the Final Approval?

Underwriting is a crucial step in the loan process but it is not the final approval. After underwriting, borrowers typically receive conditional approval, which involves the underwriter reviewing and analyzing their financial situation. If any issues arise, conditional approval may include additional steps before closing. Loan funding occurs when the lender funds the loan, which involves reviewing signed documents, re-pulling the credit report, and verifying no changes since the underwriter’s last review.

Conditional loan approval requires additional items before final approval, and the loan’s status depends on meeting the final conditions set by the underwriter. Unconditional approval, formal approval, follows conditional approval and confirms all necessary documentation, allowing the loan officer to finalize the loan application.

Final review and approval occur after all conditions have been met, ensuring all paperwork is completed and the loan is ready for closing.