What Is Underwriting?
- Underwriting affects whether or not you can get an insurance policy and how much the premiums might be. Learn more about how insurance companies assess risk.
Insurance companies want to turn a profit, so they need a way to ensure their products will be lucrative. Learn how insurance companies use underwriting to decide how much to charge for premiums and whether or not they'll issue a policy to begin with.
What Is Underwriting?
Underwriting is the process of assessing risk. In the insurance sector, that usually means figuring out how likely it is the company will have to payout on a policy. If it’s more likely that the insurance will be used, the insurance provider needs to increase the premiums or not issue a policy at all. Otherwise, they might lose too much money.
For example, if someone has a large number of traffic violations or accidents, then it’s likely they’ll have more in the future. An auto insurance company might then charge them more for coverage to help balance the risk it's taking.
Underwriting can occur with other types of insurance policies too, including health and life insurance. For example, if you have a chronic health condition or are of a certain age, insurance companies might limit how much life insurance you can purchase or increase the premiums to make up for the fact that the policy might be used sooner rather than later.
Insurance underwriters compile as much data as they can and use their experience in risk assessment to quantify the risk of a policy. They are usually involved when a policy is started or if something that would affect the risk level of a policy changes. In many cases, much of the underwriting process is automated by rules that have been set by underwriters or others.
What Does Underwritten Mean?
Underwritten simply means that your application for insurance has gone through the underwriting process. During that process, someone or some automatic mechanism decided that you could be insured.
What Are Other Types of Underwriting?
Anytime someone assesses risk, a form of underwriting may be occurring. Here are three other main forms of underwriting:
- Loan underwriting. When you take out a loan, especially a large one such as a mortgage, your application may go through an underwriting process. The lender wants to know how risky it is to fund a loan for you.
- Securities underwriting. Some stocks are more or less fickle than others. Securities underwriting can be used to determine whether an investment is too risky to be profitable.
- Real estate underwriting. In real estate underwriting, the risk of the property itself is assessed. The lender wants to ensure it can get its money back by selling the property if the borrower can't pay. This is typically part of the mortgage process.