Insurance Underwriting Process

Instructor: Deborah Schell

Deborah teaches college Accounting and has a master's degree in Educational Technology.

An insurance company will not approve everyone who applies for coverage, as they must assess the risk associated with the application. In this lesson, you will learn about the underwriting process.

What Is Underwriting?

Let's meet Ms. I.M. Risky, who is thinking about applying for life insurance. She is not sure what documentation the insurance company might need and what happens between the time she submits her application and when the insurance company makes its decision. Let's see if we can help Ms. Risky with some of this information.

An insurance company uses underwriting to evaluate an insurance application. The process involves determining the applicant's risk by reviewing his/her medical information, lifestyle, and financial information and considering the applicant's age and gender. Based on this information, the underwriter determines if the applicant qualifies for life insurance coverage and, if so, how much they will pay for it.

Understanding Risk Selection

The underwriter does not approve all applications. In some cases, the underwriter determines that the risk associated with the application is too high. It is the underwriter's responsibility to ensure that the insurance company is not taking on too much risk, which could lead to a loss for the company.

In order to determine which applicants represent a reasonable risk to the company, the underwriter uses the following information in addition to the application:

  • Medical history and examinations
  • Inspection reports
  • Information from the Medical Information Bureau (MIB)

Not every applicant will require a detailed medical examination. Insurance companies have criteria regarding the type of information that they must gather for the face amount, or the amount of insurance coverage for which the applicant is applying. The larger the face amount, the more information the applicant will have to submit. For example, if Ms. I.M. Risky applies for a $5 million policy, the insurance company would want her doctor to conduct a medical examination, and she may be required to complete additional testing.

Sometimes, underwriters request an inspection report, or independent information on the applicant's financial situation and lifestyle. For example, Ms. I.M. Risky may have disclosed that she has only participated in skydiving once, but the insurance company may want to verify this information before making a decision on her policy. If she regularly participates in skydiving, she would have a greater risk of dying than someone who does not participate in this activity.

The Medical Insurance Bureau, or MIB, maintains the applicant's medical information that the underwriter uses to make a decision about the application. The underwriter compares information obtained from the MIB to the application to identify any inconsistencies.

The MIB also provides the underwriter with information about the number of times in the past two years that another company had requested this information. The underwriter uses this information to identify whether the applicant is in the habit of cancelling his/her insurance coverage in the first two years of the policy, as this is the time when the insurance company incurs the majority of the policy's costs.

Risk Classifications

Once the underwriter has collected and analyzed the applicant's information, he/she must decide whether to approve or decline the application. The underwriter has options for classifying the risk of the application, including:

  • Preferred
  • Approved Standard
  • Approved Substandard or Rated
  • Declined

The underwriter assigns a preferred rating if the applicant represents a risk that is better than average. Applicants in this category are extraordinarily healthy and usually pay a lower policy premium, or cost of the policy, to reflect the lower risk to the company

An underwriter assigns a standard rating when an applicant's risk is considered average when compared with similar applications. The underwriter rates the majority of successful applicants as standard. Ms. I.M. Risky would prefer a rating of preferred or approved standard, as she would enjoy the lowest policy premiums.

The underwriter could also deem an applicant's risk to be greater than average and could assign a substandard or rated classification. This rating could apply if an applicant had a pre-existing condition, which represents a previous health issue. In this case, the underwriter would still approve the application, but if the applicant were to die because of the pre-existing condition, the policy would not pay. Applicants with this rating will pay a higher premium for the policy as they represent a higher risk for the insurance company.

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