What Is Insurance Underwriting?

Underwriting is vital to the success of any insurance company. The business of insurance is about transferring and covering risk while maintaining profitability. Without a successful underwriting process, no company would be able to balance the two.

Although someone looking for insurance may never meet an underwriter, an underwriter will certainly know the potential policyholder’s information. Keep reading for an overview of what underwriting means in insurance and an example of the homeowners insurance underwriting process.

Insurance underwriting is an insurance company’s process of evaluating and determining the risk of insuring someone or something. All types of insurance companies perform underwriting relevant to their industry.

Insurance is the transfer of risk. An insurer financially accepts the liability of a policyholder’s risk and charges the policyholder a fee to do so. An insurance company can’t just take on any risk since there’s no way to be sure that it will be profitable.

For instance, it wouldn’t be wise from a carrier’s perspective for a flood insurance company to insure the only house in a neighborhood where every other property has flooded in the past year. The odds are good that the last home will flood, too, and the insurer will need to provide a payout.

To calculate which risks to take, a company needs to analyze the risk and determine if it will be appropriate to insure that property, person, car, or whatever it is. Since Clovered is a property insurance agency, we’re going to focus on homeowners insurance underwriting as we go on, but know that life insurance, health insurance, business insurance, and all other types of insurance companies have their form of underwriting.

Have you ever wondered why the same coverage doesn’t cost the same from every provider when you shop for home insurance? It’s primarily because each carrier has its own way of underwriting. Companies have different underwriting guidelines, producing two different premiums. This is why shopping around for insurance is important before choosing a policy.

Underwriting is crucial for insurers to decide which policies to write and how much to charge. It also determines the conditions and exclusions for plans of all types. Underwriting is essential in taking on new customers and renewals.

An insurance underwriter evaluates and analyzes risk for the insurance company. Insurance underwriters determine the risk of potential policyholders using data from the carrier and information the applicant provides.

Insurance underwriters are the people who do the underwriting. They represent the carrier’s best interests and take the information provided by potential policyholders and agents and leverage it with data and models the insurance company has. 

Depending on the type of insurance, an insurance underwriter will use different factors to analyze the risk. As a property and casualty insurance agency, we’ll use the homeowners insurance underwriting process as an example.

The homeowners insurance underwriting process involves underwriters considering factors about homeowners seeking coverage. They will analyze aspects of the homeowner and property to determine the risk of insuring that person and place.

The homeowners insurance underwriting process starts with an application from someone seeking home insurance. The underwriter will look at the information on the application and weigh it with public records on the property and information obtained from private data services like LexisNexis.

Sometimes, a carrier will accept a home policy before fully completing the underwriting process. This is why sometimes you may agree on a quoted price but receive a different final price for your premium. In rare cases, what an insurer uncovers in the final steps of the underwriting process are grounds for the company to change its mind and refuse to cover you.

If applicable, your insurer has the ability to cancel the policy within a certain number of days in effect. This window is called the underwriting period, and it’s usually 60 days from the start of a new policy. The underwriting period varies by state, carrier, and line of insurance. It’s also subject to change if a major storm is incoming, but usually, you shouldn’t have an issue during the underwriting period unless you committed fraudulent information on your application. 

As artificial intelligence grows in popularity and practicality, insurance providers are incorporating AI technology at different rates and levels into their underwriting process. All companies use technology and data to some extent, but just know that insurance underwriting requirements are evolving as insurtech grows.

The property insurance underwriting process includes aspects of the property itself, like its age, location, and condition, as well as factors about the person seeking the insurance. 

The homeowners insurance underwriting process consists of analyzing numerous factors and variables to assess the risk and determine a policy premium. Home insurance underwriting requirements will vary by company, but they generally all include an examination of the following variables:

Underwriters must consider the age of a home because older homes have more wear and tear that can lead to an insurance claim. In some states, like Florida especially, roofs of properties are under heavy scrutiny. An underwriter may deem that a home older than a certain number of years requires an inspection before getting coverage or being renewed.

The location of your home is crucial for insurance underwriters, too. Homes in flood zones, hurricane-prone, tornado-prone, or wildfire-prone locations are much bigger risks to insure. An underwriter will also look at your distance from a fire hydrant. They may also examine crime rates in your area. These factors directly affect your premium and whether you’re eligible for coverage.

Underwriters also treat houses differently based on the way they were built. Frame houses made of wood are more susceptible to wind and fire damage than masonry houses made of brick or concrete. An underwriter will also assess attractive nuisances on your property. Attractive nuisances are features, such as trampolines and pools, that raise the liability of your house. Some companies have underwriting guidelines that forbid them from insuring such properties unless appropriate measures are taken beforehand.

Some companies also have property insurance underwriting guidelines that prohibit them from offering or renewing coverage on properties that have spawned multiple insurance claims in a two- or three-year period. Filing a lot of claims signifies to your provider that either you or your property is a notable risk. The window of time will vary by state and carrier, but filing excessive claims will raise your rates and jeopardize future coverage.

In addition to the features of a property, an underwriter may need to consider more macro-level factors directly related to the company and business operations. These may include competitors exiting and entering the market, other carriers changing their level of risk adoption, exposures and risks changing over time, and aligning with dynamic company business models.

Know that property insurance covers more than just homes. Property insurance applies to residences (homeowners and renters), cars, boats, and more. The factors underwriters analyze will vary depending on the type of property insurance.