Insurance Concepts - Part 4 - Underwriting

The Origin Of the term Underwriting and Underwriter

The term underwriter was first used in Europe in the context of Marine Insurance. In the 17th  Century, when a sea voyage is about to start, the details like destination, type and age of ship, type of cargo, route to be taken, etc. were placed on billboards. Businessmen who were willing to take on a portion of the risk for these voyages would list the amount of the voyage they were willing to insure and sign their names underneath these details of the risk. These businessmen became known as underwriters because they wrote their names under the contract terms. Since that time, the insurance business has evolved and policies are no longer underwritten by individuals who insure risks, but the term underwriter continues to be applied to those who review and select risks to insure.

 What is Underwriting ?

 Underwriting is the process in which it would be decided whether to accept or reject a risk – if accept, what terms and conditions, and premium. If reject, the reasons thereof.

Who is an Underwriter ? 

An underwriter is a professional who has the ability to understand the risks to which the underwritten object is exposed to. This ability is gained not only through theoretical study but is also the result of years of experience dealing with similar risks and paying claims on those risks.

 The job of the underwriter is to protect the insurance company from acquiring non profitable business. But this cannot mean that every risk should be declined and the decision has to be balanced with the necessity of accepting well understood risk to grow the business. This balancing act requires often a lot of creativity from the underwriter.

 Experienced underwriters develop a sense for each application that allows them to determine when the risk should be accepted and when declined. It is the job of the underwriter to protect the Insurance company and at the same time to give the agent a suitable policy which can be sold. In some lines of business, underwriters are also responsible to provide best advice with respect to risk protection and are closely involved when designing insurance programs for the individuals and companies looking for protection. Underwriters also work closely with Insurance brokers for understanding the customer’s needs and designing policies to suit their purpose.

 Underwriters analyze information on insurance applications to determine whether a risk is acceptable and will probably not result in an early claim to the insurance company. To be able to properly assess the risk, insurance companies have developed underwriting guidelines to which all underwriters must abide.

 Underwriters are not alone in the risk assessment process. They work closely with the specialists like engineers of various disciplines, scientists, accountants, lawyers, doctors, etc. in determining the most appropriate risk assessment. However, in most insurance companies, the underwriter has the final decision and responsibility on the assessment of the case.