What Is Underwriting In Insurance: A Guide

Before an insurance company accepts an application, it must decide whether granting a person life insurance would be profitable.

Insurers do that by evaluating the risk involved. If the risk is too high, simply put, if there’s a high chance the insurer will lose money, they will likely decline the application.

However, if the risk is acceptable, the insurer will evaluate numerous factors (age, job, health, etc.) and calculate an appropriate monthly premium based on the risk they would have to take. 

That evaluation process is called insurance underwriting. In this What is Underwriting in Insurance guide, we’ll examine how this process works, the factors that might affect it, and how long it usually takes. 

What Is Life Insurance Underwriting Specifically?

Underwriting in insurance is the process by which an insurer evaluates the risk and profitability of accepting an applicant’s insurance application.

Based on that process, the insurance company can decide whether to take on the risk of offering a policy. For instance, an insurer may decline coverage if there’s a high risk of paying out. 

After all, insurance companies aren’t charitable foundations, and they want to ensure they can make money from their services. 

How does underwriting in insurance work?

It’s a complex process in which an insurance underwriter analyses data and statistics to assess the likelihood of various risks.

Based on that, an insurance company can decide whether the risk level is acceptable and, if so, how much the monthly premium should be. 

What can determine the risk level and premiums? Several factors, including:

• age – the older you get, the higher the risk;
• occupation – individuals performing high-risk jobs, such as firefighters or police officers, can expect higher premiums;
• health conditions – although it depends on the severity of the condition, people with health problems are deemed high-risk individuals by insurers (e.g., diabetics, addicts, asthmatics, etc.);
• hobbies and lifestyle – if you have a high-risk hobby (motorsports or skydiving, for instance), an insurer is likely to offer you higher insurance premiums; the same goes for smokers or drug users, as they are at higher risk of developing specific conditions.

However, remember that each insurer may have different acceptance criteria, so ask around and compare companies and quotes to see whether you qualify for the policy you want to buy. 

Insurance Underwriting Process

A professional insurance underwriter performs insurance underwriting. Underwriters are trained insurance professionals specialising in evaluating and calculating the risk of providing insurance and financial services. 

They analyse numerous data points and factors, such as an individual’s health history, lifestyle, hobbies, age, etc. Based on that information, they calculate the final risk for an insurer, who can decide whether to accept or reject an insurance policy application. 

As for the underwriting process itself, its exact route may depend on the insurer.

However, in most cases, the process involves the following steps:

1. Reviewing the application. An underwriter will review your application and analyse the information to determine the risk. They will consider factors such as age, occupation, hobbies, lifestyle, and health history.
2. Deciding whether the company should offer coverage. After an underwriter reviews your application, they will share their assessment with an insurer, which decides whether offering you coverage would be profitable.
3. Recommending the policy type. If the company accepts your application, an underwriter will re-evaluate it to determine the coverage type that best suits your situation and risk level. The underwriter may suggest additional deductible options and other changes to reduce the insurer’s risk. 
4. Determining the insurance pricing. Once an underwriter identifies the most profitable, low-risk coverage, they set the premium that best fits your situation and risk. As said, the higher the insurer’s risk of paying out, the higher the premiums will likely be. 
5. Assessing the coverage. An underwriter might become involved even after your policy starts. For instance, if you stop paying your premiums or have trouble paying them on time, the underwriter might review your policy to decide whether you still meet the current conditions.

What May Impact the Process?

As said, the insurance underwriting process is quite complex. It involves an underwriter analysing a lot of data and multiple statistics.

As for the most significant factors that could affect the underwriting process and, as a result, your policy premiums, these include the following:

• Medical exam. Although not all policies require you to undergo a medical exam (over 50s life insurance policies, for instance), in most cases, you will need to undergo a medical examination to determine your health risk. The insurer will also likely check your medical history to see whether you have any pre-existing conditions, such as diabetes or asthma. 
• Family health history. Your family history may affect your risk level and premiums. For example, if there’s a history of certain diseases, such as cancer or genetic diseases. In that case, an underwriter will likely view your application as higher risk, even if you don’t have the condition. If you are interested in how genetic tests can affect life insurance premiums, read our helpful genetic tests and life insurance page.
• Lifestyle. If you’re a smoker or often consume alcohol, you’re at risk of developing certain health problems, such as cardiovascular diseases or specific types of cancer. In such a case, an underwriter might recommend, for instance, a specific type of insurance for smokers that usually has higher premiums. 
• Occupation. Some jobs are more hazardous than others. For instance, a police officer, a member of the military, or a firefighter. In such cases, an underwriter will also likely classify such individuals as higher risk, as they are more likely to get injured or even die on the job. 
• Hobby. If you often engage in high-risk activities, such as skydiving, hang gliding, or rock climbing, the insurer’s risk of paying out increases, leading to higher premiums. 
• Credit history. Although it may not seem connected to life insurance, underwriters will treat your credit history as an indicator of your risk. If you have a good credit score, an underwriter may see it as an indicator that you’re more likely to pay your premiums on time, deeming you lower risk and potentially resulting in lower premiums. 

Of course, these factors are merely a part of all the data an underwriter analyses. However, they’re the most important factors to consider when applying for a life insurance policy, and it’s imperative not to lie or manipulate them.

If you ignore facts to get lower premiums, an insurer may deny the claim. 

How Long Does the Underwriting Process Take?

That will depend on the insurer and the type of underwriting process. Usually, insurance underwriting takes 45-60 days, though it can be faster or longer. 

There are two primary types of insurance underwriting: traditional (full) and accelerated. 

Traditional insurance underwriting involves a thorough examination and analysis, including comprehensive medical exams and lab testing.

Accelerated underwriting lets you skip the exam and rely on data tools and algorithms. 

The accelerated method is faster, but the traditional method yields better, more thorough results. You can also speed up underwriting by providing your insurer with all necessary documentation in advance. 

So yes, as scary as insurance underwriting may sound, it’s a natural part of the assessment for your insurance policy application. It doesn’t require any work on your part.

Just remember to be honest when filling out your application and don’t lie about any conditions or lifestyle. 

This will help an underwriter analyse your case faster and ensure you’re appropriately insured. It also helps ensure your claim is paid out when you need it. 

With that said, find your best policy today and stay covered. Use our calculator to find the best insurance quote for your needs and enjoy peace of mind for you and your loved ones, no matter what.

Resources:

• https://www.canadalife.com/insurance/life-insurance/life-insurance-underwriting.html
• https://adviser.vitality.co.uk/life-insurance/underwriting