The process of underwriting is crucial in insurance, be it life or non-life. If the risk is assessed wrongly, the premium charged would not be appropriate. A lower premium may affect the solvency of the fund. On the other hand, a decision to charge a premium higher than necessary would also not be fair.
Underwriting refers to the process of verifying the level of risk for each new entrant and determining the terms of admission thereof.
The objective of underwriting is risk classification, which, when translated into action, will mean – to accept as many lives as possible at standard rates of premium, leaving a small portion for acceptance with an extra premium, and then an even smaller number which should be either declined or deferred.
The process of underwriting is crucial in insurance, be it a life or a non-life. If the risk is assessed wrongly, the premium charged would not be appropriate. A lower premium may affect the solvency of the fund. The cost of additional risk, not recovered from the proposer, will have to be borne by the rest of the policyholders. On the other hand, a decision to charge a premium higher than the necessary would not be fair to the proposer. Thus, underwriting has implications of fairness to the insurer and to the policyholders, both individually and collectively.
The underwriter has a number of resources that can be called upon to provide the necessary information for the risk selection process. These sources include
The policy application: The application is an absolutely crucial document because it is usually attached to and incorporated as an integral part of the insurance contract. The producer must, therefore, take special care with its accuracy in the interests of both the insurance company and the insured. The application, in general, is divided into sections each designed to obtain specific types of information.
Medical history and examinations: Medical exams and tests, when required by the insurance company, are conducted by physicians or paramedics at the expense of the insurer. Such exams are usually not required for health insurance (which only emphasizes the importance of the agent accurately recording medical information on the application). The medical exam requirement is much more common for life insurance underwriting than for health insurance.
Inspection reports: To supplement the information on the application, the underwriter may order an inspection report on the applicant from an independent investigating firm or credit agency that provides both the financial and moral (or lifestyle choices) information. This data is used only to help determine the insurability of the applicant. If the amount of insurance being applied for is average, the inspector will typically write a general description about the applicant’s finances, health, character, occupation, hobbies, and other habits. When larger amounts of coverage are requested, the inspector will provide a more detailed report. This information is based on interviews with the applicant’s associates at home (including neighbors and friends), at work, and elsewhere.
The producer or insurance agent: The producer is the most important part of the risk selection process. This is because the producer is the one who actually sees and talks to the proposed insured, asks the questions contained in the application and gauges the responses, and accurately and completely records the answers to those questions.
For a good underwriter, a 360-degree view of risk is thus essential. All underwriting evaluates the risk factor on two parameters: external (for the benefit of the client) and internal (for the benefit of the company and its profitability). This, again, is of value to the customer as it enhances the capacity of the insurer to pay claims. However, it is not merely an exercise of selection and classification of risks but a conscious attempt on the part of the insurers to visualize the risk profile of the prospect over a wider horizon and attempt to design a total risk management package.
In a dynamic world where most components of the risk profile tend to change at very small intervals of time, this task is stupendous. It calls for total involvement in studying the trends over a period of time and to apply the actuarial assumptions in a scientific manner. The efficacy of underwriting, however, is dependent on the information furnished by the applicants. As has always been emphasized, owing to the low awareness levels of the general masses in a domain that is still evolving, the importance of furnishing factual and reliable information is not fully understood. It is felt that holding back relevant information works to their advantage and the fact that it is detrimental to the entire industry, in the long run, is not taken into consideration.
Globalization and its impact on insurance, liberalization of the insurance sector, the proposed changes in the Insurance Act of 1938, intensified competition, electronic commerce, the emergence of new risk, local factors affecting the insurance market, the financial meltdown, and recession, etc. are the factors that have deeply affected the insurance business and have given rise to challenges of a new kind before the underwriting community. The insurance companies must, thus, gear themselves up to be the true underwriter of the future risk.
Life insurance offers a man the only way where he can make his will before he makes his money.