Underwriting

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Definition

Underwriting is the process in which the insurance company determines or decides to accept the risk of insuring a person/ business. 

Description

You try different marketplaces to compare the best offers, prices, and benefits from buying a product. At the same time, when you apply for a loan, the merchant checks with the banker your limit before approval. It is because none of the parties involved in the contract wants to face a loss.

In insurance, you may want to get a term plan even when diagnosed with cancer. Before offering you the policy, the insurance company will verify all the details about you. Every insurer requests to fill out a proposal form before giving the policy. The act of verifying the information to accept the proposal is underwriting.

If the insurer finds that you have not disclosed complete information, they have the right to reject the proposal. Underwriting makes the decision-making easy for the insurer enabling them to know whether the business is profitable for them or not.

When the underwriting fails, it indicates that the insurance company will suffer financial losses due to sudden losses against the forecast made at the time of premium charging. Underwriting is done by professional underwriters who help to evaluate the risk of insuring. The process of underwriting is about looking for solutions that might reduce the risk of future claims.

Example

Ravi wanted to buy a Critical Illness Insurance Policy. The insurance company provided him with a proposal form. Ravi filled out the proposal form declaring that he is a smoker. The insurer underwriter evaluated the proposal form and then decided to insure Ravi but at a higher premium rate. A higher premium is charged as the risk of life for the insured is higher.

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