What Is Underwriting and How Does the Process Work?
Ever wonder how insurance companies review your application and how they come up with the amount you pay for your monthly premiums?
Before an insurance company can accept your application for coverage, they analyze your personal, financial, and medical details. Then, they calculate the level of risk you present to their business, also known as a risk score.
This process is called underwriting. In this guide, we’ll take a look at what underwriting entails. We’ll also discuss the factors that affect your risk score so you can be better prepared for open enrollment.
What is underwriting? Underwriting definition
Underwriting is the process of assessing the amount of risk you present to a potential insurer. Professional underwriters review the criteria on your application to see if it’s possible to offer you a policy and, if so, how much coverage you’re eligible for. Then, they set your monthly premium based on the information.
Underwriting also helps your insurance provider calculate the potential cost of covering you. For instance, if you’re a younger, healthy person with a low-risk lifestyle, you’re likely less expensive to cover. On the other hand, if you’re older or engage in risky hobbies, your provider is more likely to have to pay out an insurance claim.
Underwriting isn’t exclusive to the insurance industry, either. The process applies to commercial banking, lending, and investment banking as well.
What is an underwriter?
An underwriter is a financial professional who typically works for insurance, loan, or investment companies. As mentioned above, underwriters analyze applications to calculate the risk of providing insurance coverage or financing. Underwriters consider several factors, ranging from health and hobbies to lifestyle, credit health, and more.
The underwriting process
The underwriting process begins with an application evaluation from an underwriter. Underwriters are insurance professionals specializing in risk assessment and prevention. Simply put, they evaluate applications and decide how risky it is to cover something or someone—and how much it will cost the applicant for coverage.
The underwriting process may vary depending on the type of insurance you apply for. However, insurance underwriting typically follows some common steps, including:
- Reviewing your application
- Determining whether the insurance company should cover you
- Recommending the kind of policy and conditions the insurance company should agree to
- Searching for solutions that could reduce the frequency of future claims
- Negotiating with insurance agents or brokers to find ways to cover you if there are any issues with your application
- Assessing your coverage if you’ve made multiple claims, had trouble making payments, or are taking out a new policy
Typically, underwriting is part of the application approval process. However, an underwriter may be asked to review your profile, policies, and claims if your activity or risk changes. For example, if the insurance company notices a sudden uptick in claim payouts, they may review your case to determine if they need to adjust your policy conditions.
Factors that affect the underwriting process
Underwriters consider numerous factors during the risk assessment process. These change from industry to industry.
Some of the most common factors considered during the underwriting process include:
Medical questions and exams
Your age and health status are the most important factors in determining insurability and the amount you pay for insurance coverage.
Health status is assessed through a physical exam, a health and medical history questionnaire, or a combination of both.
Family health history
Similarly, your family medical history could potentially impact your premiums. If your family has a history of certain diseases or conditions, your insurance provider may raise your premiums to offset their financial risk.
Your prescription history plays a key role in determining how much insurance coverage will cost. Insurance companies tend to look at your individual medical history to ensure you’re given a fair coverage decision. For example, you and another applicant may take the same medication for entirely different reasons, making it essential to understand your medical history before approving or denying your application.
As a general rule, smokers or those with smoking-related medical conditions tend to get higher premiums than non-smokers.
Your occupation may also impact your ability to get coverage. Most jobs are considered relatively safe. That said, some jobs come with higher mortality rates that could result in more claim payouts.
For instance, those working in the fishing, hunting, and logging industries have some of the highest job mortality rates in the U.S. As a result, applicants may only qualify for flat-rate coverage, conditional policies, or get turned down.
How’s your driving record? If you’ve got a history of unsafe driving, such as DUIs, speeding tickets, or car accidents, an underwriter may deem you too risky to insure. At the very least, your premium may be higher than someone with a solid driving record.
It may not seem connected, but your credit history can have a direct impact on your monthly premiums. A 2007 study conducted by the Federal Trade Commission found that those with lower credit scores are more likely to file an insurance claim, while applicants with higher scores cost insurance companies less. Some insurance companies even use a process called credit-based insurance scoring to predict an applicant’s risk.
Lifestyle and hobbies
Just like some jobs come with higher mortality rates, so do some lifestyle choices. For instance, if you regularly travel to dangerous locations or engage in hobbies like skydiving or aviation, an insurance company may charge higher rates to offset the risk of covering you.
Finally, your citizenship status may impact your ability to get coverage. Some insurance providers won’t cover applicants with a green card or temporary visa.
How long does underwriting take?
Typically, the underwriting process takes 45 to 60 days to complete. There are two types of underwriting: traditional (or full) and accelerated. Accelerated underwriting expedites the process by allowing you to skip medical exams and lab testing. Instead, accelerated underwriting relies on data tools and algorithms to predict your risk based on certain behaviors.
Traditional underwriting, on the other hand, requires comprehensive medical exams and lab testing and it tends to take longer as a result. However, traditional underwriting often results in better rates, since your insurance provider gets a better look at your overall health. You can also take steps to speed up the traditional underwriting process. For example, have your medical history and additional documentation on hand before you submit your application. This makes it easier to provide any details requested by your insurance provider during the application process.
Ready to enroll in a new insurance policy?
The insurance underwriting process is an essential part of taking advantage of your employee benefits. Luckily, it doesn’t require much from you, other than some personal information. Work with your human resources representative or insurance agent to ensure a quick, easy underwriting process. You may even decide to skip the exam and opt for an accelerated underwriting process so you can get the coverage you need faster than ever.